R. Kumar, B.Com. MBA (Finance)

VAT/SALES TAX CLAUSES

VAT/Sales Tax clauses form an important part of sales documentation viz. offer, quotation, order confirmation, Invoices, Purchase Order etc.  VAT/Sales tax being an indirect tax is statutorily eligible to be passed on to the customer.  However, unless customer is also bound contractually, it will be difficult to bind the customer for payment of taxes.  Therefore it is required that all sales documents must carry suitable safeguard sales tax clauses.

 Standard Clause

The under mentioned standard sales tax clause need to be specified in all quotations and order confirmations without exception:

“The prices are exclusive of sales tax (i.e. Central and/or VAT/State Sales Tax and/or Works Contract Sales Tax and/or for Lease tax and / or Turnover Tax and/or Sales Tax surcharge and/or etc. commonly known as sales tax, recovery whereof from customers is not prohibited under the provisions of the relevant law) and/or any other Central and/or State and/or Local Tax and/or Surcharge of any kind, which if levied will be charged extra”.

Particular attention is invited to the use of the words “if levied” in preference to words like “if leviable“ or  “if payable”, etc.  Use of the term “if levied” would construe that vendor is entitled to collect the amount from the client in case the same is levied irrespective of the fact whether it is leviable or not.  Since levy means payment of tax under the law, payment of taxes along with periodical Returns prescribed under the law could also be construed as payment in compliance of the levy in the relevant context. Hence, in such cases, tax included in invoices could be claimed from client provided of course that such inclusion is in keeping with the provisions of law as commonly known and/or interpreted by Sales Tax Authorities particularly with reference to past cases. As against this, use of the terms like “if leviable” and/or “if payable” leave wide scope for interpretation, for difference of opinion, litigation etc. In many cases, clients come forward with the plea that in their opinion, the tax is not leviable and/or payable.

Sales Tax clause relating to Resale of goods

a)     Local Resale:

In case where re-sales of goods do not attract any local sales tax by virtue of goods being subject to levy of first point tax only, following clause shall be incorporated in the relevant quotations and order confirmations:

“For sales within the State of……… the prices shall be enhanced by the like percentage at which local sales tax is levied.

It should be noted in this connection that the amount of price enhancement (even though the percentage of enhancement shall always be identical with the current sales tax rate) does not represent collection of sales tax or any amount by way of tax”

The standard sales tax clause in such cases will be further qualified by following specifications:

“Further please note that according to present sales tax law, sales within the State of ………… will however be exempted from sales tax as second point sales”.

b)   Inter-State Resale:

Similarly, where no Central Sales Tax is chargeable for re-sales of goods while the same are in transit from one State to another (viz. EI/EII transactions), the following clause shall be accordingly incorporated.

“For sales which are second stage inter-State sales (covered by exemption under Section 6(2) of the Central Sales Tax Act, 1956) no Central Sales Tax will be charged subject to your furnishing a valid Central Sales Tax declaration in Form ‘C’ or ‘D’. In absence of such a declaration, CST at full rates applicable to the sale of the relevant goods will be charged extra”

For all such second stage sales, for which the above referred Forms ‘C’ or ‘D’ are furnished , the prices shall be enhanced by the like percentage at which Central Sales Tax is levied at the time of delivery or sales of such goods supported by ‘C’/’D’ Forms.

It should however be noted in this connection that this amount of price enhancement does not represent collection of Central Sales Tax or any amount by way of tax.”

                The author is reachable at sunraj.18@rediffmail.com

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