Overview of CST
(Including Impact of other Indirect taxes)
Introduction
The provisions of various local VAT K-Vat Act 2003 and the Rules made thereunder concentrates on the sale or purchase of goods within the State, whereas the provisions of C.S.T Act 1956 and the Rules made thereunder formulates the principles for determining,
• when a sale or purchase of goods takes place in the course of inter-state sales or purchases
• when a sale or purchase of goods takes place outside a State
• when a sale or purchase of goods takes place in the course of import into India
• when a sale or purchase of goods takes place in the course of export out of India
The CST law also,
• provides for the levy, collection and distribution of taxes on inter-state sale of goods.
• declare certain goods to be of special importance in the case of inter-state sales or purchases
• specify the restrictions and conditions to which the state laws imposing taxes on the sale or purchase of such goods of special importance shall be subject.
Registration of dealers
The dealers liable to pay tax under the C.S.T Act 1956 shall get themselves registered under the said Act. Further any changes in the information provided in the application for registration shall be intimated by the dealer, so that the prescribed authority may amend the registration certificate to reflect such changes. For the purpose of granting registration, the prescribed authority may demand security from the dealer, if it considers necessary.
Inter-state sales or purchases
A sale or purchase is considered as inter-state sales or purchases, if the sale or purchase,-
• results in the movement of goods from one state to another; or
• is effected by transfer of documents of title to the goods during their movement from one state to another.
Hence movement of goods from one state to another is must and should, for attracting levy under CST law. However where the movement of goods commences and terminates in the same state it shall not be deemed to be a movement of goods from one state to another by reason merely of the fact that in the course of such movement the goods pass through the territory of any other state.
Sale or purchase of goods outside the state
So far we have seen cases where goods are purchase and sold within the state (where provisions of K-Vat law is applicable) and purchase and sale of goods from our state to other state or from other state to our state. It may be noted that only in the aforesaid two categories of sales or purchases the Government of Karnataka can collect the revenue (directly or by way of allocation by the Central Government towards the share of CST). In other cases, that is where the sales or purchase of goods takes place outside the state, where there is no movement of goods from or to our state, the taxes are collected by the Central Government under the CST law and our State Government is not entitled to share of such tax. Thus it becomes critical to know when the sale or purchase of goods takes place outside the state.
As per Section 4 of the C.S.T Act 1956, when a sale or purchase of goods is determined to take place inside a state, then such sale or purchase shall be deemed to have taken place outside all other states.
A sale or purchase of goods shall be deemed to take place inside a state if the goods are within the state-
• in the case of specific or ascertained goods, at the time the contract of sale is made; and
• in the case of unascertained or future goods, at the time of their appropriation to the contract of sale by the seller or by the buyer.
Sale or purchase of goods in the course of exports
A sale or purchase of goods shall be deemed to take place in the course of export of goods only if the sale or purchase either occasions such export or is effected by a transfer of documents of title to the goods after the goods have crossed the customs frontiers of India.
Even the last sale or purchase of any goods preceding the sale or purchase occasioning the export of those goods shall also be deemed to be in the course of such exports, if such last sale or purchase took place after, and was for the purpose of complying with, the agreement or order for or in relation to such export.
Sale of purchase of goods in the course of imports
A sale or purchase of goods shall be deemed to take place in the course of the import of the goods only if the sale or purchase either occasions such import or is effected by a transfer of documents of title to the goods before the goods have crossed the customs frontiers of India.
Liability to tax on inter-state sales
Every dealer shall be liable to pay tax under the C.S.T Act 1956, on all sales of goods effected by him in the course of inter-state sales. Exports are not taxed even under this Act.
If during the course of movement of goods from one state to another state a sale or purchase is affected for the second time by a transfer of document of title to such goods, then such sale for the second time is exempted from CST. However the dealer affecting such second time sales shall furnish to the prescribed authority in the prescribed manner and within the prescribed time a certificate signed by the dealer from whom the goods were purchased by him, which shall contain the prescribed details.
No tax on inter-state stock transfer
As per Section 6 of the C.S.T Act 1956, no tax is payable in case of inter-state stock transfer if the dealer effecting such inter-state stock transfer furnishes to the prescribed authority a declaration in Form-F.
Rates of tax
The rate of CST prescribed under Section 8 of the C.S.T Act 1956 is as follows,
< > percent of his turnover - subject to production of C- Form as prescribed.
Otherwise, at the rate applicable to the sale or purchase of such goods inside the state under the sales tax law of that state.
The Government can also prescribe the different rates for different products by way of a Notification. Further no tax is payable for sale of goods to SEZ units or to the Developer of SEZ.
The following are the aforesaid prescribed conditions and procedures for C form,-
• the exemption is available only for the specified goods (generally all goods specified in the purchasing dealers registration certificate as being intended for resale or for manufacture or processing of such goods for sale is available for exemption)
• the selling dealer shall obtain Form-C (in case the buyer is a registered dealer) or Form-D (in case the buyer is Government) from the purchasing dealer.
Determination of turnover
As per Section 2 (j) of the C.S.T Act 1956, turnover means the aggregate of the sale prices received and receivable by the dealer in respect of inter-state sales of any goods, made during any prescribed period. However the following shall be deducted from the aggregate of the sale prices received and receivable by the dealer,
• amount of CST, if the aggregate of sale prices comprises of the same.
• value of goods returned to the dealer from the buyers, within six months from the date of sales
• such other deductions as the Government may prescribe.
In case the dealer is registered under the local VAT laws of the state, then the tax period is same as that applicable under the local VAT laws, and in other cases, it is a ‘quarter’.
Levy and collection of tax and penalties
The tax will be levied and collected by the Central Government from the state from which the movement of goods commenced. Even though the authority to collect CST is the Central Government, the authorities of the VAT law of the state are empowered to assess, collect and enforce payment of the CST. For this purpose the authorities of the VAT laws of the state are bestowed with the required powers of administration under the CST law. Hence the provisions relating to invoicing, record keeping, assessment, etc., as discussed under K-Vat chapter may be referred to.
Goods of special importance in inter-state trade
The Central Government has declared the following category of goods to be of special importance in the inter-state trade.
• Paddy, rice, wheat etc.; Coal; Cotton; Crude oil
• aviation turbine fuel; hides and skin; iron and steel
• jute ; LPG for domestic use; Oil seeds
• < >; Sugar; Woven fabrics ; The aforesaid list indicates the broad categories of goods declared and hence please refer Section 14 of the CST for the details of the goods declared. The following are the main restrictions and conditions imposed on such goods.
• No state shall levy tax on such goods above 4%, even on sales within the state
• In case any local VAT of the state is levied on such goods, the same will be reimbursed to the dealer, if such goods are sold in inter-state trade with payment of CST.
Impact on Other Indirect Taxes
The multiplicity of taxation in India has meant that the dealers have to be aware of several other taxes as there maybe an impact of a business decision under one tax law having an adverse impact under another tax law. We examine briefly what could be the impact of CST on other taxes and those taxes on CST. Other taxes examined are: VAT, Central Excise; Service Tax; Customs and briefly impending GST in 2017. Some aspects may have relevance for CST are discussed as under:
Local VAT
The local VAT laws are very closely linked with CST. The transactions of sale of goods within the State are not liable to CST but would be liable for local VAT. Further the entire administrative mechanism of CST is dependent on the provisions contained in the local VAT laws. The connections are examined subject wise as under:
< > – All sales originating and completing within the State are ONLY liable for local VAT. The exception is where the movement of goods interstate ends up as subsequent sale within the State of origin, which is exempt as a subsequent sale under CST.
Sale/ purchase in the course of export – VAT cannot be charged for goods exported from India. Export means a sale of goods taking place in the course of export of the goods out of the territory of India only if sale either occasions such export or is effected by the transfer of the documents of title to the goods after the goods have crossed the customs frontier of India.
It includes the last sale preceding sale occasioning export, if such last sale took place after and was for the purpose of complying with agreement or order for or in relation to such export.
However when the procurement in the State is not linked intrinsically to goods subsequently exported VAT could be applicable.
Sale / purchase in the course of import – VAT is not applicable when goods are imported from outside India. However once they have crossed the customs frontier, then transaction would be liable for VAT.
Branch Transfer – The transfer of goods without payment of CST is permissible when one transfer to self or agent. Such transfer could be done from one State to another against Form F. However where there is a pre existing order as on date of transfer, the goods would be liable for CST under form C. Since forms have not been obtained, ratifying or limiting the liability is a major challenge. The impact could be as high as 20% including interest and penalty as in such cases the VAT rate applicable would have to be paid.
Rate of Tax Including Declared goods– The rate of tax under CST is the VAT rate applicable in the State of origin in normal course. This is usually when goods are sold to the consumers or the procuring dealers is unregistered or for some reason unable to provide the concessional form.
However where the “C” Form is available from registered purchasing dealers who purchase such goods, then the concessional rate of 2% is available. The liability for tax is however on the seller in case the form is not obtained or is faulty.
The rate of tax for declared goods even if sold within the State is restricted as they are understood to be essential goods. The maximum rate for such goods has been set at 5%.
Job Work–The transaction under job work are normally with independent entities who have excess capacities or specialised processing abilities. These entities maybe within the State or outside. The job worker may add some material or may just work on the materials/ components supplied by the customer. In the event that they add material then to the extent of transfer of property involved there is a need to charge either the CST or VAT depending on movement of goods outside or within the State respectively.
< > – Every dealer liable to pay tax under CST is required to register. There is no threshold limit for CST transaction unlike VAT. Normally both registrations are taken as some sale or purchase may happen interstate. For procurement of goods at concessional rate of 2% the subject goods need to be listed in the registration certificate. If not there then before procurement advisable to get them added.
Filing of Return– The returns for both CST and VAT are common. The reconciliation of respective turnovers as well as the forms underlying the concessions if any claimed are important for both taxes. The facility of filing a revised return is normally restricted to 6 months in most States.
Penalty & Prosecution– Penalty is to be fastened for any unlawful act as well as for negligence to do an act as required. The penalties in VAT laws would apply with modifications to CST. However for offenses set out in Section 10 of CST only CST would apply. The prosecution for section 10 offense is coupled with the stringent penalties which are applicable to the buyer as well as the seller. Penalties in lieu of prosecution are also an option.
Works Contract– The composite transaction can result in tax on the goods involved which are transferred in the course of execution. The scheme of taxation varies with each State. In case the goods move to another State due to the execution of the contract then it is said to be an interstate works contract. The valuation scheme prevalent under VAT in the State from which goods commence movement would be applicable. However goods procured and used in the State of execution would be subject to the local VAT.
Lease Contracts– The taxation of the right to use any goods for consideration gets covered under VAT. In these cases the control and possession of the goods are tobe with the buyer. In case control and possession is not given up by the owner then the transaction would be one of service. The goods which become immovable property after erection would not be liable for VAT/ CST as they are no longer goods.
The VAT rate applicable would depend on the underlying rate for the goods. In case goods move from one State to another then it would be an interstate lease. The place of entering into a contract for lease also is important as that would determine the situs of the sale.
Central Excise (CE)
The duty of excise is collected on the activity of manufacture on value of goods removed for home consumption. As the sales tax is on the sales and the excise duty is on the manufacture which is in fact payable at the time of removal, it is not necessary to think that whenever there is excise duty liability there is sales tax liability.
1. Manufacture – CE is liable on goods manufactured. The definition of manufacture has 3 limbs with the first one which connotes conversion of a product into another. This definition is important to understand manufacture under CST in the sense that any manufacture under CE which connotes conversion would also be manufacture under CST. The concept of deemed manufacture under CE may not apply to CST. However any process which results in transfer of property would be covered under CST. Coverage under CST therefore could be wider.
Illustrations for what are the activities amounting to manufacture is in Appendix 1 to this chapter.
2. Removal – Under CE duty is payable on removal. Many times the sales and removal coincide. However manufacture being an activity prior to sale, the CST would be payable on the amount of duty also.
However when goods are transferred to the depots/ branches, the duty of excise is payable as per the valuation rules. They maybe sent on stock transfer basis without CST. Goods which are removed for free distribution/ samples/ donation and such also would be liable to duty of CE, however not liable for CST.
In case of works contracts of larger values the possibility of goods fabricated at or off site for use in the projects is a reality. There maybe a need to pay the central excise duty say on concrete blocks, RMC, window frame, pre fabricated building tiles etc consumed in a project.
1. Cenvat Credit - Under CE the concept of credit of CE paid on capital goods and inputs is available. Also the service tax paid on input services eligible is also available for set off. However none of this credit can be set off against CST/ VAT.
2. Investigation/ Audit Under CE - The administration of CE is quite comprehensive for the reason that the number of manufacturers is limited and the exemption available is for Rs.150 lakhs. The investigations resulting in detection of suppressed turnover would directly also have avoided recording of sales. Further at the time of audit also excess credit availment, clandestine removal, undervaluation aspects being all in relation to goods would equally result in detecting leakage of revenue under CST/ VAT.
3. Valuation – The inclusion of value of goods supplied free of cost may also have some bearing when the gross amount is billed but deduction claimed for the material supplied free of cost.
4. Export/ Supply to SEZ – The documentation for export under central excise is reconciliation based. Therefore it can aid in proving sale in course of export. Various forms are also parallelly used such as CT-1 = Form H. Similarly for supply to SEZ Form I is relevant.
5. Job Work – Job work under CE is under various provisions wherein the material sent and received back are reconciled. Similar reconciliation is required for ensuring that the ITC is reversed for material not received back. Also to ensure that removals from the job worker directly where JW discharges the duty of CE are not omitted at the time of making the payment of CST by selling dealer who is selling the job worked final goods.
Service Tax
The levy of tax on services initially was on specified taxable services categories set out in Section 65(105). From July 2012, it was made comprehensive and only few services which are covered in negative list or exempted are excluded. Rest all is taxable. Some aspects of transactions where both goods and services are involved pose a few challenges. There could however be a transaction of supply, design, erection and installation where on the amount of supply of goods sales tax could be applicable and on amount of service, service tax be applicable. The dispute arises when the contract is composite and break up of components is not available.
1. Definition of Service - The definition of “service” excludes trading as well as deemed sales. Therefore an activity which constitutes merely a transfer of title in goods by way of sale, would be excluded from service tax levy. In some cases, both VAT/CST and service tax could be payable on composite contracts as in case of: works contract; supply of food by restaurants and outdoor caterers, licensing of software.
2. Declared Service - The definition of service also includes declared services wherein some intangible goods usage is also included. Therefore conflicts on what is liable for CST and what for service tax would exist.
3. Bundle of Services – Today’s transactions where both services and goods are involved are varied and many. It is estimated that 40% of all transactions are a combination. The concept of bundled service provides that the main service is the service category into which the service gets covered. However the goods transferred in the service would be liable to CST.
4. Right to Use - The right to use goods necessarily under CST is where the effective control and possession is with the customer. Therefore in a contract if an operator is involved and full control does not exist then the same would be liable for service tax rather than CST.
5. Valuation of WC/ Supply of Foods – The value of goods involved is what is subjected to CST. However where the value of services and labour are not determinable then the value can be fixed as per the deduction allowed. Similarly in service tax. Therefore in some transactions the CST/VAT is payable on 75% and Service Tax on 70%. In the case of original works contract it could be CST/VAT on 70% and Service Tax on 40%. At times when the customer is unable to avail the credit therefor, there are objections.
6. Point of Taxation – In case of continuous service like works contract AMC etc the payment of service tax is on completion of work or raising the bill or receipt of monies which is similar to CST once work is commenced. Therefore the timing of payment of CST/VAT would also be determinable based on the same criterion. However where the work has not started and advances received under CST/ VAT there is no liability.
7. Place of Provision of Services – The place of provision of services w.r.t. goods being repaired or AMC would be the place where the goods are located. This would also determine whether the activity is export or interstate or intra state sale of goods.
Customs
The connection to CST/ VAT may only be relevant in a few situations as under:
1. Sale or Purchase in course of Import- The filing of the bill of entry is the point when customs is applicable. If there is the endorsement of the title of goods imported before the crossing of the customs frontier. It is not liable as purchase/ sale in the course of import.
2. Sale or Purchase in course of export - Similarly the title of goods transferred after they cross the customs frontier is important for sale/ purchase in the course of export.
3. Payment of SAD in lieu of sales tax- When goods are imported they are liable for special additional duty [SAD] of customs @ 4%. When these goods are subsequently sold they are eligible for SAD refund subject to proof that they have been sold under CST / VAT. In some cases where MRP is affixed prior to import, the SAD itself may not be payable. At present refunds are delayed and have a transaction cost attached to them.
Impact Under GST
The fact that Central excise, service tax, part of customs [other than BCD] would all get subsumed in GST means that these connections would not be so relevant or necessary to be planned for. However till pure GST comes there would be some impact as the erstwhile sales tax on petroleum and CST @ 1% is expected to continue.
Conclusion
The understanding of the inter connection with the above taxes provides a holistic picture of the care to be taken in structuring the transaction. Also to ensure that while planning for optimising one indirect tax it does not lead to a disadvantage in another. For the tax authorities this understanding could provide vital signs of leakages. For the professionals ensure that wholesome advice without repercussions under other taxes is given.
This article is based on material adapted from Handbook on CST – May 2015 Authored by CA Madhukar N Hiregange & CA Roopa Nayak - Published by Notion Press. The impact on VAT has been explained generally. However the provisions as applicable in Karnataka have been followed. madhukar@hiregange.com
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