Sales tax is a consumption-based tax levied by governments on the sale of goods and services. It is typically a percentage of the sale price, paid by the buyer at the point of purchase. The seller is responsible for collecting the tax and remitting it to the government. Sales tax rates vary by country, state, or municipality, and some goods or services may be exempt or taxed at different rates. This form of taxation provides governments with a significant revenue stream, though it can be regressive, impacting lower-income individuals more than higher-income earners.
Sales Tax Under the GST Regime
The GST is now the primary tax levied on goods and services in India. It is a single, unified tax system that combines state-level taxes (like sales tax, VAT, and CST) and central-level taxes (like service tax) into one framework.
GST Structure:
The GST system is dual, meaning it is jointly administered by both the Central Government and the State Governments.
There are three types of GST:
- CGST (Central Goods and Services Tax): Levied by the central government on intra-state transactions.
- SGST (State Goods and Services Tax): Levied by state governments on intra-state transactions.
- IGST (Integrated Goods and Services Tax): Levied on inter-state transactions and imports.
GST Rates: GST is levied at different rates based on the category of the product or service. The rates can range from 5% to 28% on most goods and services. Some essential goods, like food items, may be exempt or subject to a lower rate (e.g., 0% to 5%).
Tax Calculation: GST is calculated as a percentage of the sale price of the goods or services. For example:
- If a good costs ₹100 and the applicable GST rate is 18%, the total price paid by the consumer would be ₹118 (₹100 + ₹18 as tax).
- The business seller collects the ₹18 tax from the buyer and remits it to the government.
How Sales Tax Worked Before GST
Before the implementation of GST, Sales Tax was a state-level tax system, and the taxation structure differed significantly between states. The major components of this system were:
- Value Added Tax (VAT):
- VAT was the predominant form of sales tax levied by Indian states. The tax was imposed at each stage of the supply chain, with credit allowed for tax paid on previous transactions (i.e., the tax was only levied on the value added to the goods or services at each step).
- VAT rates differed across states, ranging from 4% to 15% depending on the state and the type of product. Some states also imposed a CST (Central Sales Tax) on interstate transactions, which was a fixed rate of 2%.
- Sales Tax on Goods:
- States like Maharashtra, Gujarat, and Tamil Nadu had their own state-specific sales tax laws. Sales tax could be levied at different rates depending on the nature of the goods.
- For example, luxury goods like cars or jewelry might attract higher sales tax rates (e.g., 15-20%), while basic items like food grains or medicines might be taxed at lower rates.
Impact of Sales Tax on the Consumer
Sales tax in its various forms (GST, VAT, CST) directly impacts the final cost paid by consumers. For example:
- If a product costs ₹500 and is subject to 18% GST, the consumer would pay ₹590 (₹500 + ₹90 as tax).
- Certain essential goods may be exempt from sales tax, which reduces the burden on low-income consumers.
Benefits and Challenges of Sales Tax (in Rupees)
Benefits:
- Simplicity and Transparency: With GST replacing complex state-level sales taxes, the tax system is more transparent and easier to manage for businesses and consumers alike.
- Uniform Tax Structure: With GST, the taxation rate is uniform across the country for most goods and services, which helps businesses avoid complex compliance requirements associated with different state-level tax structures.
- Improved Compliance: Businesses are incentivized to maintain proper accounting and pay taxes regularly due to the availability of input tax credit (ITC), which allows them to claim credit for taxes paid on inputs.
Challenges:
- Regressive Nature: Sales taxes, including GST, can be regressive in nature, disproportionately impacting low-income individuals. Since they are applied as a percentage of the purchase price, higher-income individuals may bear a smaller relative tax burden compared to lower-income consumers.
- Complicated Tax Filing: Although GST aims to simplify the tax process, some small businesses find it challenging to comply with the filing requirements and keep track of transactions for tax purposes.
Example of Sales Tax (Before and After GST)
- Pre-GST Scenario: If you bought a car in Maharashtra costing ₹10,00,000, the sales tax (including VAT and CST) could be around 15%, or ₹1,50,000, making the total price ₹11,50,000.
- Post-GST Scenario: After GST was introduced, if the same car is subject to 28% GST, the total price becomes ₹12,80,000 (₹10,00,000 + ₹2,80,000 as GST).
Conclusion
Sales tax in India has undergone significant changes since the implementation of GST, simplifying the tax structure by merging various state and central taxes into one unified system. While GST provides several benefits, including uniformity and ease of compliance, it also comes with challenges, particularly regarding its regressive nature and its impact on lower-income groups. Nonetheless, the transition to GST has created a more streamlined and transparent tax system, benefiting both businesses and consumers, albeit with higher tax rates on certain goods and services.
