This article has been written by Aiman Hussain.

Introduction

You might have heard of taxes right?

Import tariffs, custom duties, income tax, accumulated earnings tax, consumption tax, stamp tax, property tax, luxury tax, and many others.

What do you mean by a tax? And what is the need for it?

During a country’s governance, the primary need for a rule, regulation, or law to come into effect is mainly due to a problem or a disturbance. Something similar had occurred when a global phenomenon happened, which was the Great Depression of 1929, which led to a drastic fall of major economies across the globe.

The federal economy of the US was also severely triggered by such a phenomenon and the ancillary factors led the US to implement something called a consumption tax. The motive was to earn revenues to support the economy, as there was excessive expenditure in order to facilitate economic growth.

Whereas India began with the system of VAT and made a transition to the GST system of tax collection. Global markets played a pivotal role in making the market participants aware of the global laws and their compliance.

As the market participants, foreign sellers were capturing foreign customers and foreign customers were looking for foreign products. An economy consists of a large number of producers and consumers. With that having said, consumption taxes can be a great source of government revenue. Therefore, as per the current global market scenarios, the consumption tax in India is GST and that in the US is sales tax & other taxes.

So what is a consumption tax

It is an indirect tax applied on the purchase of goods or services at a flat rate or at a percentage of the total value.

The main element being, the consumer pays the tax as they are the final users of the product. Hence, this is also known as the regressive method of taxation, which is levied irrespective of the consumer’s income.

Sales tax, GST, or VAT are the types of consumption taxes.

Now on, let us just focus on the two taxes: sales tax, which relates to US and GST, which relates to India.

Imagine Akash is an Indian online seller; he has a considerable number of customers in US. With sheer excitement of having foreign customers, he told about this to his friend, Steve. Steve happened to be a well-versed accounting, finance, and taxation professional.

Steve later consults Akash as to how he could carry forward an uninterrupted sale with complete compliance of Indian and US laws.

What do you mean by sales tax and GST

Technically, all of these VAT, sales tax, and GST could be called a type of “sales tax.” But what I mean here is a simple, one-time tax charged at the point of purchase.

The money goes from the consumer, to the vendor, to the government—the end. This form of sales tax exists throughout the United States, determined at the state and local levels. (There is no overarching national sales tax in the US.)

Initially, it was made applicable at the national level. The cascading effect, inefficiency, and high burden on the consumer led to resentment from some great public Democrats that made the US transition.

The transition was made possible by the applicability of sales tax, jurisdiction-wise at the state and local level.

On the other hand, goods and services tax (GST) is levied at every step of the supply chain. Providing input credit to manufacturers and shifting the burden on the end user. This removes the effect of cascading and it is more like one nation, one tax, further reducing the complexity of numerous earlier taxes.

In India, GST is applicable at the central and state level, whereas in federal countries like the US, sales tax is made applicable statewise. States have their set of rules and rates at which a certain product or service is taxed.

On what basis are these taxes levied

In India, there are central and state taxes such as CGST/UTGST and SGST/IGST, which are levied on the basis of the supply being an intrastate supply or an interstate supply.

In the case of US sales tax, a retail seller having an economic nexus is responsible for collecting taxes and remitting them to the state authorities for which he needs to get registered once the turnover crosses a certain threshold. The US states have fixed their dates as to when an eligible business can get it self registered as a tax collector.

For example, Texas has set a threshold of $500000 sales in the previous 12 calendar months, after which a seller needs to get registered. Currently, 45 out of 50 states charge sales tax. There are about 11000 jurisdictions, which include states, cities, and other special taxing districts. For example, Manhattan levies a state tax, local tax, and special district tax for the Metropolitan Transportation Authority. You might have a question as to what the nexus was. Let us ponder a bit more on it.

There are 2 related terms:

• Physical nexus: It refers to a physical presence in a state through a physical asset, inventory, employees, and brick-and-mortar system, i.e., a retail outlet or warehouse.
• Economic nexus: It refers to having an economic presence even if there is no physical presence.

In the case of GST, an Indian seller needs to get himself registered, once the business turnover crosses a specified threshold. The threshold varies if he is a supplier of goods or services.

In the case of Akash, assuming he stays in Karnataka and undertakes supply of goods only, he needs to get himself registered within 30 days once his turnover crosses the threshold of 40 lakhs. Akash has his setup in India but is also catering to US consumers. Therefore, he needs to get registered once his sales cross that particular US state’s specified threshold.

Wondering what the tax rates are?

For both the above-discussed taxes, different rates are applicable for different products.

Forty-five states, plus the District of Columbia, collect statewide sales tax that ranges from 2.9% to 7.25%. Thirty-eight states have some additional form of local sales tax, which can average more than 5.0% in some states. The more jurisdictions (cities, counties, states) you sell to, the more complex taxes become.

The GST Council determines the GST rate slabs. The GST Council reviews the rate slabs for goods and services on a regular basis. GST rates are typically high for luxury items and low for necessities. GST rates in India for various goods and services are divided into four slabs: 5% GST, 12% GST, 18% GST, and 28% GST.

Lets us also know about some of the different factors as well 

Basis	GST	Sales tax
Scope	Covers both goods and services	Generally limited to the sale of goods
Uniformity	Aims for uniform rates across the country	Rates can vary widely by state and locality
Tax Credit	Allows for input tax credits, reducing the tax burden on businesses	Does not allow for input tax credits
Application Level	Applied at a national level with CGST, SGST, and IGST	Typically applied at the state or local level
Cascading Effect	Eliminates the cascading effect	May lead to a cascading effect (tax on tax)
Point of Collection	Collected at various stages of production and distribution	Collected at the point of sale by the retailer
Destination-Based	Collected at the point of consumption	Not typically destination-based
Regulations	Uniform regulations across the country	Varies by state and locality, leading to multiple compliance requirements

How about we know a little about the penalties for defaulters in case of late filings or misdeclarations

For US Sales tax, The exact penalties for late filing or misdeclaration of sales tax can vary from state to state, so businesses need to familiarize themselves with the regulations of the state(s) where they operate.

Typically, late filing penalties are calculated as a percentage of the tax due and can range from 2% to 25% of the outstanding amount. In addition to penalties, interest is charged on the unpaid tax for the period between the original due date and the actual date of payment.

Some states also impose additional penalties for repeat offenders or for intentional fraud or negligence. These penalties can include the revocation of a business’s sales tax permit or even criminal charges.

While for GST, demand notices, interest, and penalties are the measures adopted to penalise the defaulters.

Conclusion

Understanding sales tax and GST is crucial for both businesses and consumers. While sales tax is a more traditional form of taxation with its complexities, GST offers a more streamlined and uniform approach.

So as Indian accounting, bookeeping, and finance professionals, we need to expand our horizons in knowing the global taxes and their compliance. We seemingly have an edge, as we have seen India transform from the system of sales tax to GST. Further helping us learn and apply the laws in a manner that provides legal comfort to the Indian sellers catering to their US customers or vice versa in a smooth and efficient manner.

In our example, Steve made Akash know all of the above, which would make Akash well equipped with knowledge, reducing the chances of default in the compliance while catering to his US consumers. Steve’s consultation may also help Akash envision a scalable business at an enormous level globally.