7.3. Sales Tax/Value Added Tax/Goods and Services Tax

Sales tax (ST) is charged by the government on the sale of an item. It is collected by the shopkeeper from the customer and given to the government. This is, therefore, always on the selling price of an item and is added to the value of the bill.

Sales tax is a type of tax that is imposed by the government on the sale of goods and services. When a customer purchases an item, the shopkeeper adds this tax on top of the item's price. The shopkeeper then collects the total amount, which includes the sales tax, from the customer and later pays the sales tax portion to the government. This means the tax is directly added to the selling price, increasing the total bill that the customer has to pay.

Think of buying a toy that costs $20. If the sales tax is 5$20 + ($20 * 0.05) =$21. The extra $1 represents the sales tax that the shopkeeper will forward to the government.

There is another type of tax which is included in the prices known as Value Added Tax (VAT).

Value Added Tax (VAT) is a form of indirect tax that is imposed at each stage of production or distribution of goods and services. Unlike sales tax, which is only charged at the point of sale to the end consumer, VAT is collected throughout the supply chain. Each business in the chain pays tax on the value they add to the product, leading it to be included in the final price that consumers pay.

Imagine a bakery that sells bread. The flour supplier charges the bakery for the flour with VAT included. When the bakery sells the bread to customers, they also charge VAT on the bread’s sale. Each stage the product goes through, from flour to bread, has VAT added based on the additional value created.

From July 1, 2017, Government of India introduced GST which stands for Goods and Services Tax which is levied on supply of goods or services or both.

Goods and Services Tax (GST) is a comprehensive tax system that was implemented in India on July 1, 2017, to replace multiple indirect taxes previously levied by the government. GST is applied to both goods and services, creating a single tax regime. It simplifies the tax structure and has the potential to raise tax compliance by providing a seamless flow of tax credit across different stages of value addition.

Consider a restaurant that prepares food. Under the previous system, they might have had to pay several different taxes on their ingredients, preparation, and dining services. With GST, there’s only one tax, making it easier for the restaurant to manage expenses and for customers to understand the pricing.

Example 4: (Finding Sales Tax) The cost of a pair of roller skates at a shop was  450. The sales tax charged was 5%. Find the bill amount. Solution: On  100, the tax paid was  5. On  450, the tax paid would be =  ×450 =  22.50 Bill amount = Cost of item + Sales tax =  450 +  22.50 =  472.50.

To find the total bill amount when purchasing an item with sales tax, first calculate the amount of sales tax based on the price of the item. In this case, for roller skates that cost 450, the sales tax is 5%. We calculate the tax by finding 5% of the cost: $450 × 0.05 =$22.50. The total amount on the bill will therefore be the cost of the roller skates plus the sales tax, resulting in a total of $450 +$22.50 = $472.50.

If you think about buying a new video game priced at $60 with a sales tax of 5$60 * 0.05 = $3. The total amount you would pay at the cashier is$60 + $3 =$63.

Example 5: (Value Added Tax (VAT)) Waheeda bought an air cooler for  3300 including a tax of 10%. Find the price of the air cooler before VAT was added. Solution: The price includes the VAT, i.e., the value added tax. Thus, a 10% VAT means if the price without VAT is  100 then price including VAT is  110. Now, when price including VAT is  110, original price is  100. Hence when price including tax is  3300, the original price =  ×3300=  3000.

To calculate the original price before VAT is added, you have to determine the portion that relates to the VAT. If the air cooler costs $3300 including VAT, and the VAT is 10$3300, which means the original price = ($3300 * 100) / 110 =$3000.

Think of it this way: if you bought a camera for $550 which includes a 10$500.

Example 6: Salim bought an article for  784 which included GST of 12%. What is the price of the article before GST was added? Solution: Let original price of the article be  100. GST = 12%. Price after GST is included =  (100+12) =  112. When the selling price is  112 then original price =  100. When the selling price is  784, then original price =  ×784= 700.

Similar to VAT, GST can be calculated from the total price that includes tax. Here, Salim bought an item for $784, which included a 12$100. This means the price with GST included rises to $112. To find out the original price for Salim’s purchase, we can set up a proportion: if$112 includes the original price plus tax, then for $784 it would be 100$700 as the base cost.

Imagine buying a smartphone that costs $600 after including GST. If GST is 12$600 corresponds to 112% of the cost. Solving that gives a listed price of approximately $535 without tax.

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