14 October 2012
Sir, Our unit is presently enjoying income tax exemption under the governments scheme for develeopment of north east india. We are also availing sales tax exemption under the tax emption scheme of assam govt. Sales tax exemption scheme is such that we are allowed to charge sales tax on our product from our buyers and 1 per sent of the collected tax amount has to be remmited to the sales tax department. Here I would like to enquire whether the remaining tax which is collected by us will be treated as other income and will be taxable as other income or business income by the income tax authorities.
02 August 2025
Great question! Here’s the treatment of **sales tax collected under a tax exemption scheme like the one you described (Assam government scheme)** from an **Income Tax and accounting perspective**:
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### Scenario Recap:
* Your unit enjoys **Income Tax exemption under government scheme (NE India development).** * You **charge sales tax to buyers** on your products. * You remit only **1% of the collected sales tax amount** to the Sales Tax Department. * The **remaining collected sales tax** amount is retained by your unit.
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### Treatment of the Remaining Collected Sales Tax
#### 1. **Accounting Treatment:**
* The **full sales tax amount collected from customers** is not a sale or revenue of your business. * However, since you are allowed to **retain a part of it (balance after remitting 1%)**, this retained portion is effectively an **additional income or incentive** from the government scheme. * **The 1% remitted to the Sales Tax Dept is an expense (or tax liability).** * The **balance retained** should be recorded as **Other Income or Incentive Income** in your Profit & Loss account because it is income over and above the usual business turnover.
#### 2. **Income Tax Treatment:**
* The **full sales tax collected is not business income**, only your **net realization after remittance of 1%** is your income. * The **retained portion (collected tax minus 1% remitted)** is treated as **business income** because it accrues from your business operations. * Since your unit is under Income Tax exemption scheme, the exemption applies as per the scheme conditions, but the retained sales tax portion is also included in your **taxable income as business income** if the exemption period is over or the scheme requires. * If the exemption scheme covers this income fully, then it may be exempt during that period.
#### 3. **Legal & Tax Authority View:**
* Tax authorities generally view **the portion retained by the unit as business income** unless there is a clear exemption provision. * The **portion remitted (1%) is an expense or tax liability**.
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### Summary:
| Component | Accounting Treatment | Income Tax Treatment | | ---------------------------- | ------------------------------------ | --------------------------------------- | | Total sales tax collected | Not revenue, but collected on behalf | Not income | | Sales tax remitted (1%) | Expense or liability | Deductible expense | | Remaining retained sales tax | Other Income / Incentive Income | Business income (taxable unless exempt) |
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### Final Notes:
* You should **maintain proper documentation** and disclosures in accounts and tax returns. * Check the **specific terms of your income tax exemption scheme and state sales tax notifications** for any clarifications. * Consult a tax advisor if there is ambiguity regarding exemption applicability on the retained amount.
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If you want, I can help draft journal entries or a note on disclosure for this treatment. Would you like that?
CAclubindia
