Indirect Taxes

1. INTRODUCTION TO CENTRAL SALES TAX.

The sixth amendment in the Constitution of India changed the scenario of taxation in India by
introducing the Central Sales Tax (hereinafter referred as CST). The amendment brought the
taxes on purchases or sales of goods in the course of inter-State trade or commerce expressly
within the purview of the legislative jurisdiction of Parliament and restrictions could be
imposed on the powers of State legislatures with respect to the levy of taxes on the sale or
purchase of goods within the State where the goods are of special importance in inter-State
trade or commerce. According to Article 266 of the Constitution of India no tax can be levied
on a person until or unless it is backed by a law. Hence in pursuance of this the Central and
Sales Tax, 1956 was enacted which governs the current Central Sales Tax system.

Central Sales Tax is levied by the Central Government of India under Entry 92A of List I
(Union List) of the Seventh Schedule to the Constitution on India but, it is collected by that
state government from where the goods were sold. Hence the tax revenue collected is given
to the same State Government which collected the tax. The current Central Sales Tax rate in
India is 3 per cent.

Central Sales Tax is charged only on the inter-state transactions and not on the transactions
occurred within the state or import/export of sales. Section 3(a)/ (b) defines the interstate
nature of transaction. When any transaction between two parties from different states records
the movement of goods then it is called interstate transaction. A sale, effected by transfer of
documents of title to goods when goods are in inter-state movement, is also an interstate sale.
However, consignments to agents or transfer of goods to branch or other offices are not
considered as interstate sale. In addition to this goods that are sold within a state, but
while transporting travel through another state is not considered inter-state sales.
Moreover,there is no exemption limit of turnover for the levy of central sales tax.

Central Sales Tax Act has also provided special importance to certain goods in order to
increase their circulation. Section 2(d) of the Act classifies good into two categories: declared
goods and other goods. Declared goods are those goods which have been given special
importance by the virtue of Section 14. Examples of such goods are cereals, coal, cotton,
crude oil, jute, oilseeds, pulses, sugar, etc. The rates of tax on declared goods are lower as
compared to the rate of tax on goods in the second category.

CST Transaction Forms

Manufacturers/Traders /Exporters/Dealers, during the course of transaction, have to issue

certain proclamations in the prescribed form to the sellers/buyers. The forms are printed and
supplied by sales tax authorities and these forms are to be prepared in triplicate.

Some important forms are mentioned below:

Form D: Any sale to Government is taxable @ 4 per cent or applicable sales tax rate for the
particular sale within that State whichever is lower. To avail this concession on CST, Form D
is issued by the Govt. Department which purchase the goods.

Form I:  This form is issued by a dealer/buyer located in a Special Economic Zone. This
form gives concession on the central sales tax because no tax is levied when sales s made to a
dealer located in SEZ.

Procedure to get CST registration

The registration for central sales tax is done in the same manner that of VAT. To register for
CST Manufacturers/Traders /Exporters/Dealers has to first acquire his TIN registration
number. TIN is an acronym for Tax-Payer Identification Number, which is unique number
allotted by Commercial tax department of the respective States. It is an 11-digit number to be
mentioned in all VAT transactions and correspondence. TIN number is used to identify
dealers registered under VAT. It is a single number which is allotted to the dealers for the
registration of all three taxes i.e. VAT, CST and Service tax. First two digits of TIN indicate
the issued state code. However, the creation of other nine digits of the TIN number may differ
from state to state. It is applied for both sales done within a state or between two or more
states. TIN is also being used to identify dealers in the same way like PAN, to identification
of assesses under income tax act.  Manufacturers/Traders /Exporters/Dealers can apply for
the

Mandatory documents required to apply for a TIN registration are: ID Proof / Address proof /
PAN card of proprietor with 4 to 6 number of photographs, Address proof of Business
premises, 1st Sale / Purchase Invoice, copy of LR/GR & payment/collection proof with bank
statement, Surety/Security/Reference. However, the requirements of certain documents may
differ from State to State. This is due to the reason that even though the central sales tax has
been framed by the central government but, the state governments are allowed to frame such
rules, subject to such notification and alteration as it deem fit.

Central Sales Tax Act, 1956

Sales Tax in India falls under the ambit of Central Sales Tax Act, 1956, which extends to the
whole of India and defines the rules and regulations guiding sales tax. This Act was
introduced in the Sixth Constitutional Amendment and brought the taxes on sale/purchase of
goods in inter-state trade under the purview of the legislative jurisdiction of Parliament. This
act came into force in 1957 and forms the backbone for Central Sales Tax in India, containing
various provisions for the same.

This Act mentions the definitions of inter-state trade, situations where CST is applicable,
penalties involved, important goods for interstate trade, trade restrictions, appeals and any
other information which might be relevant.

Objectives of Central Sales Tax Act:

The government introduced the Central Sales Tax Act in a bid to simplify and streamline tax
collection in the country. Some of the main objectives of Central Sales Tax Act are
mentioned below.

 Provide provisions for levying, collecting and distributing taxes collected via
interstate sale of goods and products.

 Frame policies to determine when sale and purchase of goods occurs, with reference
to interstate commerce.

 Classifying certain goods as being essential and important for trade and commerce.

 Establish which competent authority will settle interstate trade disputes.

Central Sales Tax Rate:

Central Sales Tax rates are determined by the government and have changed since the time
the Act first came into force. The original Central Sales Tax rate was 1%, which was then
increased periodically to 2% and finally became 4% from July 1975 onwards. Goods which
are extremely important for inter-state travel are not taxed under certain provisions of the
CST Act, ensuring that essential commodities do not become dearer.

In 2007, an amendment to central sales tax rates was accepted, which saw the Sales
Tax coming down to 3% from the previously charged 4%.

June 2008 witnessed a further reduction in the tax rate, with the rate coming down to 2%. A
major reason for the reduction in CST rates was the need to introduce Goods and Services
Tax (GST), which would make CST inconsistent with GST.
 2. Service Tax Introduction and Background

The Service Tax was introduced in India around 21 years back on July 1, 1994 at the
recommendations of Dr. Raja Chelliah Committee on tax reforms. The introduction of this
levy in India can be termed as milestone in Indian Tax history.

This is also an indicator of foresightedness and thoughtfulness of the reformers, economists

and the government of India. 

Perhaps, the reformers in favour of this levy and the government also would not have
imagined such grand revenue to come 21 years back. But today, this is the reality.

On July 1, 1994, the service tax was introduced on 3 services only. These were Telephone
Services, Non-Life Insurance Services and Stock Brokers’ Services. From July 1, 2012, the
concept of Negative List Regime has been introduced. Meaning thereby that all the services,
other than those mentioned in the Negative List (as per Section 66D of the Finance Act, 1994
as enacted by the Finance Act, 2012) are liable to service tax if not specifically exempted
otherwise.

The above information is sufficient to indicate the importance of service tax in:

 The contribution of service sector in the Indian economy;

 Formation of appropriate fiscal and other policies by the government and

 The growth of Indian Economy.

Therefore, it is important to understand that what is meant by service.

Meaning of Service:

As per the dictionary meaning, the term service means-

‘A valuable action,  deed, or effort performed to satisfy a need or to fulfill a demand or

an  action of helping or doing work for someone’.

As per another thought-

‘Service means a system of supplying a public need such as transport, communications, or

utilities like, electricity or water or to perform routine maintenance or repair work on a
vehicle or machine or to ensure that gas appliances are serviced regularly etc.
From the economic and taxation point of view, one can say that, service is an activity, (like
transportation, communication, repair or maintenance etc.), carried on by one person for
another for some consideration measurable in money.

In the like manner, clause (44) of section 65B of the Finance Act, 1994 (as introduced by the
Finance Act, 2012 w.e.f. 01.07.2012) defines the word ‘Service’ as under:

“Service means any activity carried out by a person for another for consideration and
includes a declared service, but shall not include-

(a) an activity which constitutes merely,-               

(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other
manner; or

(ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the
meaning of clause (29A) of article 366 of the Constitution; or

(iii) a transaction in money or actionable claim;

(b) a provision of service by an employee to the employer in the course of or in relation to his
employment;

(c) fees taken in any Court or tribunal established under any law for the time being in
force.” 

Now let us analyse the above definition of service:

♠ There should be an activity, means a condition in which a person does or has done a thing
for other person like repair, transportation or erection etc.

♠ It is carried on by a person for another. The person has been defined under clause (37) of
section 65B to include, an individual; a HUF; a company; a society; a LLP; a firm; an
AOP/BOI (whether incorporated or not); Government; a Local Authority or every artificial
judicial person.

♠ The activity should be for consideration.

As per explanation (a) to section 67 of the Finance Act, 1994, as amended by the Finance
Act, 2015:
“consideration” includes– (i) any amount that is payable for the taxable services provided or
to be provided; (ii) any reimbursable expenditure or cost incurred by the service provider
and charged, in the course of providing or agreeing to provide a taxable service, except in
such circumstances, and subject to such conditions, as may be prescribed; (iii) any amount
retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in
addition to the fee or commission, if any, or, as the case may be, the discount received, that is
to say, the difference in the face value of lottery ticket and the price at which the distributor
or selling agent gets such ticket.’.

♠ It includes a declared service.

As per section 66E of the Finance Act, 1994 as inserted by the Finance Act, 2012, the
following shall constitute declared services, namely:–

(a) renting of immovable property;

(b) construction of a complex, building, civil structure or a part thereof, including a complex
or building intended for sale to a buyer, wholly or partly, except where the entire
consideration is received after issuance of completion-certificate by the competent authority.

(c) temporary transfer or permitting the use or enjoyment of any intellectual property right;

(d) development, design, programming, customisation, adaptation, up-gradation,

enhancement, implementation of information technology software;

(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to
do an act;

(f) transfer of goods by way of hiring, leasing, licensing or in any such manner without
transfer of right to use such goods;

(g) activities in relation to delivery of goods on hire purchase or any system of payment by
instalments;

(h) service portion in the execution of a works contract;

(i) service portion in an activity wherein goods, being food or any other article of human
consumption or any drink (whether or not intoxicating) is supplied in any manner as a part
of the activity.
♠ It is not transfer of title in goods or immovable property by way of sale gift or any other
manner.

♠ It is not a deemed sale under Article 366(29A) of the constitution of India. As per the sais
Article, the following transactions are termed as deemed sale:

(a) the transfer, otherwise than in pursuance of a contact, of property in any goods for cash,
deferred payment or other valuable consideration;

(b) the transfer of property in goods (whether as goods or in some other form) invoked in the
execution of a works contract;

(c) the delivery of goods on hire purchase or any system of payment by instalments;

(d) transfer of the right to use any goods for any purpose (whether or not for a specified
period) for cash, deferred payment or other valuable consideration;

(e) the supply of goods by any unincorporated association or body of persons to a member
thereof for cash, deferred payment or other valuable consideration;

(f) the supply, by way of or as part of any service or in any other manner whatsoever, of
goods, being food or any other article for human consumption or any drink (whether or not
intoxicating), where such supply or service, is for cash, deferred payment or other valuable
consideration, and such transfer, delivery or supply of any goods shall be deemed to be a
sale of those goods by the person making the transfer, delivery or supply and a purchase of
those goods by the person to whom such transfer, delivery or supply is made;

♠ It is not a transaction in money, means a transaction like deposit or withdrawal of money

from a bank; advancing or repayment of principal amount of loan or conversion of currency
of once denomination to another. However, the services rendered in connection with the
monetary transactions like commission taken by money changers or banks will be termed as
service.

♠ It is not an actionable claim like, unsecured debt, which is not secured by any mortgage of
immovable property or hypothecation/pledge of any movable property or any beneficial
interest in the movable property not in possession of the claimant which the civil courts
recognise as affording grounds for relief

♠ It is not the service provided by an employee to the employer and

♠ It is not a fee taken by any court or a tribunal established under any law.

♠ Vide explanation 1 to the said clause (44), it is also clarified that the services rendered by
MPs, MLAs, Members of Local Authorities/Municipalities or by the persons who hold any
post in pursuance of the provisions of the Constitution of India or by the person/chairperson
or the member or director in the body established by the central or state government, will not
termed as service.

Conclusion:

Service tax is a tax levied by the government on service providers on certain service
transactions, but is actually borne by the customers. It is categorized under Indirect Tax and
came into existence under the Finance Act, 1994. The introduction and levy of service tax in
India w.e.f. July 1, 1994 is one of the most important and successful tax reforms in the
country. Huge tax collections of service tax prove this fact. These are also indicators of role
of service sectors in the growth of Indian economy since last 21 years. In fiscal and other
policy formations in the country, the service tax and service sectors play a vital role.

In order to term an activity a service it is necessary to see that such activity is carried out by
once person for another for monetary consideration and that activity is neither
sale/transfer/gift of immovable/movable property or goods nor a deemed sale in terms of
Article 366 (29A) of the constitution of India. Likewise it is not a service rendered by an
employee to the employer or a service rendered by an MP/MLA or the like persons.
Similarly, the transactions in money or actionable claims or the fees taken by any court of
law or the tribunal will not be termed as service.