When Sales Tax Become Applicable? And How to Calculate Sales Tax? Formulae with Examples

Sales Tax is a tax, levied on the sale or purchase of goods which is produced or sold for the first time. If any goods is sold subsequently for which sales tax had been paid earlier or sold later without being further processed, it is exempt from sales tax. Sales Tax a tax on sales of goods levied by the Central Government of India which is applicable only in the inter-state sales (when a sale or purchase constitutes movement of goods from one state to another) not on sales made within the state.

Sales Tax is payable in the state where the goods are sold and movement of the goods commences. The Government of the State where the movements of goods commence, such government administers, collects and retains the tax. Sales Tax is levied on the turnover based on the basis of sale price at the specified rate and is payable by the dealer making the sale. However, in view of the specific provisions contained in Article 286 of the Constitution, no Sale tax can be levied on import of goods into India.

When Sale Tax becomes applicable?

  1. There must be a sale by a seller (whether registered or unregistered) to a buyer
  2. The sale must arise out of any business
  3. The sale may be for any goods whether declared or undeclared.
  4. The seller must be registered under the Sale Tax Act.
  5. The sale should be in the course of interstate trade or commerce, not a sale within a state.
  6. It should not be a sale in the course of any export or import.

Sales Tax and VAT or Value Added Tax is not same. VAT is one type of indirect tax that is imposed at different stages of production on goods and services unlike Sales tax which is levied on the entire value of goods and services purchased. VAT is imposed on the imported goods also as per the prevailing rate of local goods. If the annual turnover of any business exceeds Rs 10 Lakhs, it is liable for registration under VAT Act and further, unless such business is registered under VAT, it cannot take VAT credit. If the turnover of any business does not exceed Rs 10 lakhs, it may opt for VAT registration and claim VAT credit.

How to Calculate 8% Sales Tax

The price of one mobile phone is US$ 100.

If the rate of sale tax is 8%, the price of the phone with Sales tax will be US$ 100 + 8% on US$ 100

Or, US$ 100 + (8 /100) X US$ 100 = US$ 100 + US$ 8 = US$ 108

Suppose, the offered price of one Microwave Oven is US$ 270, inclusive of 8% sale tax

What will be the price of the Microwave Oven without 8% Sales Tax?

The offered price includes 8% sales tax. So if the offered price is expressed in percent, it will look as,

Sale price of the Microwave Oven without Sales Tax + 8% Tax on Sell Price Or,  100% + 8% = 108%.

Therefore 108% = US$ 270

So, 100% or Sell Price = US$ (270 / 108%) X 100%

Or, Selling Price excluding Sales Tax (that is, 100%) = US$ 250

If you want to add 8% sales tax on any item, the easiest way to find out the tax amount is simply multiply the selling price of the goods with 0.08, and add the result of such multiplication as the tax amount with the sale value of the goods.

If any item is selling at a discount, to know the sale price with tax, first you find out the sale price by deducting the discount amount from sale price, then add the tax amount by multiplying the net sale price with prevailing tax rate (say 8%) .  For example, say a watch is selling at a 5% discount on its marked price. If the marked price is US$ 200, the price with 5% discount is US$ 190. Now you add 8% Sale Tax to find out the price with Sales Tax. The price becomes US$ (190 + 190 X 0.08) = US$ (190 + 15.20) = US$ 205.20.

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