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Sales Tax

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Overview

A sales tax is a consumption tax charged at the point of purchase for certain goods and services. The tax is usually set as a percentage by the government charging the tax. There are usually a list of exemptions. The tax can be included in the price or added at the point of sale.

Ideally, a sales tax is fair, has a high compliance rate, is difficult to avoid, is charged exactly once on any one item, is simple to calculate and simple to collect. A conventional or retail sales tax attempts to achieve this by charging the tax only on the final end user, unlike a gross receipts tax levied on the intermediate business who purchases materials for production or ordinary operating expenses prior to delivering a service or product to the marketplace. This prevents so-called tax "cascading" or "pyramiding," in which an item is taxed more than once as it makes its way from production to final retail sale.

Question: I am a manufacturer of Paper (Sales Tax)

I am a manufacturer of Paper, I purchases a waste paper from out side India than recycle it & make new paper. I am paying a service tax on import exp.,insurance on capital goods & non capital goods,bank charges,tel.bills,mobile bills,freight inward on raw material & machinery (my fixed assets),Freight outward on interstate sale,stock transfer,local & export, Building repair.Computer repair,Generator repair (used for fuel for office & running machinery) Can I claim a service tax credit on above , what will be percentage (50% or 100%)of service tax credit. Can I claim service tax credit on all items on which service tax is charged. What is mean of TRADING ITEMS & MANUFACTURED ITEMS. Jiwan Pokhariya (via mail)

ANSWER YOU CAN ADJUST SERVICE TAX ONLY ON RAW MATERIAL PURCHASED BY YOU IN INDIA. SERVICE TAX PAID BY YOU ON EXPENSES ARE NOT ALLOWED TO BE ADJUSTED. ON CAPITAL GOODS IT CAN BE ADJUSTED IN TWO ACCOUNTING YEARS EQUALLY. ssunderagarwal@sify.com - 9870243410

Effect on consumers

Sales taxes are considered by some to be regressive tax that is, low income people tend to spend a greater percentage of their income in taxable sales (using a cross section time-frame) than higher income people. However, this calculation is derived when the tax paid is divided not by the tax base (the amount spent) but by income, which is argued to create an arbitrary relationship. The tax rate itself is flat with higher income people paying more tax as they consume more. While the tax on spending as a percentage of gross income may be regressive, the effective tax rates can be progressive on consumption due to exemptions or rebates. If a sales tax is to be related to income, then the unspent income can be treated as defered (spending savings at a later point in time), at which time it is taxed. Sales taxes often exlude items or provide rebates in an effort to create progressive effects. In many locations, "necessary" items such as non-prepared food, clothing, or prescription drugs are exempt from sales tax to alleviate the burden on the poor. Others consider sales tax preferable since it taxes only consumption, which creates an incentive for savings and investment.

A related type of tax is the Value added tax or VAT. It is a system in which all businesses remit taxes on their sales but they are also refunded the amount of VAT remitted by their suppliers. In addition to avoiding cascading, under VAT there is no need for government to determine which sales are taxable and which are not, since all sales--retail, wholesale and intermediate--are taxed. Some or all of these taxes may be refunded but it generates a lot of paperwork (and income). The VAT paperwork can be burdensome but it remains a major source of tax income for most of the European Union, Mexico and other countries which charge on average a 15-25% VAT rate. Canadian sales taxes range from 0% in Alberta to an effective 10.6% in Prince Edward Island where sales tax is also applied to the federal Goods and Services Tax.

Most countries in the world have sales taxes or value-added taxes at all or several of the national, state, county or city government levels. Countries in western Europe, especially in Scandinavia have some of the world's highest valued-added taxes. Norway, Denmark and Sweden have the highest VATs at 25% although reduced rates are sometimes used. In some countries, there are multiple levels of government which each impose a sales tax. For example, sales tax in Chicago is 9%, consisting of 5% state, 2.25% city, 0.75% county and 1% regional transportation authority. And in Baton Rouge, Louisiana is 9%, consisting of 4% state and 5% local rate.1 However, there is no nationwide sales tax in the United States.

Since the 1990s, the idea of replacing the income tax with a national sales tax has been floated in the United States; many of the actual proposals would include giving each household an annual rebate, paid in monthly installments, equivalent to the percentage of the tax (which varies from 15% to 23% in most cases) multiplied by the poverty level based on the number of persons in the household, in an effort to create a progressive effect on consumption. While many political observers consider the chances remote for such a change, the FairTax has attracted more cosponsors than any other fundamental tax reform bill introduced in the US House of Representatives.

If a person purchases personal property from an out-of-state seller, sales tax is not due, but rather the customer may owe a so-called use tax. For example, if a person purchases a computer from a local brick-and-mortar retail store, the store will charge the state's sales tax. However, if that person purchases a computer over the internet or from an out-of-state mail-order seller, sales tax may not apply to the sale, but the person could possibly owe a use tax on the purchase. Because of exclusions on what is taxed and not taxed the typical consumer will pay on average about 1/3 of the listed sales tax on all his/her expenditures, i.e. a 7.5% tax will collect on average about 2.5% of a persons income.

See also

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