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

  1. Sales Tax is paid on sale price
  2. Sales Tax = \frac{ \text{Rate of Sales Tax} \times \text{Sale Price}}{100}
  3. Rate of Sales Tax =  \frac{\text{Sales Tax}}{\text{Sale Price}}  \times 100

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.