VAT or CST- what should you charge?

Editor | Sep 14, 2020

At one of our IOS Seller Meetup in Mumbai,, one of the heavily discussed topics was the difference between VAT and CST in India. While some of the experienced sellers and representatives from marketplaces felt that only VAT should be charged to customers, from different states also, some felt CST and not VAT should be charged. Also discussed was the practice of procuring from one state and moving to another with lesser VAT% to reduce taxes. Would it be illegal when the units sold were more than 50,000 per month?

The primary difference between VAT and CST is that VAT is applied on transactions where the goods’ origin and delivery destination are within the same state in India, whereas, CST is applied when the goods originate in one Indian state but the delivery is in a different Indian state. In other words, VAT deals with intra-state trade and is a State government’s tax where as CST deals with inter-state trade and is a Central government’s tax.

For instance, when you’re dealing with a business between Bangalore and Mysore (both in Karnataka) VAT will come into play and whenever you’re dealing with a business between Bangalore and Mumbai, CST will be applied.

What is VAT?

VAT (Value Added Tax) is intended to tax every stage of sale where some value is added to raw materials, but taxpayers will receive credit for tax already paid on procurement stages. VAT can be imposed only when tangible goods and products are sold. Every state has a separate and distinct VAT act reserved for their state. It is a form of indirect tax imposed only on goods sold within a particular state, which essentially means that the buyer and the seller need to be in the same state. Exports are exempted from VAT.

What is CST?

CST (Central Sales Tax) is a form of indirect tax imposed only on goods sold from one state to another state, which particularly takes into account that the buyer and the seller needs to be in two different states. This tax is governed by a single central act, though the chargeability is state specific. CST registration is not dependent on amount of turnover. Simply put, registration of dealer becomes compulsory once he affects an inter-state sale. Traders who procure from one state and move their goods to another State with lesser VAT will not be avail of the benefits as VAT will no longer apply and CST will automatically come into play.

Is CST compulsory in the course of inter-state trade?

Yes, Sec.6 (1) of CST Act provides that every dealer shall be liable to pay tax under this Act on all sale of goods (other than electrical energy) effected by him in the course of inter-state trade.  Goods here include all materials/articles/ commodities and other kinds of moveable property. The definition of goods however excludes electricity, newspapers, stocks and shares. The implication of this definition is that no sales tax will be levied on the sale of newspapers. However if the same newspaper is sold as waste paper, they are treated as goods and are taxable.

A dealer shall be liable to pay tax under the CST Act on the sale of any goods effected in the course of inter- State trade though no tax can be levied under the local sales tax Act of the appropriate State if such sale is Intra state sale. Therefore exemption in the local sales tax law is irrelevant for the purpose of Central Sales Tax Act. For example, take Tamil Nadu; no Local sales tax is levied on sales up to prescribed limit (For e.g. it is 3 lakhs in Tamil Nadu). However these goods, which escape tax under local sales tax, cannot avoid tax under the CST ACT. Suppose Mr. A’s sales turnover under TNGST is less than Rs.3,00,000. No tax is levied under TNGST up to a turnover of Rs.3,00,000. However, CST is payable on the Rs.3,00,000 also.

Exemption from CST during inter-state sale

Section 6(2) of CST Act gives an exemption to subsequent inter-state sale affected by transfer of documents of title to goods when the goods are in movement from one state to another. However such exemption to subsequent inter-state sale is subject to production of Form E-I, as obtained from prior vendor and ‘C’ form from buyer.

A simple example can be that, suppose A of Mumbai has sold goods to B of Ahmedabad. The goods are dispatched by lorry and L.R. is taken out by A (Mumbai), wherein A is consignor and B (Ahmedabad) is consignee. If before taking delivery from transporter, B decides to sell his goods to ‘C’ of M.P., he can simply endorse the L.R. in name of ‘C’ and the sale will be complete. This is the second or subsequent interstate sale in the course of same movement. In this case A must have charged 4% CST in his bill. Being a second interstate sale effected by B to C, B is equally liable to pay CST on above transaction.

However the intention of Government is not to levy multiple taxes on sale taking place in one course of movement. Therefore the subsequent sale is given exemption. However it is subject to production of given forms. In above example, the sale by B to C will be exempt if B produces before his assessing authority Form EI issued by A of Mumbai and Form ‘C’ issued by C of M. P. 

The case of M/s. Duvent Fans P. Ltd. vs. State of Tamil Nadu explains this point clearly. In this case a local dealer purchased goods from other local dealer and directed to send them to his purchaser’s place in other State. Madras High Court held that the first transaction is first interstate sale and the second sale is also subsequent interstate sale exempt u/s.6 (2) of CST Act.

In light of above it is clear that the sale effected by transfer of documents of title to goods is eligible for exemption u/s. 6(2). These exempted sales are also referred to as “Sale in transit”.

it is Vakilsearch was founded by Hrishikesh Datar in 2010 and is India’s leading online legal services provider for businesses and individuals. Vakilsearch is a web-portal that acts as a facilitator for seeking legal advice with lawyers, and provides documentation services, intellectual property registrations, including copyright and trademark, tax filing and accounts related services in India.

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