Sales Tax Rules in India

Sales tax is levied upon a product when it is sold for the first time, whether it is produced domestically or imported.

There are two types of sales tax in India: the central sales tax, or CST, which is governed by the central government, and the local sales tax, governed by the states. The CST remains at a static rate, whereas the local sales tax varies based upon type of commodity. Since 2005, most states have replaced local sales tax with VAT. The VAT is the value added tax levied upon the difference between cost of production and eventual cost to the consumer.

1. Interstate Sales

If during the trade or sale of a good, the good leaves the state and enters another one, it is subject to sales tax on the part of the dealer, or the entity who is selling the good to another party. According to the Central Sales Tax Act, a sale falls under the interstate category when 1) the sale or purchase occasions the movement of goods from one state to another or 2) the sale is affected by a transfer of documents of title to the goods during their movement from one state to another.

2. Sales Tax Rates

Central sales tax is 2 percent when the dealer provides Form C to the buyer and 4 percent without form C. These rates became effective April 1, 2008.

Local sales tax (or VAT) rates are broken up by type of product. Minimum is 1 percent (such as for gold); maximum is 20 percent (such as for alcohol). The three common rates are 1 percent, 4 percent and 14.5 percent.

The products formerly at the 12.5 percent rate under Schedule V of the VAT Act were increased to a rate of 14.5 percent on January 10, 2010. This affects many products in the construction industry, as well as some other items such as butter, chocolate, cars, appliances and cosmetics.

3. Registered Dealers

The state that the goods are produced in or originally imported into receives the tax. In other words, the seller in any stage of a sale pays sales tax to the state the goods travel out of. The seller who causes the goods to be moved into another state is responsible to pay the tax. However, sellers commonly pass the cost onto the buyer at the point of sale.

To become a registered seller or dealer, a person must apply to the state department of taxation to receive a sales tax ID. A sales tax ID is a seller's identification when conducting business, similar to a social security number or employer identification number in the U.S. The process to obtain this number generally takes about four weeks.

4. Exceptions

The following sales are generally exempt from sales tax, although it varies by state: services, food and drugs, sales to tax-exempt institutions such as charities, and sales to state-registered resellers.