One thing that you surely look for while income tax filing, is the scopes for sales tax deduction. The tax that you pay throughout the year while purchasing some goods and services, can provide you with some deduction facilities during the annual income tax filing.
The incorporation of GST or Goods and Service Tax from July 2017 has led to a unified sales tax market for over 1.4 billion people in India. While this unifying sales tax makes your tax filing easier, you need to know the metrics of sales tax deduction to get some real savings from your annual income tax billing.
What Is Sales Tax Deduction?
Before knowing how you can calculate the sales tax, it is important to know what actually sales tax is. Sales tax is a tax that you pay to the central government for selling your goods or services. Sales tax deduction is simply subtracting this taxable amount from your tax bill. The term “sales tax deduction” also often refers to as CST or Central Sales Tax deduction process. The sales tax is usually deducted indirectly during the time of buying and exchanging the taxable goods. By claiming your sales tax deduction, you can lower your overall individual income tax amount from the tax bill.
There is a list of goods and services that upon purchasing or availing in a fiscal year can provide the individual with the chance of claiming a sales tax deduction. This can be your specified mutual fund investments, your PPF and EPF, your life insurance policy or simply the educational loan you have taken for your child. But to claim for a sales tax deduction you need to calculate your yearly expenses for sales tax properly. Let’s see how you can begin with your calculations.
What Is the Right Way to Calculate Sales Tax?
Without proper guidance, you may feel that the calculation of sales tax is extremely difficult. Therefore, here is a brief guide for you to smoothly calculate sales tax. The formula for calculating sales tax us;
Total Sales Tax = Cost Of Item × Sales Tax Rate
Let’s conceptualise the formula using a simple example;
Say, Mrs. Roy has bought a watch worth rupees 1000 which has a sales tax component of 10%. Then the total sales tax she has paid during the purchase of the watch will be (1000 × 0.10) = 100. Thus, she paid rupees 100 extra as a sales tax. The total amount that she paid comprising the sales tax thus would be 1100 rupees. Now while filing her income tax billing, she can show these sales tax-deductible amounts to get some reduction from her overall taxable amount.
To claim for your sales tax deduction, you will have to calculate your sales tax expenses till a scheduled day. There are several central sales tax calculating tools and software you can utilize to speed up this process. However, there is a fine difference between sales tax deductions and tax exemptions. Let’s understand the difference below here.
The Difference Between Sales Tax Deduction and Exemption
Often taxpayers get confused between these two terms; deduction and exemption. Deduction means some reduction from your taxable income whereas exemption means to exclude some types of income totally from the taxation process.
- Your tax deduction limits are mostly predefined and can differ on your selection of a specific Income Tax Act. On the other hand, exemptions are directly offered by the central government on certain products and services to promote their use.
- Tax deductions are often offered to promote individual savings and investments whereas tax exemptions are offered to provide relief to the taxpayers or encourage buying certain goods or services.
- Tax exemption in India falls under the Income Tax Act of 1961. Some of the tax-exempt areas that Sec 10(13) of this Act has are for House Rent Allowance (HRA) and Leave Travel Allowance (LTA). There are also special sources of income such as agricultural income that is entirely tax exempted.
- Tax deduction on the other hand falls under the sections 80C, 80D,80G and 24 of the same Income Tax Act of 1961. However, most of the deductions under this section are now removed from the new tax regime. These sections let you claim for tax deductions in areas like education loans, donations, medical premiums, investments, etc.
Conclusion
The calculation of sales tax is very simple if you know the percentage of the retail price of your purchased goods and services. By calculating the expenditure of sales tax throughout the year, you can demand a certain percentage of sales tax deduction during annual income tax filing. This brief understanding of the technique of calculating sales tax, along with its difference from the tax exemptions will help you make a more comprehensive tax filing from here on.
Also, Read – Sales Tax Compliance Outsourcing for Business Startups
FAQs
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What things to keep in mind while calculating sales tax?
One thing you must consider while calculating sales tax is that it often differs depending on the state or city. If you are purchasing multiple items, the sales tax will also be calculated separately for each taxable item and it will be calculated in percentage.
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What are the different types of forms issued by sales tax authorities?
The sales tax authority of India issues different sorts of forms for sales tax deductions. These are Form C, Form D, Form E1, Form E2, Form F, Form H, and Form I.
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What does inter-state sales mean?
As its name suggests, inter-state sales mean moving sellable products from one state to another solely to sell them to customers. While buying or selling products from different states the sales tax deduction rates may vary according to the taxation policy of that state.
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What is the sales price?
The sales price is the ultimate price at which a manufacturer sells his/her product to the end customer. This thus consists of the manufacturing price, packaging price, insurance chargers and lastly the sales tax paid by the manufacturer.
