What is Sales Tax?
This is the tax levied by a state government on the sale or purchase of items within the state.
Important Terms
Cost Price (C.P.): The price, at which an article is purchased, is called its cost price.
Selling Price (S.P.): The price, at which an article is sold, is called its selling price.
List Price: This is the price at which the trader/shopkeeper sells the goods. This price is known as the list price of the article.
Discounts: In order to give a boost to the sale of an item or to clear the old stock, sometimes the shopkeepers offer a certain percentage of rebate on the marked price. This rebate is known as a discount.
Computation of Sales Tax
- Sales Tax is paid on sale price
- Sales Tax
- Rate of Sales Tax
Value Added Tax (VAT)
What is VAT?
It is the tax on value-added at each transfer of goods from its original manufacturer to the retailer. To understand this, review the table below.
In case of Sales Tax | In Case of VAT | |
For Manufacturer:
Purchase Price = 100 Rs. Sale Price is = 150 Rs. |
Tax Paid = Nil
Tax Charged = Nil |
Tax paid = 10% of 100Rs. = 10 Rs.
VAT Paid = 10% of 50 Rs. = 5 Rs. (Value added is 50 Rs.) |
1st Dealer:
Purchase Price = 150 Rs. Sale Price = 210 Rs. |
Tax Paid = Nil
Tax Charged = Nil |
VAT Paid = 10% of 60 Rs. = 6 Rs.
(Value added is 50 Rs.) |
2nd Dealer
Purchase Price = 210 Rs. Sale Price = 280 Rs. |
Tax Paid = Nil
Tax Charged = Nil |
VAT Paid = 10% of 70 Rs. = 7 Rs.
(Value added is 50 Rs.) |
Final Retailer
Purchase Price = 280 Rs Sale Price = 400 Rs. |
Tax Paid: Nil
Tax charged = 10% of 400 Rs. = 40 Rs. Total Tax Paid to Government = 40 Rs. |
VAT Paid = 10% of 120 Rs. = 12 Rs.
Total Tax Paid to Government = 10+5+6+7+12 = 40 Rs. |
The government gets the same tax, just that it is collected at all levels of transactions.