Sales Tax

Sales Tax, commonly imposed by different state and national governments is defined as a percentage tax generally levied at the point of purchase of goods and services from the market. It is form of indirect tax, a percentage of the final price paid by the consumer when purchasing the commodity from the market.

The practice of the sales tax has been to successfully raise resources for the government in a risk-free manner. With almost no opportunity to evade sales tax on registered items with the sales tax departments in different states, localities and counties across the world, it guarantees the administrative authority of a permanent source of income. In this context, it should be noted that some essential commodities such as medicines and various drugs are kept outside the purview of sales tax. Sales taxes are added on the final value of the commodity in question and it is a type of mark-up value over the cost of the product. Thus sales taxes are unavoidable on the part of the consumers as they are levied on the retail price of the product. Under most circumstances, sales taxes have a high compliance rate and are simple to collect.

Sales taxes as a form of indirect taxes are generally argued to be regressive as opposed to progressive label attached to income taxes. This is mainly because they tend to bring down the real income of poor people who spend a major share of their income on consumption articles. Consumable goods are the most heavily taxed with sales taxes accounting for almost 10% for certain commodities in advanced Western countries.

Sales taxes, of the type mentioned earlier, are called the conventional or retail sales tax. Another type of sales tax of the “cascading†or “pyramiding†variety exist which implies taxing the product at every intermediate stage of production making its way to the final retail market. This sort of taxing the suppliers of raw materials to the final maker of the product has been replaced by the Value Added Tax (VAT) in many countries.

In addition to the present VAT system implemented in India since 2005, the system for Octroi duty also exists in the country. Octroi duty is charged when there is lateral movement of different goods across states or cities. It is mainly levied when goods enter or leave different cities. Octroi duties will differ across states and may vary between different commodities.

Sales tax rates levied on the retail price of the commodity vary between the different states of India and they are also charged on intra state sales of goods. Sales taxes have the advantage over octroi duty in that they can be claimed back when goods are returned to the source as being defective.

The most recent addition to VAT in India in the name of CENVAT or Central Value Added Tax is yielding great returns to the Indian Government and indirect tax collections are on a steady rise as announced in the Budget Session for 2007-08. It had also been announced that Central Sales Tax (CST) will be reduced from 4% to 3% effective from 1st April, 2007. The first Central Sales Tax Act was passed in 1956.

Value Added Taxes or VAT have the advantage that the sales taxes paid by every producer at every stage of production is refunded by the amount of value added taxes paid by their suppliers. Thus to avoid the cascading type of sales tax, every commodity ranging from wholesale, retail to intermediary is taxed under the VAT regime. The VAT framework has been successful in India in 15 states like West Bengal, Andhra Pradesh and Orissa whereas states like Tamil Nadu is still outside its purview. VAT rates are one the major revenue earners for most of the European Union nations and countries like Mexico. VAT rates are found to be the highest in the Scandinavian nations such as Norway, Sweden and Denmark where it often hovers in the range of 25%.

Sales tax is administered by the different department of sales taxes operating under state governments in case of India. Sales taxes imposed by the national government in case of India falls under the Central Excise and Sales Tax whereas Local Sales Tax implemented by the state governments can climb up to 15%. Excise duty is generally fixed at 16% for all commodities. In case of USA too, sales taxes will vary across states and counties who are the administrative head for fixing sales taxes. Giving rough estimates of sales taxes will reveal adhoc figures which are not uniform in most of the countries. For example, sales taxes vary between 0%-10% in case of Canada.

Sales Taxes are the most easy to collect and the most difficult to avoid which makes it the most popular revenue earner for world governments.