Given the federal structure prevalent in India, the tax treatment of inter-state supplies of goods and services in the dual GST model will pose a major challenge. Several key issues concerning inter-state trade and commerce need to be appropriately addressed under the proposed dual GST regime. The Empowered Committee of State Finance Ministers (EC) has set up a joint working group to address these issues and to come up with recommendations on the most suitable model of taxation to be adopted in this regard.
The fundamental point to be noted is that unlike the present origin-based tax model that operates on inter-state transactions concerning goods, in the form of the Central Sales Tax, the dual GST is a destination-based consumption tax and hence goods and services are to be taxed in the destination / importing state in cases of inter-state supplies.
As a corollary to this fundamental change in the manner of taxation, it follows that such inter-state supplies are not taxed at all in the state of origin. In other words, such inter-state supplies will need to be zero rated, in the GST parlance, in the exporting or origin State and for such supplies to be charged to the GST of the importing or destination state alone. It must straightaway be understood that in the dual GST model that we envisage in India, this discussion of the tax treatment of inter-state supplies is relevant only for the State Goods and Services tax (SGST) portion since the Central Goods and Services Tax (CGST) will, in any case, apply to all taxable supplies including to the inter-state supplies. Equally, this method of tax treatment will apply on inter-state branch or stock transfers as also on inter-state sale of goods.
The two key alternate models that are being discussed by the EC in this regard are apparently the banking model and the inter-state GST model (IGST).
As is understood in the public domain, in the banking model, the SGST of the importing state would be charged by the seller in the exporting state on inter-state supplies and recovered from the buyer in the importing state. The SGST so collected in the seller’s state would be deposited with the designated bank of the importing state. Since the goods are zero rated in the origin state, the seller would be eligible for a refund / set-off of the SGST paid on the inputs used in such inter-state supplies. Similarly, the buyer in the importing state would be eligible for the input tax credit of the SGST already paid by him and remitted by the seller in the exporting state on such inter-state transactions.
The banking model is considered to be a robust one to monitor and tax inter-state transactions of goods, including stock transfers. This model requires the banks to evolve an IT infrastructure equipped to communicate electronically with all the stakeholders concerned in respect of such inter-state transactions.
The key challenges for implementation of this model are the requirement for the banks to gear up to handle very large volumes of transactions as also the significant costs involved in this regard. One disadvantage of this model is that it does not address the possibility of default or failure on the part of the seller in the exporting state to remit the SGST collected in the designated bank to the credit of the importing states’ account. Further, and more importantly, the refund of accumulated input tax credits in the hands of the sellers would be substantial, leading to significant funds being blocked.
The other model being discussed is apparently the IGST model, where the selling dealer in the exporting state would charge IGST on all inter-state transactions. It is proposed that the Central Government would collect the IGST. The rate of the IGST would be equal to the aggregate of the CGST rate and the SGST rate. The input SGST used for the payment of the IGST would be paid by the exporting states to the central government. The central government would pay, to the importing state, the input IGST used for the payment of the SGST in the importing state on subsequent supplies in that state. In addition, the buyer in the importing state can claim the input tax credit of the IGST paid while discharging his tax liability in his state while filing his return on the basis of the invoices.
The account settlement between the Centre and the States is proposed to be assigned to a Centralised external agency (to be appointed by the EC and the Central Government). This agency would work out the net transfer of funds between the Centre and each of the States based on the e-returns and the listings to be filed by the tax payers.
In the IGST model, an uninterrupted input tax credit on the inter-state transactions could be maintained. Further, no refund claim will be required in the exporting State as the input tax credit is used up while paying the tax and there is no upfront payment of tax/ blockage of funds for the inter-state buyer or seller.
To sum up, both the banking model and the IGST model have their own advantages and disadvantages. The trade and industry’s viewpoint on the taxation of inter-state supplies needs to be considered by the government before a final decision is taken on the most feasible model to be adopted. The model so adopted needs to be acceptable to all the stakeholders in order to pave the way for a smooth transition to the much awaited dual GST regime.
The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers
E-mail: pwctls.nd@in.pwc.com
