In today’s highly economical world, timely filing of taxes is crucial to avoid financial discrepancies and legal harassment. One such tax that most citizens have to pay is the sales tax. The sales tax or VAT produces around 55.822 billion Indian rupees of the total tax revenue.
The state and local governments impose sales tax on retail products and services to collect this revenue in the treasury. Companies add the sales tax to their retail price to make it available to the end user upon each transaction. Understanding the fundamentals of calculating sales tax will help you comply with the taxing authorities and dodge the negative effects of an audit. So, let us start without further ado.
What is Sales Tax?
A sales tax is a consumption tax that the state or central government imposes on the consumer upon purchasing taxable goods and services. The taxable amount is calculated based on the price of the product and then added to the retail price during sales. Businesses add the sales tax amount to the cost of the product to collect the taxable amount from the end user and remit it to the government monthly, quarterly, or yearly.
What is The Purpose of Sales Tax?
Different states can have different sales tax rates per the guidelines of their respective local governments. The revenue collected from these sales taxes is then used in serving several public beneficiary services, including;
- Healthcare
- Public schools
- Public transport
- Road construction and maintenance
- Law enforcement
- Fire services
- General funds
The central government sets a basic sales tax rate upon which the local governments can impose their taxes. However, one may not necessarily have to pay local sales taxes when buying and selling online.
How To Calculate Sales Tax?
One must record the expenditure on sales tax to calculate sales tax. You can do it using accounting software, separating the taxable amount into a separate bank account, retaining all the receipts, and reconciling the books at least once a month to confirm the accuracy of the tax collection. Below are the 5 essential steps following which you can calculate sales tax more effectively;
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Determine the Rate of The Sales Tax
The first step in calculating sales tax is obviously knowing the exact rate. In India, the sales tax rate ranges from 5% to 18%, depending on the type of goods or services you are purchasing. Sometimes, on this base tax rate, the local government imposts extra taxes, that too add up to the total amount of the product. Therefore, knowing the sales tax rate according to your area of operation is crucial before calculating it.
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Calculate the Total Sales Tax Rate
The next step will be to combine the local and central sales tax rates to calculate the overall sales tax rate. Companies operating across different states in the subcontinent or overseas need to calculate the combined sales tax depending on the selling location. Sales tax also depends on the shipping location of the goods. Therefore, online sellers must have a strong nexus with the location to calculate correct sales taxes. The overseas storehouse, employees, drop shipping relations and affiliate marketers, all can together make up the nexus.
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Classify Taxable Goods and Services
The next important task for you is to segregate your products into taxable and tax-exempt categories. In general, most of the physical products fall under the taxable goods. Products like books, cars, electronics, and furniture are taxable. Agricultural products, medicines and clothes can witness some tax exemptions. Usually, taxes on services are less than taxes on products.
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Determine the Sales Price for Taxable Goods and services
Then, to calculate the total sales price, the tax preparer adds the listed price tag of every taxable amount. They exclude tax-exempted products and products with reduced sales tax rates. For the reduced sales tax-rated products, they can set up a different calculation on the balance sheet.
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Calculate the Sales Tax
The final formula you will need to calculate sales tax is;
“Sales tax amount = (total taxable sales price)
×
(sales tax rate in decimals)”
So, you will need your product’s tax rate and total selling price to multiply them. To get the final amount after adding sales tax you can follow the formula;
“Final sales amount = (total taxable sales price) + (sales tax amount) + (total non-taxable sales price)”
Therefore, if the price of a watch is 1000 rupees and it has a 5% sales tax then the sales tax amount will be 1000 × 5/100 = 50 and the final sales amount of the product will be 1000 + 50 = 1050 rupees.
Conclusion
To conclude, sales tax is one of the essential tax obligations that all consumers pay when purchasing taxable goods and services. Consumers pay the ultimate amount but calculating sales tax lies in the hands of the businesses. Therefore, any mistake in filing such sales tax and GST tax billing can create more significant financial and legal obligations. Trust Captainbiz for your GST billing and all sorts of tax queries today.
Also, Read – Everything You Need to Know About Sales Tax Deduction
FAQs
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Who collects sales tax?
Generally, in physical selling, the seller, retailer, or vendor collects the sales tax from the end user by adding the taxable amount to the taxable product’s price. In the case of online selling, the big online sites take on the responsibility of charging sales tax.
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What is nexus?
Nexus refers to the seller’s connections with the marketplace. This term is especially used in the case of international trading.
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What is value-added tax?
Value-added tax, or simply VAT, is a tax added at each level of a product’s transformation. The raw material is subjected to tax, and as it transforms through a one-by-one manufacturing procedure, the tax adds up to it.
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How do you calculate sales tax?
To calculate the sales tax, you can convert the sales tax percentage into a decimal number by dividing it by 100. Then multiplying this decimal number with the cost of the item will give you the sales tax amount.
