IGST Innovative way of handling Inter State Transactions

DECEMBER 16 !""#
By $iral Ra%a
T$E E&'owered Co&&ittee of State (inance Ministers )nveiled the (irst Disc)ssion
'a'er on Goods and Service Ta* in India on 1" th +ove&,er !""#- This disc)ssion 'a'er
'rovides )s with ,road conto)rs of d)al GST to ,e i&'le&ented in India -
It is 'ro'osed that Central GST .CGST/ as well as State GST .SGST/ will ,e levied on
all transactions of goods and services &ade for a consideration .e*ce't the e*e&'ted
goods and services and transactions ,elow the 'rescri,ed threshold li&it/- Central GST
will ,e retained ,y the Centre and State GST will ,e retained ,y the State-
0ro'osed GST is to ,e ,ased on the destination 'rinci'le i-e- the state in which the
goods1services are cons)&ed will get reven)e .i-e- SGST/ in res'ect of that transaction-
2hile this is ,een easily wor3a,le for transactions within the state in case of interstate
transactions clarity was re4)ired in ter&s of how ta* reven)e .i-e- SGST/ on a inter state
transaction will &ove fro& origin ,ased state to the destination ,ased state- The 'ossi,le
o'tions availa,le were5
66 The seller in the origin state collects the ta* reven)e .i-e- SGST/ and re&its the ta* to
the origin state govern&ent- The origin state Govern&ent then transfers this re&ittance to
the destination state- This wo)ld have re4)ired5
7 $)ge co7ordination ,etween the states-
7 $)ge controls on &ove&ent of goods in ter&s of chec3'osts road 'er&its etc in order
to verify whether the goods have really &oved o)t of the state-
66 The seller in the origin state collects the ta* reven)e .i-e- SGST/ and re&its the ta*
directly to the destination state govern&ent- This wo)ld have &eant5
7 Selling dealer wo)ld have to get registered in vario)s destination states in order to re&it
the ta* to the res'ective state govern&ents
7 8ot of tro),le and hicc)'s to the trade and co&&erce-
66 The seller in the origin state collects the ta* reven)e .i-e- SGST/ and re&its the ta* to
the origin state govern&ent- Centre acts as a clearing agent and transfers the ta* collected
in res'ect of s)ch transactions to the destination state- This o'tion wo)ld &ean the
following advantages5
7 Si&'ler and hence 'referred o'tion fro& the trade co&&)nity-
7 Strong IT Infrastr)ct)re ens)ring s&ooth of ta* reven)e to the destination state-
The disc)ssion 'a'er has s)ggested the IGST &odel for ta*ation of inter state goods and
services .in line with o'tion 9 as &entioned a,ove/- IGST &odel wo)ld wor3 as follows5
7 Centre wo)ld levy IGST .CGST 'l)s SGST/ on all inter state transactions of ta*a,le
goods and services-
7 :''ro'riate 'rovision will ,e &ade for consign&ent or stoc3 transfer of goods-
7 The inter state seller will 'ay IGST on val)e addition after ad%)sting availa,le credit of
IGST CGST and SGST on his ')rchases-
7 The E*'orting State will transfer to the Centre the credit of SGST )sed in the 'ay&ent
of IGST-
7 The i&'orting dealer can clai& credit of IGST while discharging his o)t')t ta* lia,ility
in his own state-
7 The Centre will transfer to the i&'orting state the credit of IGST )sed in the 'ay&ent of
SGST-
This &odel wo)ld ens)re that the SGST a&o)nt will ,e transferred to the destination
state-
2e will now try to )nderstand as to how IGST act)ally wor3s and how the SGST
co&'onent of the ta* gets transferred to the destination state-
(or the sa3e of si&'licity CGST rate has ,een ass)&ed at ;< SGST rate has ,een
ass)&ed at #< IGST rate wo)ld wor3 o)t to1=<
E-g- Dealer > in State : ')rchases goods worth Rs- 1"" locally and sells the goods to the
Dealer ? in State B at Rs- 1!"17-
Total IGST 'aya,le to the Centre ,y the Dealer : is Rs- !"-@- $e will )tilise the credit of
CGST .'ertaining to Centre/ of Rs- ;17 and SGST .'ertaining to State :/ of #17 and 'ay
net IGST of Rs- 9-@ to the Centre- Then state : will transfer the credit of SGST )tiliAed in
the 'ay&ent of IGST .i-e- Rs- #17/ to the Centre- By doing this it has ,een ens)red that
the entire ta* reven)e of Rs- !"-@ .incl)ding SGST 'ortion in it/ in res'ect of this sale has
,een transferred to the Centre- $ence state : has not retained any reven)e in res'ect of
this inter state sale at all-
+ow lets ass)&e Dealer ? in state B sells these goods to another dealer locally at Rs-
1B"17
Dealer B5
Credits availa,le on inter state ')rchases of Rs- 1!"17
IGST5 Rs- !"-@
Ta* 0aya,le on local sales of Rs- 1B"17
CGST5 Rs- 1!-" .;< on Rs- 1B"17/
SGST5 Rs- 19-B .#< of Rs- 1B"17/
State B has to receive reven)e of Rs- 19-B in res'ect of this sale-
Dealer has three o'tions
66 Set off the IGST first co&'letely against the ta* 'aya,le for CGST and ,alance
against ta* 'aya,le for SGST
66 Set off the IGST first co&'letely against the ta* 'aya,le for SGST and ,alance for ta*
'aya,le for SGST-
66 Set off certain a&o)nt say Rs- 1" against CGST and re&aining a&o)nt i-e- Rs- 1"-@
against SGST-
66 Set off the IGST first co&'letely against the ta* 'aya,le for CGST and ,alance
against ta* 'aya,le for SGST
In this case State B will get SGST reven)e of Rs- B-1 fro& the dealer > and Centre will
'ay the credit of IGST )tiliAed in 'ay&ent of SGST i-e- Rs- ;-@- $ence in total State B
will receive total SGST of Rs- 19-B-
66Set off the IGST first co&'letely against the ta* 'aya,le for SGST and ,alance against
ta* 'aya,le for CGST
In this case State B will not get any SGST reven)e fro& the dealer > and Centre will 'ay
the credit of IGST )tiliAed in 'ay&ent of SGST i-e- Rs- 19-B- $ence in total State B will
receive total SGST of Rs- 19-B-
66 Set off certain a&o)nt say Rs- 1" against CGST and Rs- 1"-@ against SGST
In this case State B will get SGST reven)e of Rs- 9-1 fro& the dealer > and Centre will
'ay the credit of IGST )tiliAed in 'ay&ent of SGST i-e- Rs- 1"-@- $ence in total State B
will receive total SGST of Rs- 19-B-
$ence fro& the a,ove e*a&'les it can ,e clearly seen that the end ')r'ose of this entire
e*ercise which was to ens)re that the SGST reven)e goes to the destination state in a
s&ooth way has ,een achieved- The &anner in which this entire 'rocess is s)''osed to
o'erate is really innovate and s)rely goes a long way in ens)ring that dealers do not face
)nd)e diffic)lty on acco)nt of change of conce't- The E&'owered Co&&ittee of the
State (inance Ministers really deserves 3)dos for ado'ting this )ni4)e syste&-
()rther a very i&'ortant 4)estion that still re&ains )nanswered is whether the stoc3
transfers fro& one state to another will ,e ta*ed )nder IGST in the origin state and credit
of the sa&e will ,e availa,le in the destination state or will there ,e an e*e&'tion fro&
levy of IGST on stoc3 transfers-
In case stoc3 transfers are e*e&'t then there is a 'ossi,ility of h)ge acc)&)lations of
SGST in certain states and the state govern&ents will have to give ref)nd of these ta*
credits- $ence it is i&'erative that the stoc3 transfers are also ta*ed )nder IGST in the
origin state and credit of the sa&e is availa,le in the destination state so that the val)e
chain re&ains intact- $owever we will have to wait to have f)rther clarity on this iss)e-




(lawless GST fro& 1st Ccto,er !"1" 7 The Disc)ssion 0a'er released ,y E&'owered
Co&&ittee of (inance Ministers on 1"th +ove&,er !""# envisages an e*tre&ely dil)ted
for& of GST 7 Tas3 (orce on GST
TIC87DDT 1!B#
16-1!-!""#
2ednesday
IT is )nderstood that the Tas3 (orce on GST has s),&itted its re'ort yesterday- (or so&e
strange reason the re'ort is not &ade '),lic ,)t so&e selected revelation has ,een &ade-
2e are told that a tas3 force &e&,er who is slated to %oin one of the Big (o)r Cons)lting
(ir&s has lea3ed the re'ort to his f)t)re ,osses- 2e donDt ,elieve s)ch st)'id r)&o)rs ,)t
if yo) find one of the Tas3 (orce &e&,ers in a cons)lting fir& soon donDt ,la&e )sE
The Tas3 (orce is headed ,y Mr- :r,ind Mody who was till recently the Foint Secretary
T08 in CBDT- The Tas3 (orce did not have a single Me&,er fro& the CBEC Central
GST or fro& any State G:T De'art&entE
The tas3 force has of co)rse e*'ressed its than3s to
1- Mr- 0G Bhide the all 3nowing Reven)e Secretary who is retiring ne*t &onth and
who is ,)sy with searching for that 6! %o,E
!- Mr- Fose Cyriac the :dditional Secretary in the Reven)e De'art&ent who is %)nior to
all the Chief Co&&issioners of C)sto&s and Central E*cise-
9- Mr- Give3 Fohri FS TRH CBEC These are the fo)r wise &en who deal with Central
E*cise and service Ta* at the highest level and they sho)ld have ,een in the Tas3 (orceI
Instead of that an Inco&e Ta* Cfficer has ,een &ade the head of the Tas3 (orce-
@- Mr- Ga)ta& Bhattacharya FS TRH CBEC
B- Mr- R- Se3ar (or&er FS TRH CBEC
6-Mr- S)shil Solan3i Co&&issioner CBEC
It is not 3nown how Mr- :r,ind Mody an Inco&e Ta* Cfficer had ,een &ade the
Chair&an of the Tas3 (orce on GST 7 and yo) 3now the Direct Ta*es Code a)thored ,y
hi& is attac3ed ,y his own Board the CBDTE
Co)ldnDt they find any E*cise1G:T officer to head the 'anelJ
TE+ Co&&and&ents for a ')re GST Tho) shallE
:CCCRDI+G to the T:SK (CRCE the &ost i&'ortant ten ele&ents of a ')re GST are
the following57
1- The ,ase sho)ld e*tend to all goods and services incl)ding i&&ova,le 'ro'ertyI
!- There sho)ld ,e a single low rate I
9- The ta* sho)ld ,e destination ,ased I
@- The ta* sho)ld ,e designed on invoice7credit &ethod I
B- ()ll and i&&ediate in')t ta* credit in res'ect of ca'ital goods I
6- The GST &)st re'lace all transaction ,ased ta*es on goods and services and factors of
'rod)ction-
=- There sho)ld ,e sea&less flow of the ta* thro)gh all stages of 'rod)ction and
distri,)tion so as to stic3 on LfinalM cons)&'tionI
;- The e*'orts sho)ld ,e Aero rated and i&'orts sho)ld ,e f)lly ta*ed I
#- There sho)ld ,e a threshold e*e&'tion for s&all dealersI
1"- ()ll co&')terisation of the co&'liance and ad&inistrative syste&s-
(lawless GST 7 Reco&&endations 7 Total 1!< Ta*
T$E Tas3 (orce has reco&&ended a NflawlessD GST in the conte*t of the federal str)ct)re
which wo)ld o'ti&ise efficiency e4)ity and effectiveness- The NflawlessD GST is
designed as a cons)&'tion ty'e destination G:T ,ased on invoice7credit &ethod-
It 'rovides for a co&'rehensive ,ase incl)ding financial services and i&&ova,le
'ro'erty- To the e*tent there are e*e&'tions al,eit li&ited to ite&s covered for
distri,)tion thro)gh the '),lic distri,)tion syste& and health and ed)cation services the
')rity of the GST is dil)ted- : threshold e*e&'tion of Rs- 1" la3h has also ,een 'rovided
for s&all ,)sinesses- I&'orts into the co)ntry are 'ro'osed to ,e ta*ed in the sa&e
&anner as do&estically 'rod)ced goods- 8i3e inter&ediate in')ts f)ll and i&&ediate
credit for ta* 'aid on ca'ital goods will also ,e 'rovided- ()rther it also 'rovides for a
single rate of ta* of 1! 'ercent for all general goods and services across all states
co&'rising of B 'ercent ,y the Centre and = 'ercent ,y the States- $owever 'rod)cts of
high val)e li3e gold and 'latin)& will ,e s),%ect to ta* at the rate of 1 'ercent each ,y
the Centre and the States and e*'orts will ,e Aero rated-
There is e&'irical evidence to s)ggest that the switchover fro& the 'resent distortionary
ta*ation of goods and services to a NflawlessD GST will a&ongst others increase
'rod)ctivity of all factors of 'rod)ction and hence enhance GD0- The switchover has also
,een analysed to ,e 'ro7'oor and therefore f)rther the ca)se of 'overty red)ction-
()rther in the Indian conte*t a d)al G:T ty'e ta* conc)rrently levied ,y ,oth the Centre
and the States wo)ld ena,le the creation of a co&&on &ar3et-
Given the ,enefits of the changeover to the flawless GST it wo)ld ,e econo&ically
rational for all levels of Govern&ent to introd)ce and s)ccessf)lly i&'le&ent the
flawless GST and for the Central Govern&ent to invest in incentivising the State
Govern&ent to ado't the flawless GST- It is reco&&ended that the Central Govern&ent
sho)ld 'rovide a s)& of Rs 9"""" crores over the ne*t five years which will ,e )sed to
co&'ensate the States for reven)e loss if any and the ,alance for distri,)tion ,etween
the States on the ,asis of the sa&e for&)la a''lica,le for ta* devol)tion to the States-
The i&'lications for fiscal &anage&ent are far7reaching- It will significantly i&'rove
fiscal &anage&ent thro)gh higher ta* ,)oyancy- 2hile the R+R for State level NT(7
ta*esD .incl)ding Sta&' d)ty/ is only 6 'ercent the Tas3 (orce has allowed the& a higher
rate of = 'ercent along with the fle*i,ility to 'hase o)t the sta&' d)ty over a 'eriod of
ne*t three years- This has the 'otential to increase the co&,ined ta* reven)es of States ,y
an esti&ated a&o)nt of Rs ="""" crores- In addition it is also reco&&ended that the
States sho)ld ,e 'rovided with an additional Rs 9"""" crores as incentive to ado't a
NflawlessD GST- Therefore the switch over to the flawless GST will a)g&ent the
co&,ined reso)rce ,ase of the States ,y an aggregate s)& of Rs 1""""" crores-
The Tas3 (orce recognises that the levy will ,e i&'osed and enforced ,y a large n)&,er
of Govern&ents- Therefore there wo)ld ,e constant 'ress)re on States to deviate fro&
the ')re G:T &odel and trigger har&f)l ta* co&'etition- This wo)ld %eo'ardise the
s)staina,ility of the ,enefits fro& the i&'le&entation of the NflawlessD GST- Therefore it
is also necessary to esta,lish an instit)tional &echanis& which wo)ld ,e res'onsi,le for
&a3ing any change in the design and str)ct)re of the G:T- The reco&&endation to
esta,lish a Co)ncil of (inance Ministers is intended to s),s)&e the inde'endent 'owers
of the ,oth the Central and State Govern&ents to levy ta* on goods and services in favo)r
of collective e*ercise of the 'owers- Therefore there is no e*acer,ation in the vertical
i&,alance in the fiscal 'owers-
The (irst Disc)ssion 0a'er released ,y the E&'owered Co&&ittee of (inance Ministers
on 1"th +ove&,er !""# envisages an e*tre&ely dil)ted for& of GST )nder which inter
alia .i/ a n)&,er of cascading ta*es incl)ding ')rchase ta* will contin)e to ,e levied ,y
the StatesI and .ii/ the ,ase is considera,ly eroded on acco)nt of the 'ro'osed
contin)ation of the e*e&'tions- The design of the GST as envisaged ,y the E&'owered
Co&&ittee is a significant dil)tion of the NflawlessD GST- Conse4)ently the 'otential
econo&ic ,enefits fro& a switch over to the flawless GST wo)ld not ,e realised-
The Tas3 (orce has reco&&ended that the i&'le&entation of the GST sho)ld ,e
'ost'oned to 1st Ccto,er !"1"- The ,enefits fro& the switch over to the GST are
contingent )'on the ')rity of the GST design- In the conte*t of G:T international
e*'erience shows that any design7related NG:T &ista3es are very hard to rectifyD-
Therefore it &)st ,e ens)red that there are no design related &ista3es at ,irth- $owever
if there is a trade7off ,etween the ti&eline and the design of the GST the dile&&a &)st
,e resolved in favo)r of design-
()rther in order to i&'le&ent the NflawlessD GST it wo)ld ,e necessary to )nderta3e
constit)tional a&end&ents to ena,le ,oth the Centre and the States to e*ercise conc)rrent
%)risdiction over the ta*ation of all goods and services creation of the 'ro'osed Co)ncil
of (inance Ministers and assign&ent of 'art of the GST 'roceeds to the third7tier of
govern&ent- These a&end&ents &)st inter alia 'rovide that the ta*ation of goods and
services ,y ,oth the Centre and the States sho)ld ,e a cons)&'tion7ty'e destination
,ased GST-
The introd)ction of the NflawlessD GST is one of the &ost i&'ortant refor& agenda which
can 'rovide a new i&'et)s to Indian ind)stry and incl)sive growth- It is an econo&ic
ga&e changer- :ll sta3eholders &)st )nite and develo' the necessary will to coo'erate in
introd)cing the flawless GST- It wo)ld ,e worthwhile to &a3e greater 'olitical
invest&ent in this endeavo)r-