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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 |
Yes |
|
Wealth
Tax |
Yes |
|
|
Property
Tax |
|
Yes |
|
Professional
Tax |
|
Yes |
|
Stamp
duty |
|
Yes |
|
Indirect |
Excise
duty |
Yes |
|
Customs
duty |
Yes |
|
|
Service
tax |
Yes |
|
|
Sales
tax |
Yes |
Yes |
|
VAT(Value
added tax) |
|
Yes |
|
Entertainment
tax |
|
Yes |
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 sale price is Rs 654.
The rate of sales tax is 9%. If you ask the shop keeper to reduce the sale price
so that you pay
only Rs 654, 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+ 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 |
Cost
of product = Raw
material cost(step1)+ 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 sale): step 1 |
7 |
Net |
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 thatstate
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
31/03/06.
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 1,00,000)
Then the tax on net income is calculated as per the
following table for the financial year ending 31st March 2006
Slab |
Net income range |
Income-tax rates |
Surcharge |
Education cess |
1 |
Up to Rs. 1,00,000 |
Nil |
Nil |
Nil |
2 |
Rs. 1,00,000 – Rs. 1,50,000 |
10% of (total income minus Rs.
1,00,000) |
Nil |
2% of income-tax |
3 |
Rs. 1,50,000 – Rs. 2,50,000 |
Rs. 5,000 + 20% of (total
income minus Rs. 1,50,000) |
Nil |
2% of income-tax |
4 |
Rs. 2,50,000 – Rs. 10,00,000 |
Rs. 25,000 + 30% of (total income minus Rs. 2,50,000) |
Nil |
2% of income-tax |
5 |
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 25,000 per month as salary. He receives 20,000 as interest
income on deposits
made with Banks..
He deposits 43,000 in Provident funds, invests 26,000 in NSCs. He spends 21,000 towards children’s education. He
pays a premium of 25,000 towards LIC. Find the total tax payable by him
1) Income :
Annual salary = 3,00,000(=25,000*12months)
Interest
= 20,000
Gross income = 3,20,000
2)Rebates
Provident Fund = 43,000
NSC
= 26,000
Children education = 21,000
LIC Premium =
= 25,000
Total rebate = 115,000
Since total of rebates is in excess of Rs 1,00,000 He will get rebate only
up to Rs 1,00,000
Net income = 2,20,000
( 3,20,000 - 1,00,000)
Thus Tax rate applicable for him is as per 3rd Slab in
the above table
Tax = Rs. 5,000
+ 20% of (total income
minus Rs. 1,50,000)
= Rs 5,000 + 20%( 2,20,000-1,50,000)
= Rs 5,000 + 20%( 70,000)
= Rs 5,000 +
1400
= Rs 6,400
Since his income is less that Rs 10,00,000 he does not pay
surcharge.
However he has to pay educational cess @ 2% on 6400 = Rs 128
Total tax payable by him =Tax + Education cess
= 6400+128 = 6528
4.14 Summary of learning
No |
Points learnt |
1 |
S.Tax,VAT and Income Tax concepts and calculations |