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What is Sales Tax? (Meaning, Formulas & Examples)

what is sales tax

This post is also available in: हिन्दी (Hindi)

Taxes are mandatory contributions levied on individuals or corporations by a government entity – whether local, regional, or national. Tax revenues finance government activities, including public works and services such as roads and schools, or programs such as social welfare schemes and healthcare, etc.

Sales tax is a tax levied on the sale of goods and services that is usually calculated as a percentage of the purchase price and collected by the seller. Let’s understand what is sales tax and how is it calculated.

Types of Taxes

There are two types of taxes collected by the government which is paid by the citizens of a country. These two types of taxes are

  • Direct Tax: Direct taxes are one type of taxes an individual pays that are paid straight or directly to the government, such as income tax, poll tax, land tax, and personal property tax. Such direct taxes are computed based on the ability of the taxpayer to pay, which means that the higher their capability of paying is, the higher their taxes are. Examples of direct taxes are income tax, corporate income tax, capital gains tax, and property tax.
  • Indirect Tax: Indirect tax is the tax levied on the consumption of goods and services. It is not directly levied on the income of a person. Instead, he/she has to pay the tax along with the price of goods or services bought by the seller. Examples of direct taxes are sales taxes, excise taxes, value-added taxes (VAT), and gross receipts tax.
what is sales tax

What is Sales Tax?

Sales tax (abbreviated as ST) is imposed by the government when a product is sold to the customer. The shop owner collects this tax and pays it to the government. It is therefore charged on the selling price of the item and then later added to the bill.

The process involved in the computation of sales tax is

  • Sales tax = Tax% of Bill Amount
  • Total Bill = Cost of the Item + Sales Tax

How To Compute Sales Tax?

The sales tax is calculated on the marked price of an item. A marked price(or list price) is the price printed on an item. When a shop owner sells an item at the marked price, the sales tax is calculated on the marked item. 

what is sales tax

In the case the shopkeeper is offering a discount on a product, first of all, a discount is calculated and subtracted from the marked price and then the sales tax is calculated on the final sales price.

what is sales tax

And finally, the bill amount is calculated after adding the sales tax amount to the selling price of the item.

what is sales tax

The sales tax is computed based on the tax rate applied to an item or item’s category. Different items or item categories have different tax rates.

what is sales tax
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Maths can be really interesting for kids

Examples

Let’s consider some examples to understand the procedure behind calculating sales tax.

Ex 1: What is the selling price of an item for which a customer paid ₹$470$ including a sales tax of ₹$20$?

$\text{S.P. (including S.T.)} =$₹$470$

$\text{S.T.} =$₹$20$

$\text{S.P. with S.T.} = 470 – 20 = $₹$450$ 

Ex 2: What is the amount paid by a customer for an item costing ₹$500$ and sales tax charged at the rate of $8\%$ on the item?

$\text{S.P.} = $₹$500$

$\text{S.T. Rate} = 8\%$

$\text{Sales Tax} = \text{S.P.} \times \frac {\text{S.T. Rate}}{100} = 500 \times \frac {8}{100} =$₹$40$.

$\text{Amount Paid} = \text{S.P.} + \text{S.T.} = 500 + 40 =$₹$540$.

Ex 3: Find the tax paid by Bablu for a chair if the chair’s list price is ₹$700$, and the tax rate is $6\%$. The shop owner offers a discount of $12\%$ on the chair. Also, find the amount paid by Bablu for the chair.

$\text{L.P.}$ of chair = ₹$700$

Discount percent = $12\%$

Discount on chair = $\frac {12}{100} \times 700 =$₹$84$

$\text{S.P.} = \text{L.P.} – \text{Discount} = 700 – 84 =$₹$616$  

Sales tax rate = $6\%$

Sales tax = $\text{S.P.} \times \frac{\text{Sales tax rate}}{100} = 616 \times \frac{6}{100} =$₹$36.96$

Therefore, bill amount paid by Bablu = $\text{S.P.} + \text{S.T.} = 616 + 36.96 =$₹$652.96$.

Ex 4: Jay buys a pair of trousers for ₹$2,180$ including the tax of $9\%$. Find the original price of the pair of trousers.

S.P. including the sales tax = ₹$2,180$

S.T. Rate = $9\%$

Let the original price of pair of trousers = $x$

Sales tax = $x \times \frac{9}{100} = \frac{9x}{100}$

Final S.P. = $x + \frac{9x}{100} = \frac{109x}{100}$

$\frac{109x}{100} = 2,180 => x = 2,180 \times \frac{100}{109} = $₹$2,000$

Therefore, the original price of the pair of trousers is ₹$2,000$.

Ex 5: The marked price of a refrigerator is ₹$10,000$. Sameer got a discount of $8\%$ on it but had to pay a tax of $2\%$. How much did Sameer pay for the refrigerator?

$\text{M.P.} =$₹$10,000$

Discount Percentage = $8\%$

Discount = $10,000 \times \frac {8}{100} =$₹$800$

Final S.P. = $10,000 – 800 = $₹$9,200$

Sales Tax = $9,200 \times \frac {2}{100} =$₹$184$

Amount paid by Sameer for the refrigerator = $9,200 + 184 =$₹$9,384$.

Maths in Real Life

Conclusion

Sales tax is imposed by the government when a product is sold to the customer. The shop owner collects this tax and pays it to the government. The sales tax is computed based on the tax rate applied to an item or item’s category. Different items or item categories have different tax rates.

Practice Problems

  1. The marked price of an article is ₹$900$ and the rate of sales tax on it is $6\%$. Find the sales tax charged by the shop owner and the final bill amount paid by the customer.
  2. If there is a $10\%$ discount on an item, and then $9\%$ sales tax is applied to that after-sale price, then what is the total cost of the item including tax as a percentage of its pre-sale sticker price?
  3. Suman buys $2$ shirts, each costing ₹$350$, a pair of pants for ₹$400$, and a belt for ₹$180$.  At the register, the total she owes is ₹$1,382.40$.  What is the rate of sales tax?
  4. A certain state charges sales tax at a rate of $8.75\%$ per rupee spent. Mukesh spends ₹$1,275$ in total, including tax, on clothes. What was the total price of the clothing before tax was added?
  5. Meenu is at the grocery store. She buys ₹$428.70$ in groceries, and groceries are not taxed in her state. She also buys ₹$331.70$ in other items, which are taxed at $9.1\%$  (not yet applied). How much is her total bill amount?
  6. Lalita just bought a desktop computer. The computer cost ₹$15,000$, the keyboard cost ₹$1,000$, and the mouse cost ₹$250$. If the local sales tax is $7\%$, what was the total cost of her purchases?

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FAQs

What is meant by tax?

The amount paid by the people to the government for goods and services provided is called tax which is further utilized by the government for public welfare activities.

What is the meaning of marked price?

Marked price is the price set by the shopkeeper on the label of the article. It is set by adding the profit margin to the cost price of the article.

What is sales tax?

Sales tax (abbreviated as ST) is imposed by the government when a product is sold to the customer. The shop owner collects this tax and pays it to the government. It is therefore charged on the selling price of the item and then later added to the bill.

How sales tax is calculated?

The sales tax is calculated on the marked price of an item by multiplying it with the tax rate. The sales tax is then added to the marked price as a final bill amount paid by the customer.

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