SALES TAX GENERAL ORDER NO. 1 OF 1995

DATED 9TH APRIL, 1995

Rescinded by Sales Tax General Order No. 2 of 1996.

Subject:- LEVY OF SALES TAX ON GOODS PRODUCED BY VENDORS FROM MATERIALS SUPPLIED BY PRINCIPALS.

Attention is invited to Sales Tax General Order No. 5/1994 dated the 6th April, 1994 (copy enclosed for ready reference). The said General Order deals with calculation of sales tax on consideration received by a vendor who manufactures a product with the help of raw materials supplied by the principal to the vendor for converting them into finished products.

 2.   It is stated in the said General Order that value of supply by the vendor for calculating sales tax in such cases, will be the gross amount of conversion charges without any deduction therefrom. Sales tax is therefore, to be calculated on the gross amount of such charges and excise duty, if any, levied thereon. However, input tax credit for sales tax paid on raw materials and packing materials or other goods supplied by the principal would not be adjusted against the tax so calculated. Certain conditions are also laid down vide para 4 of the said General Order which are required to be fulfilled.

3.    The issue has further been examined in Central Board of Revenue, with the broadening of sales tax base, similar more complex situations are emerging; they may need careful consideration and decision. Considering the probabilities that may be encountered, the following guidelines are issued:

 

(i)   in a case where a vendor produces goods with the material supplied by his principal (against labour charges only) sales tax will be calculated on the gross amount of charges received by the vendor and excise duty, if any. Input tax credit of sales tax paid on such raw materials and packing materials etc. which are supplied by the principal will not be available to vendor, for example, the principal provides raw materials worth Rs. 2,000.00 and the job involved labour charges of Rs. 500.00. The vendor will pay sales tax of Rs. 75.00 @ 15% on Rs. 500.00 charged by him and will not get any input tax credit.

 

(ii)   input tax credit will be available to the vendor on purchases of those materials which are purchased from a registered person other than the principal, and on which sales tax was paid. This will be available in case he uses them in making the product for his principal.

 

(iii)  when the principal supplies the goods made by the vendor, he will pay the sales tax on final value of supply after availing input tax credit which was incurred by the vendor and the principal for making purchases for raw materials. For example, if the principal sells a product for Rs. 4,000.00 manufactured out of the raw materials worth Rs. 2,000.00 and Rs. 500.00 have been paid to vendor, the net liability of the principal will be as under :-

 

Sales Tax on Rs. 4,000.00                        =    Rs. 600,.00

Sales tax Paid:

a)    on raw materials worth Rs. 2,000.00   =     Rs. 300.00

b)    by vendor for charges of Rs. 500.00    =     Rs.   75.00

                Sub Total                               =     Rs. 375.00

 

Net Sales Tax payable by the principal:

Rs. 600.00 (-) Rs. 375.00                         =     Rs. 225.00

 

(iv)  Principals as well as vendors who wish to avail the provisions of this General Order shall get themselves registered.

 

(v)   Necessary records will be maintained which every manufacturer is required to maintain under the law, in addition special records and returns may be prescribed by the Collectorate to satisfy them that the Input tax credits are correctly being claimed by the vendors and the principals.

 

(vi)  The Collectors have to ensure that the principal pays sales tax on the value of finished product sold by him after getting it fabricated through the job vendor.

4.    The provisions of Sales Tax General Order No. 5/1994 need not be followed as the present order covers all the situations.