An Alumnus of IIM and DU with almost a decade of experience in the banking and finance sectors. I had the opportunity to work with all types of institutions in BFSI ecosystem like Bank, NBFC, Fintech, Consulting and Auditor. I started my professional journey at KPMG and subsequently worked in leading names of the BFSI sector including Ujjivan Bank, Vistaar Finance. Currently building a fintech startup ( PICE) by handling alliances, compliance and creation of GTM strategy for payments and credit product.
2 Dec 24
7 mins
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Central Sales Tax (CST): Objectives of CST Act 1956
CST's Role: CST governed inter-state trade and tax compliance before GST.
Tax Framework: It was an indirect tax under the CST Act, 1956, levied on inter-state sales.
Economic Impact: CST affected business costs and increased consumer prices.
Transition to GST: GST replaced CST, simplifying taxes and boosting inter-state trade.
Unified System: GST created a cohesive tax framework, promoting ease of business.
The Central Sales Tax (CST) was a vital tax mechanism in India before the implementation of the Goods and Services Tax (GST). Governed by the Central Sales Tax Act, of 1956, CST was levied on the sale of commodities across state boundaries. Understanding CST is crucial for understanding how India and its tax structure evolved, as it played a pivotal role in regulating interstate trade before being replaced by GST.
In this blog, we will discuss the objectives of CST before GST implementation and its effect on businesses and consumers.
What Is Central Sales Tax?
When a businessman sells certain goods to another state, the goods are subjected to a tax known as the Central Sales Tax. It is an indirect tax in GST that is to be paid in the state where the goods are being sold. This tax is only levied upon inter-state transactions. If the goods are exported within the same state, they are not subject to CST.
Central State Tax in India
Central Sales Tax, CST in GST was introduced in India to eradicate the chances of any discrepancy in cases of inter-trade sales. In the year 1956, the Parliament passed an Act to introduce the Central Sales Tax.
The primary reason was to monitor goods sales and their tax. Therefore, CST comes under the bracket of the Union List of Seventh Schedule. Despite being levied by the Central Government, the government of the state of transaction administers the entire sales process.
Thus, in cases of lawful inter-state trade, the trader needs to pay both central sales tax and state sales tax.
The Central Sales Tax Act of 1956 lays down the fundamental regulations concerning sales taxation in India. Introduced in the Sixth Constitutional Amendment, this Act has been effective since 1957. It serves as the basic framework of Central Sales Tax in India, bringing inter-state trade transactions under legislative jurisdiction. The Act clearly states the penalties involved, trade restrictions on interstate sales and goods important for inter-state trade.
Objectives of Central Sales Tax Act, 1956
Here are the primary objectives for introducing Central Sales Tax, in 1956:
Simplify the taxation process when it comes to inter-state trading. From levying to collection to distribution of taxes, the CST Act aims to reduce confusion regarding sales tax.
Frame tax transaction policies to ensure that the government regularly monitors the occurrence of sales and interstate purchases of goods, concerning interstate commerce
Categories and classify goods according to their importance in trade and commerce
Establish an official authoritative body that settles interstate trade disputes
Central Sales Tax Rate
Since the implementation of CST, the rate of tax has kept changing from time to time. Initially, it was 1%, which eventually rose to 2%. From July 1975 onwards, the tax rate further rose to 4%.
CST Act exempts all goods of the tax which are important to be transported from one state to another. The Act consists of provisions for essential commodities so that they remain non-taxable, taking public welfare into account.
In 2007, the Central Sales Tax rate came down to 3% from the previous rate of 4%. Further in June 2008, the tax rate saw a decline to 2%. This reduction in CST rate was accepted because of the need to introduce GST (Goods and Services Tax).
The Central Sales Tax rate applicable for different situations is shown in the following table:
When a trader is dealing in goods that involve inter-state trade transactions, he must abide by certain rules, such as:
A dealer should apply (via Form A) to register under Section 7 of the CST Act. The application must have the signature of the proprietor and be verified by a competent authority.
Even if the trader had businesses in more than one state, only one application will be taken into consideration.
The registration certificate must be present at the principal place of business. At the other business locations, you can keep a copy of the certificate.
If the registration certificate is lost, the applicant has to make a payment in the form of court fee stamps for a fresh copy.
How To Get Central Sales Tax Registration?
The first step towards registering for Central Sales Tax is keeping your TIN registration number handy. After filling in the Taxpayer Identification Number, you need to complete the necessary documentation. Once you are through with the documentation process, the individual can pay the registration fees.
You need the following documents to get central sales registration :
Government-approved proof of ID
Address proof of business location
PAN card
Address proof
Photographs
Bank statement
Purchase invoice
Security/Reference
Impact of CST on Businesses and Consumers
The Central Sales Tax (CST) significantly affects both businesses and consumers in today's economic landscape. For businesses, CST impacts cost structures, influencing product pricing and overall profitability. Companies involved in inter-state trade must consider CST rates when setting prices. This impacts business strategies, supply chains and distribution efficiency, affecting competitiveness.
For consumers, CST directly increases the sale price of goods, impacting purchasing decisions and spending patterns.
India’s transition from the Central Sales Tax (CST) to the Goods and Services Tax (GST) marks a transformative shift. GST subsumes all the existing indirect taxes under a single head with an efficient framework.
The uniform tax structure simplifies compliance, eliminates cascading taxes and helps to achieve the government's aim of 'One Nation, One Tax.' This shift fosters a business-friendly environment, encouraging smoother inter-state trade operations.
Conclusion
The transition from CST to the Goods and Services Tax (GST) addressed several issues by simplifying taxation. The implementation of CST before GST remains significant, but its replacement by GST created a more cohesive, transparent, and business-friendly environment, aligning India's tax structure with global standards.
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FAQs
What is Central Sales Tax (CST)?
CST was an indirect tax levied on inter-state sales of goods in India under the Central Sales Tax Act, 1956. It applied only to goods sold across state borders and was collected by the state where the sale originated. CST was a precursor to the Goods and Services Tax (GST), which now governs inter-state trade.
What were the objectives of CST?
The primary goals of CST were to regulate inter-state trade, simplify the taxation process, ensure proper tax monitoring, and categorize goods based on their trade importance. It also aimed to prevent tax evasion and address disputes arising from inter-state sales.
How was CST different from GST?
CST applied only to inter-state goods sales, while GST is a comprehensive tax that subsumes multiple indirect taxes, including CST, under one framework. GST ensures a uniform tax rate across the country, eliminates cascading taxes, and simplifies compliance for businesses.
What was the CST rate and its evolution?
Initially, CST was 1%, later rising to 4% in 1975. It was reduced to 3% in 2007 and further to 2% in 2008, paving the way for GST. The reduced rates aimed to ease the transition to a uniform tax system under GST.
How did CST impact businesses and consumers?
For businesses, CST increased costs and influenced pricing strategies, supply chains, and competitiveness. For consumers, it raised the sale price of goods, affecting purchasing power and spending patterns. The introduction of GST resolved many of these inefficiencies.
An Alumnus of IIM and DU with almost a decade of experience in the banking and finance sectors. I had the opportunity to work with all types of institutions in BFSI ecosystem like Bank, NBFC, Fintech, Consulting and Auditor. I started my professional journey at KPMG and subsequently worked in leading names of the BFSI sector including Ujjivan Bank, Vistaar Finance. Currently building a fintech startup ( PICE) by handling alliances, compliance and creation of GTM strategy for payments and credit product.
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