JANUARY 23, 2017

By K Srinivasan, IRS

WE left our first part with a parting note that GST is not the real game changer but IGST is. Yes it is, in the sense that, in an Intra State environment, there is no need for any game change for tax as levied and consumed are at the point of origin itself and in that it resembles absolutely our erstwhile/present taxing system of Excise/Service Tax/Sales Tax/VAT.

Only in an Inter-State context, the taxes paid and collected by the Centre in the form of IGST which contains CGST and SGST, the need for transmitting it to the State of consumption arises – and that too only with reference to the SGST component for the CGST component is an arithmetical constant that gets added at the time of inter-state (or) cross-border transactions from the originating point and gets subtracted or delinked at the place of consumption. This cycle can be repeated as many time as the transaction goes through inter-state supplies and from each stage of such origin CGST with get added to the SGST in the form of IGST and get dislodged and so on until the final stage of consumption even as CGST goes to the CGST account of the centre and SGST goes to the SGST account of the consuming State

Art.246A(2) read with Art 269 A empowers the Centre to levy and collect IGST on supply of Goods & Services in the course of Inter-State trade or commerce. Art.269 (1A), (1B), (1C) enjoin on the Centre the liability and the manner in which the said IGST shall be apportioned between the Centre and the State across the CGST and SGST Accounts at the first stage and between the SGST&CGST Accounts at then second stage and between the CGST&SGST Accounts of the residue left if any in the IGST Account at the third and final step.

It is also worthwhile to note that Article269A in addition to Article246A(2) reiterates the exclusive power of the Centre to levy IGST on Goods and Services or both supplied in the course of Inter-State trade or Commerce & in addition mandates that such taxes collected shall be apportioned to the States as prescribed under Art.269A (1A), (1B) & (1C). It is equally worthwhile to add that imports/Exports for the purpose of GST shall be deemed to be Inter State Trade and IGST shall be levied and collected by the Centre. The Customs Act, 1962 shall be commended accordingly so as to enable IGST, in place of CVD + SAD which again needs to be apportioned to the States and Centre as discussed above.

Each State and Union Territory has certain autonomy. However, the trade and commerce has to be free all over India, without which the slogan ‘One Nation', ‘One Market' would have no meaning. As we saw now, tax on Inter State Sale/Purchase can be imposed only by Central Government.

Trade, Commerce and Inter Course throughout the territory of India shall be free, subject to Articles 302 to 304 of the Constitution as per Article 301.

Restrictions on Trade or commerce can be placed by Parliament in the public interest as per Article 302

No discrimination can be made between one State and another or give preference to one State or another as per Article 303 (1).

Such discrimination or preference can be made only by Parliament by Law to deal with situations arising from scarcity of Goods as per Article 303(2).

State can impose tax on goods imported from other States or Union Territories, but a State cannot discriminate between Goods manufactured in the State and Goods brought from other States as per Article 304 (1)

State Legislature can impose reasonable restrictions on freedom of trade & commerce within the state in public interest. However, such bill cannot be introduced in State Legislature without previous sanction of Parliament as per proviso to Article 304. The above provisions are continued without any change and it is important that we appreciate their presence so as to understand the extant provisions of the new CGST Act enacted through the Constitutional Amendment Bill, 2014.

Now let us turn to the IGST model as conceived by the Government and already given legal backing through suitable amendments in the Constitution that we saw above to facilitate the movement of taxes paid at the place of origin to the place of consumption of Goods and Services. It is quite interesting to acquaint oneself with the nuanced approached of the IGST model in carrying out the above transfer of origin based tax collection to the destination state of consumption through a fund transfer mechanism such that the policy objective of GST itself is squarely met.

While the macro fundamentals are in favor of taxes collected at the originating states be given to the consuming states to encourage uniform growth amongst the federation of States which go to make our Union, we need to have the legal frame work in place to carry out the above task. As you all know, it has been benchmarked that 14% shall be the growth rate percentage which shall be adopted for the purpose of compensating the States for loss of revenue the projected growth rate for the transitional period of 5 yrs to which the Centre is committed to compensate the States for the possible loss of revenue arisen by the implementation of GST.

It is likely to be reckoned by using 14% as the bench mark and revenue to be projected by applying the formula 100 (1+14/100) n where 14% is the bench marked growth rate, and ‘n' is the number of years for which the revenue needs projection and 100 is presumed to be the base year revenue of a state in a given year. eg. If base year 2015-16 revenue is 100, and you want to project the revenue for the year 2018-19, then you apply the formula 100(1+14/100) 3 to arrive at the revenue to be projected for 2018-19 as per Sec.5 of the Compensation Bill 2016 which awaits its passage through the Parliament along with CGST, SGST& the IGST Bills.

Article 377 (12A) provides for levy of GST on all Goods and Services or both except Alcoholic liquor for human consumption and Article 246A(2) provides for exclusive power to the Centre to levy and collect IGST in the course of Inter State Trade or commerce in lieu of Central Sales Tax which has been hitherto levied and collected by the States on an origin based principle. Further, the objective of the said CST Act was to fulfill the sole purpose of argumentation of revenue of the States.

The Integrated Goods & Service Tax (IGST) model is essentially a Pass-through mechanism evolved with the sole objective of ensuring availability of Input Tax Credit (ITC) of the taxes paid by the tax payer in exporting State on Inter-state supply to the tax payer who has borne the said inter-state tax in the importing state. Therefore, it stands to reason that the exporting state owes the centre the credit of SGST used by the taxpayer in the Exporting state in the payment of IGST

Concomitantly the Centre owes the credit of SGST portion of IGST used in the payment of SGST by the taxpayer in the importing State while discharging his Intra state tax liability in the consuming state. This is done simply by further debiting the SGST A/c and crediting the IGST A/c to the extent of ITC of SGST used and in the second leg debiting the IGST A/c and crediting the SGST A/c to the extent of ITC of IGST used for payment of SGST in the importing or consuming state such that the revenue of the Exporting State becomes Zero and the said revenue is transmitted and given to the importing state.

The transfer of the CGST portion of IGST which remain tagged gets transmitted to the CGST A/c at the same time of transmitting the revenue of the Exporting state to the importing state. Article 269A(2) mandates that the Centre formulate the principles for determination of Place of Supply of Goods and Services in the course of the inter- state trade or commerce for not only levy and collection of IGST but also to ensure that the consuming state gets its due share of taxes paid at the place of origin as per the guarantee given under the new tax policy statement of GST.

It is interesting to note that Article 270 (1A) provides that apportionment of the taxes levied and collected by the Government of India except IGST apportioned with the States under Article 269A(1), shall also be distributed between the Union & States in the manner prescribed under Article 270 clause (2).

It must be appreciated that as per the provisions of Article 270 (1A), (1B) & (1C), the apportionments done shall not form part of consolidated Fund of India. In addition, balance of IGST if any remaining even as an academic possibility has been adequately covered under Article 270 (1A) to be distributed between Union and States, leaving no residue in the IGST A/c whatsoever.

The Government of India thus makes a clean breast of its intentions of apportionment of the Hybrid tax IGST collected by it. It is therefore more than clear that the IGST is not strictly a specie of tax at all except that it is a hybrid taxing mechanism employed during Inter State trade or commerce as a Special Purpose Vehicle (SPV) for the ease of movement of taxes paid at the originating state to the state of consumption to fulfill the policy objective of GST.

It is not anything the taxing authorities of either the centre or the states need to bother about, though not the Centre and the States like even though the lovers may not but love shall be, certainly endeavor to be faithful to its plan and purpose. The officer in the Centre and the States while administering the IGST, need to only help their respective Establishments in properly identifying the place of supply with the help of the Place of supply provisions which are fairly straight forward and simple, so as to enable the taxes due to the States of consumption reach safe and secure without any upsetting of the Apple Cart of tax collection of IGST made by the Centre.

When you know the principles of your taxation be it Excise or Service Tax or VAT for that matter, you know CGST and SGST as well as You know your own taxes that you have been familiar in administering all these years from both pre and post independence times.

The new GST minus theIGST is but your old taxation only. Even the IGST, except for the fund transfer part which any way will be taken care by the Union with the help of the Front end IT support provided by Goods and Services Tax Network (GSTN) and Back end support provided by the Directorate of Systems, CBEC, is anybody's job like before.

So there is strictly nothing to fear and nothing to unlearn or relearn or reinvent for that matter, except that you dust off your old statute Books and your Hand maidens of Rules and read them thoroughly so that you can lend refreshing insights to the so called new tax.

Your strength is your hoary experience handed down by your old doyens of the CBEC. Awake, arise and march forward with pride.

Also See : GST-There is nothing new, but for clatter going on all over - Part-I

(The author is Assistant Commissioner of Service Tax, Chennai and the views expressed are strictly personal.)