Basic aspects of CST, Inter state sales, stock transfer

Tax on sales by Union and Sale tax on Inter State sale is levied by Union Government under Entry 92A of List I (Union List), while sales tax on intra-State sale (sale within State) (now State Governments termed as Vat) is levied by State Government under Entry 54 of List II (State List) of Seventh Schedule to constitution of India. Categories of sales Sales can be broadly classified in three categories. (a) Inter-State Sale (b) Sale during import/export (c) Intra-State (i.e. within the State) sale. State Government can impose sales tax only on sale within the State.

State cannot discriminate State cannot discriminate between goods manufactured/produced within the between local goods and State and goods brought from outside the State i.e. tax on local goods and goods from outside State goods from other States must be same Rate of CST CST is payable on inter-State sales @ 2%, if C form is obtained. No CST if form H or I is obtained from purchaser. Otherwise, CST rate is same as applicable for sale within the State. Even if CST is levied by Union Government, the revenue goes to State Government. State from which movement of goods commences gets revenue. CST Act is administered by State Government.

Revenue of CST goes to State Government

Inter state sale, intra-state sale and stock transfer

Types of Inter-state sale

Inter State can be either direct u/s 3(a) or by transfer of documents u/s 3(b) of CST Act. In case of inter state sale u/s 3(a), sale is inter state if it occasions movement of goods from one State to other. There should be express or implied stipulation for movement of goods outside the State. Sale is inter state even if goods move from one State to another under agreement to sale. The agreement may be express or even implied. Movement of goods should be inter-linked with sale or agreement to sale.

Sale should occasion movement of goods u/s 3(a)

Movement of goods can be under agreement to sale u/s3(a)

Property in goods can pass in either In inter-state sale, property in goods can pass to buyer in either

State u/s 3(a)

State. Sale can be inter-state even if buyer takes delivery of goods within the State, if he is required to take the goods outside the State.

Buyer and seller can be in same State Sale can be inter state even if both buyer and seller are in same u/s 3(a) State if goods are moving out of State on account of sale. Sale by transfer of documents u/s 3(b) Inter Stale sale can be by transfer of documents of title during movement of goods from one State to another u/s 3(b) of CST Act. Sale can be inter-state even if buyer and seller are in same State. The movement of goods commences as soon as goods are handed over to transporter. The movement is deemed to be continuing till delivery of goods is taken at other end.

Meaning of during movement of goods for purpose of section 3(b)

Exemption to subsequent sale during E-I/E-II transactions are required to establish sale during movement. If done, all subsequent sales are exempt from sales movement of goods u/s 3(b) tax/Vat. Stock transfer/Branch transfer of goods In stock/branch transfer, goods move from one State to another, but there is no sale. Goods are sent to branch or depot or consignment agent in other State. Stock transfer/branch transfer is not subject to tax since there is no sale. Stock transfer can be only of standard goods. Stock transfer of tailor made goods for a specific customer is a bogus stock transfer. It can be held as inter-state sale and sales tax may be payable. If buyer is identifiable before goods are dispatched, it is Inter State sale and not a stock transfer. Form F for stock transfer/branch transfer of goods Form F is required to be submitted to establish stock transfer. Sales Tax Officer can make enquiry regarding truth of contents in form F.

Stock transfer can be only of standard goods where buyer is not known

Double taxation of stock If dealer claims dispatches as stock transfer but Sales Tax transfer/branch transfer held as inter Authorities treat it as sale, there is double taxation. In such case, state sale CST Appellate Authority can grant relief. Sale subsequent to stock transfer/branch transfer Sale inside the State After stock transfer, sale in that other State is first sale and State sales tax (Vat) will be payable. If a sale is inside one State, it is outside all other States.

Sale in case of ascertained/unascertained goods

In case of specific or ascertained goods, sale within State takes place at the time of contract. In case of unascertained or future goods, sale takes place when goods are appropriated to contract in the State. If sale is inter-state as defined in section 3 of CST Act, it can never be intra state sale. Thus, inter-state sale is a residuary sale. Sale when there is no specific foreign destination is local sale. It is not export sale. Sale to ship which is within territorial waters is local sale.

Sale inside the State is a residuary sale Sale not export if no specific destination

Sale within territorial waters of India Sale within territorial waters of India i.e. within 12 nautical miles from the base line on the coast of India the is local sale. It is not is local sale inter-state sale.

Quantification of CST payable

Rate of CST

CST rate for sale to registered dealers is 2% (effective from 1-6-2008) or local sales tax rate, whichever is lower, if the purchasing dealer issues C form to selling dealer. If the buyer is not registered, sales tax payable is same as applicable for sale within the State. Sale to Government will be treated as sale to unregistered buyer.

Turnover for purpose Turnover for purpose of levy of CST is equal to Aggregate Sale price in respect of sale of goods prescribed period, minus CST payable. Prescribed period is the of CST period in respect of which a dealer is liable to submit returns under the General Sales Tax law of the appropriate State. Sale price for CST Sale Price means the amount payable to a dealer as consideration for the sale of any goods, less any sum allowed as cash discount according to the practice prevailing in the trade, but inclusive of any sum charged for anything done by the dealer in respect of the goods at the time of or before the delivery thereof, other than cost of freight or delivery or the cost of installation, in cases where such cost is separately charged.

Inclusions in sale price CST is payable on excise duty, cesses on goods, packing material, dharamda, design changes in respect of goods, and goods returned beyond 6 months. Exclusion of outward CST is not payable on outward freight (if charged separately) and outward

freight from sale price insurance if property in goods passes to buyer at the time of despatch. Exclusions fro sale price for CST CST is not payable on installation and commissioning and goods rejected. Trade and cash discounts are excluded for purpose of calculating CST. Subsidy paid by Government, export incentives and deposits for returnable containers are not part of turnover. Cost of installation and commissioning is not includible if shown separately in invoice. CST is not payable if goods are returned within 6 months. This time limit does not apply to rejection of goods since in that case there is no sale

Goods returned and rejected

Service tax and sales Service tax and sales tax are mutually exclusive. tax Goods eligible for Only those goods for which a dealer is eligible and which are contained in his registration by Dealer Registration Certificate are eligible for concessional rate. Purchasing dealer has to for concessional rate issue C form to avail concessional rate. of CST Goods (i) intended for resale, (ii) for use in manufacture or in processing for sale (iii) for use in telecommunications network (iv) for use in mining (v) for use in power generation/distribution, or (vi) containers and packing materials are only eligible for concessional rate. - For use means intended for use. Newspapers can purchase their raw material at concessional rate even if they are not required to pay sales tax/Vat on newspaper.

Exemptions from CST

Subsequent sale by transfer of documents

CST is not payable in case of subsequent sale by transfer of documents during movement of goods from one State to other, if E-I/E-II declarations are given. All purchasers have to issue C form to earlier seller. E-I form is to be given by first seller to first buyer and E-II form by all subsequent sellers to their buyers. CST is exempt if sale within the State is exempt. Sales tax may be payable on packing even if goods are exempt, if there was separate sale of packing material.

CST exempt if local sale exempt

Exemption by issuing State Government can exempt CST partially or fully by issuing a Notification, but a notification State Government cannot waive condition of issue of C form.

Sale to SEZ/UN/foreign mission Sale in course of Export

Sale to Special Economic Zone (SEZ) (if they give I form) and to foreign missions/UN (if they give J form) are exempt

No tax can be levied by State Government on sale in the course of export. Even when exports are arranged with the help of an agent, sale will be sale in course of export, if the goods are not sold to agent any time. Export sale can be direct or by transfer of documents after goods cross customs frontier of India. Purchase of aviation turbine fuel by Indian carriers and foreign aircrafts flying abroad is not in course of export, as there is no foreign destination. Sale to any destination outside territorial waters is export. Penultimate sale i.e. sale prior to actual export is exempt if exporter issues H form to supplier. There should be pre-arrangement of sale. Same goods which are purchased should be exported. Some processing can be done, so long as same goods are sold. Packing material can be purchased for export by issuing H form.

Sale in the course of State Government cannot levy tax on sale in the course of import. Sale by Agent in India can be in course of import only if two sales (i.e. sale by foreign supplier to Import Indian Agent and by Indian Agent to buyer in India) are integrated or inter-linked so as to form one transaction. Sale in the course of import by transfer of documents is also exempt, if it is before goods cross customs frontiers of India. The ultimate buyer in India should clear goods from customs. This is termed as high seas sale. Sale by Agent in India after import of goods is exempt only if there is privity of contract between ultimate buyer and exporter. Sale of goods in customs bonded warehouse is sale during import. Sale after import is a distinct sale and sales tax/Vat will be payable.

Basic Concepts of State Vat White paper is policy document issued by Empowered Committee White paper was released by Dr. Asim Dasgupta, (Earlier Chairman of Empowered Committee consisting of representatives of 29 States), on 17-12005. The White Paper is a policy document indicating basic policies of State Sales Tax VAT. However, the white paper is not a legally binding document. States have deviated from policy indicated in White Paper. The empowered committee is a misnomer as really it has no powers. State level Vat is introduced to avoid cascading effect of State taxes. Vat works on system of giving input tax credit (ITC) of state sales taxes paid on inputs and capital goods. Credit on inputs is instant, i.e. as soon as these are purchased. Credit of capital goods is usually spread over 2/3 years in many States. No one to one relation Vat does not require one to one relation. Instant credit is another beauty of Vat. No credit of certain taxes There is no credit of CST paid on inter-state purchases. There is no credit of other taxes like octroi, entry tax, entertainment tax, stamp duty, excise, customs duty, service tax etc.

Vat to eliminate cascading effect

Purchases not eligible Broadly, following purchases are not eligible for Vat credit (a) Inter-state purchases i.e. goods purchased from outside the State (b) Goods imported for ITC (obvious, since there will be no Vat invoice) (c) Goods purchased from unregistered dealer (as he cannot charge Vat) (d) Goods purchased from dealer who is paying Vat under composition scheme (as he cannot charge Vat separately in invoice) (e) Purchase where final goods sold are exempt from Vat (f) Final product is given as free sample i.e. goods not sold (g) Inputs stolen/lost/damaged before use/sale (h) Proper Tax Invoice showing Vat separately is not available (i) Ineligible purchases like automobiles, fuel, certain capital goods etc. as specified in relevant State Vat law i.e. items in negative list. Utilisation of Input Tax The input tax credit can be utilised for payment of Vat (sales tax) of goods sold. Credit Net Tax payable Net tax payable is calculated as follows (a) Output tax plus (b) Reversal of Credit (On exempted goods, stock transfers, free samples, lost inputs) Less (c) Input tax credit available. This net amount is required to be paid through prescribed challan on or before due date. Vat is consumption based tax Vat is consumption based tax on sale of commodities. Thus, Vat is payable in the State in which goods are consumed. If any input tax is paid in which goods were produced, the dealer exporting such goods outside the State is entitled to get

refund of such taxes or he can utilise that amount to pay Vat payable on other sales. All States except J&K have State Vat Vat Rates All States except J&K have introduced State Vat. Each State has its own Vat laws and procedures. Vat rates are generally as follows 0% for goods having special implications, 1% on gold and sliver ornaments, precious stones, 5% on declared goods and for basic necessities and machinery (earlier rate was 4%. Now many States have increased it to 5%), 12.5% Revenue Neutral Rate on all goods (Some States have increased this rate also), and 20% or more on fuel, diesel, cigarettes, lottery tickets etc. [There are variations among various States]. Purchase tax Some States are imposing purchase tax in certain cases, though not envisaged in White Paper. Exemption and composition scheme for small dealers Small dealers upto Rs 5 lakhs turnover per annum are exempt [In some States this limit is lower than Rs 5 lakhs]. Dealers having gross turnover exceeding the exemption limit but specified higher limit (which is Rs 50 lakhs in many States) have option of composition scheme. In such cases, 1% tax is payable on gross turnover in many States (without any input tax credit). Composition scheme is available in most of the States in respect of works contract and sale of food in hotel

Composition scheme for works contract, sale of food articles

Zero rated and exempt Certain sales are zero rated i.e. tax is not payable on final product in certain specified circumstances. In such cases, credit will be available on the inputs i.e. sales credit will not have to be reversed. Distinction between zero rated sale and exempt sale is that in case of zero rated sale, credit is available on tax paid on inputs, while in case of exempt goods, credit of tax paid on inputs is not available. Exports are zero rated. Inter-state sales will be zero rated when CST is brought down from present 2% to Nil or when GST is introduced. Tax on inter-state transactions At present, inter-state transactions are not zero rated. If there is sale, CST @ 2% is payable. If there is stock transfer, input tax credit.(ITC) upto 2% is disallowed. Present CST forms i.e. C, E-I/E-II, F, H, I and J are continuing. Each dealer is given a 11 digit Tax Identification Number (TIN). There is no regular assessment but selective audit is done by State Vat (sales tax)

TIN to dealer Departmental and external audit of

accounts of dealer

department. In case of large dealers, audit report by CA/CWA will have to be submitted. In some States, audit can be done by Sales Tax Practitioners.

Paper work Possibility of Frauds

Tremendous paper work is disadvantage of Vat system. Carousel fraud and frauds due to bogus invoices are very much possible in Vat.

SEZs Currently, India has 1022 units in operations in 9 functional SEZs, each an average size of 200 acres (0.81 km2). 8 Export Processing Zones (EPZs) have been converted into SEZs. These are fully functional. All these SEZs are in various parts of the country in the private/joint sectors or by the State Government. But this process of planning and development is under question, as the states in which the SEZs have been approved are facing intense protests, from the farming community, accusing the government of forcibly snatching fertile land from them, at heavily discounted prices as against the prevailing prices in the commercial real estate industry. Also some reputed companies like Bajaj and others have commented against this policy and have suggested using barren and wasteland for setting up of SEZs. Attempts to set up a Special Economic Zone in Nandigram have led to protests by villagers in the area. A Parliamentary Committee to study and give recommendations on SEZs has said that no further SEZs be notified unless the existing law is amended to incorporate the changes related to the land acquisitions. Genpact has announced its plans to expand its presence in Hyderabad by setting up a Special Economic Zone (SEZ) across 50 acres in the city at Jawahar Nagar. PointIndu has inaugurated Hyderabad by setting up a Special Economic Zone (SEZ) across 150 acres near Shamshabad close to airport. Salient Features of SEZs: Designated duty-free enclave to be treated as foreign territory for trade operations and duties and tariffs Permitted activities are manufacturing of goods, services, production, processing, assembling, reconditioning, re-engineering, packaging and trading SEZ units are positive net foreign exchange earners calculated cumulatively for a period of five years from the commencement of production Duty-free goods are meant to be utilized within the approved period

Performance of SEZ units to be monitored by an Approval Committee consisting of the Development Commissioner and the officers nominated by the Central and State Government.

The effects of Indian SEZs

Fiscal Benefits Multiplier effect SEZs offer several tax incentives. These tax incentives can play a vital role in catalyzing economic growth. The impact of SEZ investments can have a multiplier effect on the economy with exponential employment generation and forex earnings along with the reinforcement of competitiveness of SEZbased growth. Riding the IT/ITES Growth Wave India is fast becoming a preferred destination for off-shoring. The current run for SEZs is primarily driven by the boom in IT and ITES sectors luring global companies to invest in SEZs. According to NASSCOM, India IT & ITES industry is expected to grow steadily to US$ 148 billion by 2012. Global Participation in Indias Growth SEZs can bring enormous benefits like forex earnings, FDI, global exposure and transfer of technology. In India, SEZs are expected to get investments of the order of Rs.400 Billion over the next 5 year and generate 500,000 new jobs apart from the indirect jobs created during the construction period. Incentives and facilities offered to the SEZs: Preferential treatment is meted to SEZ units by granting them government policy concessions. Government offers a multitude to fiscal and non-fiscal concessions including duty free imports of raw material and capital goods and income tax exemptions. A summary of these concessions is given below: CUSTOMS & EXCISE CONCESSIONS The import of goods to SEZ units is duty free. Alternately, the goods can also be domestically procured. SEZ units may import or procure from the domestic sources, all their requirements of capital goods, raw materials, DG sets etc. for implementation of their project in the Zone without any license or specific approval. Goods imported/procured locally duty free could be utilized over the approval period of 5 years. Domestic sales by SEZ units will now be exempt from SAD. Domestic sale of finished products, by-products on payment of applicable Custom duty.

Domestic sale rejects and waste and scrap on payment of applicable Custom duty on the transaction value. INCOME TAX CONCESSIONS Physical export benefit 100% IT exemption (10A) for first 5 years and 50% for 2 years thereafter. Re-investment allowance to the extend of 50% of ploughed back profits Carry-forward of losses FOREIGN DIRECT INVESTMET 100% foreign direct investment under the automatic route is allowed in manufacturing sector in SEZ units except arms and ammunition, explosive, atomic substance, narcotics and hazardous chemicals, distillation and brewing of alcoholic drinks and cigarettes, cigars and manufactured tobacco substitutes. No cap on foreign investments for SSI reserved items. BANKING / INSURANCE / EXTERNAL COMMERCIAL BORROWING Setting up off-shore Banking Units (OBC) is allowed in SEZs. OBCs are allowed 100% Income Tax exemption on profit for 3 years and 50% for next two years. External commercial borrowings by units up to $ 500 million a year allowed without any maturity restrictions. Freedom to bring in export proceeds without any time limit. Flexibility to keep 100% of export proceeds in EEFC account. Freedom to make overseas investment from it. Commodity hedging permitted. Exemption from interest rate surcharge on import finance. SEZ units allowed to write-off unrealized export bills. CENTRAL SALES TAX ACT Exemption to sales made from Domestic Tariff Area (DTA) to SEZ units. SERVICE TAX Exemption from Service Tax to SEZ units

ENVIRONMENT SEZs permitted to have non-polluting industries in IT and facilities like golf courses, desalination plants, hotels and non-polluting service industries in the Coastal Regulation Zone area. Exemption from public hearing under Environment Impact Assessment Notification COMPANIES ACT Enhanced limit of Rs.2.4 crores per annum allowed for managerial remuneration Agreement to opening of Regional office of Registrar of Companies in SEZs. Exemption from requirement of domicile in India for 12 months prior to appointment as Director DRUGS AND COSMETICS Exemption from port restriction under Drugs & Cosmetics Rules SUB-CONTRACTING / CONTRACT FARMING SEZ units may sub-contract part of production or production process through units in the Domestic Tariff Area or through other EOU/SEZ units SEZ units may also sub-contract part of their production process abroad. Agriculture / Horticulture processing SEZ units allowed providing inputs and equipments to contract farms in DTA to promote production of goods as per the requirement of importing countries. Some of the new norms for SEZs are as follows: Ceiling on the maximum land size at 5,000 hectares Minimum processing area has been increased from 35% to 50% State Governments not allowed to acquire land for SEZ on behalf of private developers nor can they form JVs with private developers for the same State Governments allowed to acquire land to develop SEZs on their own, provided they follow the new relief and rehabilitation package

LIST OF FORMAL APPROVALS GRANTED UNDER THE SEZ ACT,2005

LIST OF VALID IN-PRINCIPLE APPROVALS