India GST: What you need to know about Inter-state transactions

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India GST: What you need to know about Inter-state transactions
GST has been conceived as a destination-based consumption tax, and hence the tax on the transaction should go to the consumption state.

Chennai - Despite the criticism, the new levy isn't that hard to implement and make it work harmoniously

By K. Vaitheeswaran

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Published: Fri 30 Jun 2017, 8:11 PM

Last updated: Fri 30 Jun 2017, 10:16 PM

GST is a tax on both goods and services and it is not very difficult to implement in a small developed country given the fact that all the business transactions are within the country or with other countries.
The EU VAT is a classic example of how countries within the European Union managed to arrive at a consensus on VAT on goods and services and also with reference to transactions between the EU. In the United States there is no VAT or GST and some states levy sales tax in the nature of 'use tax'. In a developing country like India, which has a federal structure as per the constitution and the union and states have equal powers with reference to governance, law, administration, revenue, etc, GST is a challenge with reference to transactions between states within India.
 
Pre-GST
Sales tax in India dates back to 1939 when Madras State imposed sales tax for the first time. All other states followed Madras and the levy was in the context of a sale within the state. Disputes arose with reference to goods sold from one state to another with reference to jurisdiction. State A would take the position that since the goods originated from its state, the right of levy is with State A. However, State B would take the position that it has the right to tax the transaction since the customer is located in State B and the goods are delivered in State B.
Parliament solved the problem by enacting the Central Sales Tax Act in 1956 in order to ensure that the originating state has the right to levy and retain the tax on inter-state sales emanating from the originating state. Even though there was a specific law that was enacted for this purpose, disputes continued since each state had a right to levy tax on a sale taking place within the state. Litigation was rampant on what constitutes a local sale and what constitutes an inter-state sale.
 
Inter-state transactions and GST
GST has been conceived as a destination-based consumption tax, and hence the tax on the transaction should go to the consumption state. However, complexities arose as to how to enact the law to ensure and achieve this objective. After many rounds of discussions and debate, tax on inter-state transactions have taken a concrete shape and the law broadly covers the following:
. Inter-state supply of goods or services or both are governed by parliament law known as 'Integrated Goods and Services Tax Act, 2017'. The tax is known as Integrated GST (IGST).
. A transaction of import of goods or services into the country from outside India is also considered as an inter-state supply for the purpose of tax levy.
. When goods are imported into the country, IGST is payable in addition to the customs duty leviable under the Customs Act and the IGST is levied through the customs mechanism.
. When services are imported into the country and are considered as taxable as per applicable provisions, there is a levy of IGST.
 
Tax credits and IGST
In a given transaction, where there is an inter-state supply of goods or services from State A to State B, the supplier in State A is required to pay the IGST and would collect it from the recipient in State B. The recipient in State B would be entitled to avail the input tax credit of the IGST so charged and when the said recipient makes a supply within State B, the said recipient can set off the IGST against the CGST and SGST payable in that state. In this manner, the IGST which is levied through parliament legislation can be used to even pay the state GST. This would mean that the inter-state movement of goods would no longer be restrained or controlled by tax or cost factors since any IGST charged would be fully available for credit in the other state.
 
Stock transfer
In the existing system, where there is a stock transfer of goods from a factory in State A to another branch in State B, the stock transfer was exempted from the levy of sales tax subject to certain procedural requirements. This has created different sets of problems both for the government and the industry and the challenges were as under:
. State A would lose revenue when the goods manufactured in State A are stock transferred to State B and sold in State B. State A would therefore implement restrictions in input tax credit.
. Where a neighbouring state provided for a lower rate of tax, goods were stock transferred to that state and sold either locally or on inter-state basis from that state taking advantage of the lower rate.
. Stock transfer was subject to stringent compliance requirements and even genuine stock transfers were questioned.
. When VAT was introduced in 2005, and there was a distinct advantage in buying from a local supplier, the market drove the industry to implement a stock transfer model in order to retain customers.
The IGST to a large extent solves issues pertaining to stock transfer since when goods move from one location in a state to a location of the same company in another state, IGST is payable and is fully-available as a credit in the other location. Since stock transfers become taxable, the originating location has no loss of input tax credit and can set-off the GST paid on various inputs and input services against the stock transfer which would now attract IGST. The other location would avail the IGST as a credit and set it off against the GST payable when the said location makes the supply. The industry would review its supply chain and many godowns and depots which are not required would slowly be phased out. This would result in the supply chain becoming leaner and smarter.
 
Issues in IGST
The first issue is the working capital and cash flow pressure. IGST would be aggregate of CGST and SGST rates. On stock transfer there is an upfront payment of IGST by the company and even though tax credit is available in the other state, the tax credit would be relevant only when there is a supply from that state. If the stocks stagnate or the turnaround time to be longer then money is locked in the system apart from cash flow pressures.
The second issue is the rate. An item like cement attracts a GST rate of 28 per cent. If cement is stock transferred from the factory to the depot in another state there is huge outflow. Similarly, construction companies move huge equipment from one location to another location. Discharging IGST on each inter-state movement would create a huge impact.
The third issue is on account of the scope and ambit of the provisions which would govern a transaction to conclude its nature. In the IGST regime if a supplier is in State A and the place of supply is in State B, the transaction would attract IGST. The place of supply provisions for goods and services are different. They are also very technical and capable of different interpretations. What constitutes an intra-state supply as against an inter-state supply is back in debate and it is even more complex in the context of services.
The fourth issue is from a government perspective. A manufacturing state would lose revenues since goods manufactured in its state would be sold on inter-state basis or stock transferred given the fact the customers are located in other states. The manufacturing state will not get any share from the IGST since it is the consumption state that will get the state GST portion in the IGST through the revenue sharing mechanism. To address this issue, a compensation mechanism has been contemplated and the GST cess is sought to be imposed on certain select items over and above the GST to compensate the states which will lose revenue post GST implementation.
The writer is an advocate and tax consultant based in Chennai. Views expressed are his own and do not reflect the newspaper's policy.



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