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



Name of tax

By Central Government

By State Government


Income Tax


Wealth Tax


Property Tax


Professional Tax


Stamp duty



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.




Sale price = 5460, S_tax% =8

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 = Sale price + taxes = 5460+600.60 = Rs. 6060.6


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.




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


654= x+(9x/100)

654*100 =109x

 x = 65400/109 = Rs 600

Thus shop keeper has to reduce the price by 54 (=654-600)



Sale price = 654

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.




Under ST (10%)

Under VAT (10%)


Cost of raw material =Price of raw material +tax

110=100+ 10

(10% ST on 100)

110=100+ 10

(10% VAT on 100)


Cost of processing




Product cost=Raw material cost( step 1)+ processing cost (step 2)




Tax on Sale of product(as arrived in step 3)

12 (10% ST on 120)

12 (10% VAT on 120)


Sale price =Cost of product + tax on sale of product

(As arrived in step 3 and 4)




Rebate under VAT


10( VAT paid in the previous step): step 1


Price to be paid by buyer (Step 5- Step 6)

132-0 = 132

= 132-10 =122


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



Net income range

Income-tax rates


Education cess 


Up to Rs. 2,50,000





Rs. 2,50,000– Rs. 5,00,000

10% of (total  income minus Rs. 2,50,000)




Rs. 5,00,000 – Rs. 10,00,000

Rs. 25,000 + 20% of (total  income minus Rs. 5,00,000)


2% of income-tax


Above Rs. 10,00,000

Rs. 2,50,000 + 30% of (total  income minus Rs. 10,00,000)

10% of


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


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




Points learnt


S.Tax,VAT and Income Tax concepts and calculations