Comprehension of Sales Tax Calculation - Lecture Notes

Key Requirements

• Subject: Calculation of sales tax payable or refundable for Confidence Engineering (a sole proprietorship engaged in manufacturing auto parts) for the period ending February 2024.
• Reference: Provisions of Sales Tax 1990 and rules made thereafter.
• Objective: Compute the amount of sales tax payable or refundable and the input tax to be carried forward for the tax period.
• Critical Tasks:
  • Exclude irrelevant details and highlight pertinent computations.
  • Provide reasons for exclusions or adjustments.

Summary of Transactions

Purchases

• From Registered Persons: Rs. 338 million
  • Includes Rs. 6 million for wires and cables used in machinery repair.
• From Unregistered Persons: Rs. 60 million
  • Includes Rs. 14 million purchased from cottage industry (exempt).

Sales

• To Registered Persons: Rs. 220 million
  • Includes Rs. 5 million in auto parts, supplied FOC under warranty (non-taxable).
  • Rs. 4 million withdrawn by the owner for personal use (treated as supply).
  • Rs. 2 million raw materials given to a factory engineer for personal use (non-taxable).
  • Rs. 32 million sold to pre-trader with early payment discount.
• To Unregistered Persons: Rs. 40 million
  • Includes Rs. 16 million to cottage industry (exempt).
• Destroyed Raw Material: Rs. 25 million (fire accident, registered supplier).
• Purchase Return: Rs. 26 million (returned within 180 days).
• Sales Invoice (not previously declared): Rs. 8 million (dated July 15).
• Sales Return: Rs. 9 million (July 2023).

Exemptions and Non-Adjustable Items

• Excluded Items: Total Rs. 2 million raw material for personal use, Rs. 14 million from cottage industry purchases, Rs. 16 million sales to cottage industry, Rs. 5 million FOC parts under warranty.

Computation Steps and Adjustments

Input Tax Credits (ITC)

1. Wires and Cables: Rs. 6 million from registered persons.
2. Remaining Purchases: Rs. 332 million (338 - 6 million), 18% of this.
3. Destroyed Raw Material: Rs. 25 million
4. Purchase Return: Rs. 26 million within 180 days.
5. Sales Tax: Rs. 27 million (brought forward).
6. Electricity Bill: Rs. 1.2 million (tax credit).

Output Tax Computations

1. Adjusted Sales to Registered Persons: Rs. 170 million
   • Exclusions: Rs. 5 million FOC, Rs. 4 million personal use, Rs. 2 million raw material personal use, Rs. 32 million early discrimination.
2. Adjusted Sales to Unregistered Persons: Rs. 24 million (40 - 16 cottage industry).
3. Undeclared Sales Invoice: Rs. 8 million.

Final Tax Calculation

• Total Output Tax: Sum of all chargeable sales tax after adjustments.
• Total Input Tax Credit: Add all eligible ITC (purchased goods/services).
• Net Output Tax: Total output tax minus input tax credit.
• Final Payable: Includes added further tax.

Key Points and Further Considerations

• Early Settlement Discounts: Ignored in tax computations due to treated exclusions.
• Tax Compliance: Necessary to declare all sales to reflect accurate liability, recognizing non-declared invoices are subjected to taxation without time bound adjustments.
• Accuracy: It’s crucial to ensure all adjustments comply with regulatory requirements to avoid discrepancies.

Conclusion

• Detailed and accurate computations assure compliance and reduce possible tax disputes.
• Regular reviews of sales/purchases and timely declarations are essential.

Additional Reminders

• Exercise attention while excluding and including taxable transactions.
• Proper documentation is key for audits and verifications.