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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 discount.
Computation of Sales Tax
- Sales Tax is paid on sale price
Value Added Tax (VAT)
What is VAT?
It is 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.) |
2^{nd} 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.