JULY 24, 2015

By Hiral Raja

THE proposed Goods and Service Tax (GST) is certainly one of the most awaited tax reforms in India. The Empowered Committee of State Finance Ministers unveiled the first discussion paper on Goods and Service Tax in India on 10th November 2009. This discussion paper provided broad contours of the dual GST to be implemented in India. Until now, the revenue from interstate sale of goods is retained by the origin state i.e. CST revenue is retained by the state from which the goods are sold. However GST is proposed to be a destination based tax i.e. in case of interstate supply of goods and services, SGST portion of the tax revenue will be retained by the state in which the goods are consumed.

The Empowered Committee of State Finance Ministers has decided to adopt the IGST model for taxing inter-state transactions of goods and services. Under the IGST model, Central Government would levy IGST, which would be CGST plus SGST on all interstate provision of goods and services. The interstate seller would pay IGST on value addition after adjusting input tax credit of IGST, CGST and SGST on its input purchases. The exporting state will then transfer to the Centre the credit of SGST used in payment of IGST. The importing dealer will utilize the credit of IGST while discharging his output tax liability. The Centre will transfer to the importing state the credit of IGST used in payment of SGST. The advantage of the IGST system is that it ensures seamless movement of SGST portion of tax from the origin state to destination state, without requiring the interstate seller to get registered in the destination state.

Since proposed GST is supposed to be a destination based tax and the SGST portion of the tax revenue in case of inter state supply of goods and services is proposed to be retained by the consuming/destination tax, there will be a revenue impact to the origin states wherein currently a lot of goods are manufactured and sold interstate to various states and CST revenue on such sale is retained by the origin/producing states.

Hence in order to assuage the revenue concerns of the origin/producing states, the Constitution (122nd Amendment) Bill, 2014 approved by Union Cabinet and introduced in Lok Sabha has included a provision to allow states to collect additional tax (not exceeding one percent) on supply of goods in the course of interstate trade for a period of two years or such other period as the GST council may recommend.

While the intent of levying this additional tax is understandable, however levying this additional tax in the current form may have many unintended consequences:

•  If the intention is to only assuage the concerns of the producing states, then this provision needs to be suitably worded to ensure this additional tax will be levied only on the goods manufactured within the state and sold to any person outside the states for a consideration. The provision in its current form leads to an understanding that this additional tax will be levied even on stock transfer of raw materials, finished goods, goods sent to job worker and received back, etc and might be incurred several times whenever the goods move from one state to another in a single business cycle.

•  Levy of additional tax on interstate supply of goods and services and the revenue for the same to be retained by the origin state makes this tax origin based taxation. This will be in stark contrast to the basic fabric of the proposed GST which is based on destination-based tax and this will lead to implementation of hybrid GST in India.

•  Currently there is no clarity on availability of input tax credit on this additional tax. In case the credit for this additional tax is not available, same would lead to cascading effect and would lead to increased cost of doing business, thereby taking away real advantages of India as a single market and would still have tax based distortions based on the movement of goods from one state to another. This will also not achieve our intent of making the country cost competitive.

•  Additional tax would also lead to increased compliance burden for the taxpayers.

Under the proposed GST, the details of supply of goods in the course of interstate trade would be provided by all the tax payers in the GSTN and hence in case the intent of the Central Government is to only provide additional revenue to the manufacturing states, then the Central Government can appropriately increase the RNR rate of CGST (and correspondingly IGST also) and can, based on the details received from GSTN, compensate the manufacturing states for this additional revenue. In any case, the Central Government has agreed to compensate the states for revenue loss for a period of five years from the date of implementation of GST and hence it would be appropriate that the Central Government considers this revenue loss for the manufacturing states also as a part of GST compensation. Considering the above, we hope that the Central Government reconsiders its decision to implement this additional tax on supply of goods in the course of interstate trade under the proposed GST.