4.14 Taxes (Sales,
VAT, Income Tax)
It is the responsibility of the governments to
maintain law order in the country/state, defense of the country, providing
health and education facilities, welfare of women and children and many other
social responsibilities. To carry out all these activities governments need
money. The governments collect money from public as taxes.
The way schools follow the concept academic year( June to March or April) governments follow the concept of Financial
year.
The financial year always starts from 1st
of April and ends on 31st of March of next year.
Normally in the month of February, Finance
ministers of central and state governments make presentation, called ‘budget’ to Parliament and State assemblies
respectively.
This budget contains facts and figures about the
economy and also the method of collection of taxes and details about planned expenditure
under various categories.
Since central government collects maximum of taxes
from the public major portion of the tax so collected is given to states for
developmental activities and to meet the expenses of state governments.
The tax is broadly been classified as direct and
indirect taxes. As the name suggests the direct tax is imposed on individuals,
group of individuals, companies. On the other hand indirect taxes are not
levied on individuals, but on goods/services
Direct taxes include
|
Type |
Name of tax |
By Central Government |
By State Government |
|
Direct |
Income
Tax |
|
|
|
Wealth
Tax |
|
|
|
|
Property
Tax |
|
|
|
|
Professional
Tax |
|
|
|
|
Stamp
duty |
|
|
|
|
Indirect |
Excise
duty |
|
|
|
Customs
duty |
|
|
|
|
Service
tax |
|
|
|
|
Sales
tax |
|
|
|
|
VAT(Value
added tax) |
|
|
|
|
Entertainment
tax |
|
|
4.14.1 Sales
Tax:
This tax is levied by states on the sales made
within the state. However central government can also impose sales tax in which
case it is called central sales tax. The seller (shop keeper) collects Sales
tax on purchases made by the buyer and in turn he pays the collected sales tax
to the state governments on a regular basis. The amount collected by way of
Sales tax is used by state governments for the state’s developmental
activities. Sales tax is charged as a % on the sale value of product. On the
same product it is possible that different state governments charge different %
of Sales tax. Some state governments may not charge sales tax on certain types
of products to help common people (Kerosene, match boxes, cycles, and seeds).
In case of inter state movement of goods, central Government imposes Central
Sales tax (CST) and the amount collected by central government by way of CST,
is shared with all the state governments.
Refer to Section 4.1 to recollect the meanings of
Cost Price, selling Price. Marked Price, Profit and Loss and
related method of calculations.
The sales tax is calculated on the sale price. If
seller gives discount, then sales tax has to be calculated on the final price
after deducting discount.
Sales_tax = (Sale_price*S_tax %)/100.
S_tax % = (Sales_tax/ Sale_price)*100
4.14 Problem 1: A person purchased some articles costing Rs 5460.
The shop keeper charged 8% as S.Tax on the goods.
Since this person was taking the articles to another state, He was charged
additional central Sales tax of 3% on the sale price. Find out the total amount
paid by the buyer.
Solution:
S.tax = (Sale_price*S_tax %)/100
= 5460*8/100 = 436.8
Central sales tax = (Sale_price*CS_tax %)/100
= 5460*3/100 = 163.8
Total tax = Sales tax
+ Central sales tax = 436.8+163.8 = Rs. 600.60
Total amount paid to
seller =
4.14 Problem 2: Suppose you go to a shop to buy a bag whose price excluding tax is Rs 654. The rate of sales tax is 9%. You also ask the
shop keeper to reduce the price so that you pay only Rs 654, then find the reduction(discount)
in the sale price of the bag.
Solution:
Since, shop keeper can not sell without paying
Sales tax and you are paying only Rs 654, you are asking the shop keeper to
sell the bag at Rs.654 inclusive of Sales tax.
Let x be the reduced price of the bag
On this price, sales tax= 9x/100
Total price to be paid
= x+(9x/100)
This is the amount which you pay to the shop keeper
Hence
654= x+(9x/100)
654*100 =109x
x = 65400/109 = Rs 600
Thus shop keeper has to reduce the price by 54
(=654-600)
Verification:
Discount =
54
Net sale price = 600
S. tax = (600*9)/100 =54
Price paid by you =
Net sale price after discount+ S.tax = 600+54 = 654
This is as given in the problem and hence our
solution is correct.
4.14.2 VAT(Value Added Tax):
In the case of sales tax there is a compounding
effect of tax on tax. In order to remove this double effect on taxation many states
have introduced VAT in place of Sales Tax. As the name
suggests here tax is levied only on value addition carried out at each stage.
VAT is always beneficial to the consumers.
In case of VAT, at each stage the producer/seller
gets the credit on the tax paid at the previous stage.
Let us understand the difference with an example of
10% ST and 10% VAT.
Let us assume that, a manufacturer buys raw
material worth Rs 100 from a supplier in order to manufacture a product. Also
assume that the cost of processing of raw material by the manufacturer is Rs10.
Let us compare final the sale price under the two methods.
|
Step |
Procedure |
Under ST (10%) |
Under VAT (10%) |
|
1 |
Cost
of raw material =Price of raw material +tax |
110=100+ 10 (10%
ST on 100) |
110=100+ 10 (10%
VAT on 100) |
|
2 |
Cost
of processing |
10 |
10 |
|
3 |
Product
cost=Raw material cost( step 1)+ processing cost (step 2) |
120=110+10 |
120=110+10 |
|
4 |
Tax
on |
12 (10% ST on 120) |
12 (10% VAT on 120) |
|
5 |
(As
arrived in step 3 and 4) |
132=120+12 |
132=120+12 |
|
6 |
Rebate
under VAT |
0 |
10( VAT paid in the previous step):
step 1 |
|
7 |
Price
to be paid by buyer (Step 5- Step 6) |
132-0 = 132 |
=
132-10 =122 |
|
8
|
Tax
received by state government |
22
= (10+12) |
12
= 10+12-10 |
As can be seen from the above VAT is beneficial to
the consumer as the product price has come down to 122 from 132 which was the
sale price under ST scheme.
You would also observe that total tax received by
the stage government also has come down to 12 under VAT from 22.
Thus the question arises is it not that state
governments loose on taxes?
In reality, because of the scheme of ‘rebate of tax to the extent of tax paid in the previous
stage’ encourages manufacturers and distributors to maintain clean
records. This will have less scope for avoidance of taxes, which leads to
better revenue collection for state governments.
4.14.3 Income
tax:
The tax imposed by the central government on the
income is called ‘Income tax’ Individuals and
companies are liable to pay income tax on their income. Here we will be
discussing Income tax in respect of individuals only.
A person having income from agriculture,
need not pay Income tax. However, salaried people, business men, professionals
like doctors, lawyers
and others need to pay income tax if
income exceeds certain amount.
From the total income received, there are certain
categories of expenses which are deducted before tax is calculated. One such
deduction allowed is expenditure incurred towards tuitions fees paid to schools
for children education subject to a limit two children.
Senior citizens and women are allowed extra
rebate while calculating income tax.
It is mandatory that all tax payers need to submit
details in prescribed form called ‘Income tax
return’ by a fixed date ( normally by 31st
July)for the income received for the period ending 31st March.
The method of calculation of tax and rate
of tax changes from year to year. For the latest rules please refer to www.incometaxindia.gov.in
As an example we shall discuss here the method of
calculating tax for the financial year ending
31/03/05.
1. Gross Income = salary + pension+ Interest income
(From savings bank, fixed deposit)+ other income.
2. Deductions = Contribution to provident funds+ LIC premium+ expenses towards children’s education+
Investment in NSCs(National Saving Certificates)
3. Net income = Gross income-Deductions (Up to
maximum of Rs 1,50,000)
Then the tax on net income is calculated as per the
following table for the financial year ending 31st March 2015
|
Slab |
Net income range |
Income-tax rates |
Surcharge |
Education cess |
|
1 |
Up to Rs. 2,50,000 |
Nil |
Nil |
Nil |
|
2 |
Rs. 2,50,000– Rs.
5,00,000 |
10% of (total income minus Rs. 2,50,000) |
Nil |
|
|
3 |
Rs. 5,00,000 – Rs. 10,00,000 |
Rs. 25,000 + 20% of (total income minus Rs. 5,00,000) |
Nil |
2% of income-tax |
|
4 |
Above Rs. 10,00,000 |
Rs. 2,50,000 + 30% of
(total income minus Rs.
10,00,000) |
10% of Income-tax |
2% of income-tax and
surcharge |
4.14 Problem 3: A Person receives 50,000 per month as salary. He
receives 70,000 as interest income on deposits made with Banks..
He deposits 53,000 in Provident funds, invests
26,000 in NSCs. He spends 51,000 towards children’s education.
He pays a premium of 35,000 towards LIC. Find the total
tax payable by him
1) Income :
Annual salary = 6,00,000(=50,000*12months)
Interest
= 70,000
Gross income = 6,70,000
2)Rebates
Provident Fund
= 53,000
NSC = 26,000
Children education =
51,000
LIC Premium = =
35,000
Total rebate = 165,000
Since total of rebates is in excess of Rs 1,50,000 He will get rebate only
up to Rs 1,50,000
Net taxable income = 5,20,000 ( 6,70,000 - 1,50,000)
Thus Tax rate applicable for him is as per 3rd Slab in
the above table
Tax = Rs. 25,000
+ 20% of (total income
minus Rs. 5,00,000)
= Rs 25,000 + 20%( 5,20,000-5,00,000)
= Rs 25,000 + 20%( 20,000)
= Rs 25,000 +
4000
= Rs 29,000
Since his income is less than Rs 10,00,000 he does not pay
surcharge.
However he has to pay educational cess @ 2% on
29000 = Rs 580
Total tax payable by him =Tax + Education cess
= 5400+580 = 5980
4.14 Summary of
learning
|
No |
Points learnt |
|
1 |
S.Tax,VAT and Income Tax concepts and
calculations |
