Inter state transactions under proposed GST

How will Inter State Transactions be affected with the advent of GST? This is the basic question which is hovering over common man’s mindset these days.

Will the situation be favourable or more adverse? Whether Rate to be increased/ decreased? Who will levy the tax- Centre or State? Will State’s Revenues be reduced?

This article will help you in getting answers to these basic questions. Firstly, we look at the ‘Present Indirect Tax Structure’ in India.

 INTER STATE TRANSACTIONS- PRESENT SITUATION

Now it is quite clear that the State Government has no role to play as far as Service Tax is concerned. Only the Central Government can levy Service Tax whether the Service is rendered within the State or outside it.

One more point, Sales Tax is segregated between the Centre and States for Interstate and Intra State Transactions. Only one Government can levy the Sales Tax. No question of Sales Tax levy by Dual Governments is present.

Goods Imported in India are subject to Import Duty under the Customs Act, 1962. Revenue goes to the Union Government. State Governments are not entitled to any part of the Import Duty anyhow.

Services Imported in India are taxable through ‘Reverse Charge Method’. It means Tax is paid by the Service Recipient at the time of Import of Service. Usually, it is the Service Provider who pays the Service Tax. Since, power of levy vests with the Centre, situs (place of provision) is not an issue here.

DETERMINANT FACTORS FOR INTER STATE TRANSACTIONS UNDER GST

How to determine whether a Transaction is an Inter State Supply or not depends upon some factors -:

GST is levied on destination or consumption principle. So, determining the place of supply is very important as tax revenue accrues to the State where supplies occur or deemed to occur.

Like other countries, in India also a set of Rules (Place of Supply Rules) will be prescribed for defining the ‘Place of Taxation’ or ‘Place of Supply’. These Rules will help in determining the place where the supply of goods or services will take place plus whether the supplies are interstate or intra state. A Supply is taxable in a given jurisdiction only if the supply is considered to take place in that particular jurisdiction.

Factors determining jurisdiction for supply of Services or Intangible Property:

• Place of performance of service
• Place of enjoyment of service/intangible property
• Place of residence/location of recipient
• Place of residence/location of supplier

Services with Own Set of Rules for fixation of situs:

• Immovable Property services e.g., services of estate agents or architects
• Banking & other financial services
• Transport of goods by road
• Business auxiliary and event management services
• Advertisement given on PAN India basis in print or electronic form.

Special Rules for Mobile Services (no fixed place of performance or enjoyment):

• Passenger travel services
• Freight transportation services
• Telecommunication services
• Motor vehicle lease rentals
• E-commerce transactions
• Software development through electronic mode
• Supply of goods during transportation

For the above mentioned mobile services, Special rules may be designed to yield best results. More certainty and clarity is assured in situations where place or location or residence of the supplier or recipient is not clearly defined at the time of supply.

POSSIBLE PLACE OF TAXATION :

BUSINESS TO BUSINESS (B2B) - : Place of destination is normally the place where the recipient is established or located.

BUSINESS TO CUSTOMER (B2C) - :

i. Tangible Supplies: Place of destination could be the place where the supplier is located or established, which is generally the place where the service is performed. E.g., haircuts, hotel accommodation, local transport, entertainment services.

ii. Intangible/Mobile Supplies: Place of supply could be the place of residence of the customer or the place where services are used or enjoyed. E.g., telecommunication, e-commerce services.

Now for proper application of sub national tax on inter state supplies of goods & services, suitable mechanism is required. Instead of zero rating of inter state supplies, preferred approach is required.

Various models are adopted by other countries for inter state transactions. Instead of discussing all the models in detail & zero rating of inter state transactions; our focus will be on IGST (Integrated Goods & Services Tax) Model. This is the ideal model for our country. IGST model envisage levy of IGST by the Centre on all transactions during inter state taxable supplies.

Features of IGST Model:

• Seller of the origin state will charge IGST (CGST+SGST) on inter state transactions.
• Inter state seller will now able to pay net IGST after utilising credit of input CGST & SGST.
• Inter state buyer will also avail input tax credit for payment of his own IGST, CGST or SGST on the basis of tax invoice.
• Both buyer & seller shall report these transactions in their e-returns.
• Amount paid by the seller in his State along with input tax credit claimed by him will be remitted by the Central Agency to the buying state. This mechanism is required to maintain GST a destination based tax.
• B2B transactions will be able to get input tax credit without any break till it reaches the final consumer.

IGST Model permits cross utilisation of credit of IGST, CGST & SGST for paying IGST unlike intra state supply where CGST/SGST can be utilised only for paying CGST/SGST respectively. It would meet the objective of providing seamless credit chain to taxpayer across states.

This model obviates the need for refunds to exporting dealers as well as the need for every state to settle account with another state. Exporting state will transfer to the Centre the credit of SGST used for payment of IGST. The Centre will transfer to the importing state the credit of IGST used for payment of SGST.Now, finally the Central Government will act as a clearing house for all the states through transfer of funds.

Illustration for IGST Model:

Mr. A is based in Maharashtra & Mr. B is based in Gujarat. Mr. A supplied goods to Mr. B and paid 17% IGST. Mr. A has Input credit of CGST 8% and SGST 8% from local purchases made by him.

 Now, Mr. A is required to pay only 1% IGST to the Central Government. He will be able to utilise input credit of 16% for paying IGST. Maharashtra will transfer to Centre 8% SGST used for payment of IGST.

Mr. B who had purchased those goods supplied the same locally to Mr. C who is also based in Gujarat. Now he is liable for SGST 10% and CGST 8 %. He will utilise credit of IGST of 17% first for CGST 8% and 9% for SGST. He will be required to pay 1% in cash. 

Gujarat Government is entitled to SGST since it is the destination state. Centre will transfer 9% IGST credit used for payment of SGST to Gujarat.

Points to Remember:

1. Maharashtra Government will not get any tax anyhow since it is inter state supply from Maharashtra to Gujarat.

2. Central Government will get 9 % IGST (8% from Maharashtra & 1% paid in cash by Mr. Havi) on inter state supply of goods to Gujarat.

3. Gujarat Government will get 10 % SGST (9% from Central Government & 1 % paid in cash by Mr. Rajat) for intra state supply of goods.

4. Mr. Rajat (based in Gujarat) has been allowed full credit of IGST paid by Mr. Havi (based in Maharashtra) of 17%.

Key Enablers of IGST:

• Common e - Return for CGST, SGST & IGST
• Uniform e – Registration
• Common periodicity of returns for a class of dealers
• Uniform cut-off date for filing of returns
• Effective fund settlement among Centre & States.
• System based validations on ITC availed, tax refunds
• Extensive Computerisation & strong IT infrastructure
• National Agency
• Trained and well equipped staff

Issues to be considered by the Government:

1. Specific provisions for determining nature of activity (whether the transaction is a sale or service) are required.

2. For ascertaining consideration price of sale, specific rules are necessary. E.g., sometimes freight element in a transaction of sale to other state is more than the base price of goods. Now the confusion is whether freight element is part of sale or service.

3. Provisions are also required to allow inter GST set off between CGST & SGST of input tax. This will avoid cascading effect of taxes.

4. exemption in respect of import sale and high seas sales u/s 5(2) of the CST Act will be continued or not?

5. exemption to penultimate exports will be continued?

6. Whether exemption on subsequent sales u/s 6(2) of the CST Act will be continued?

7. Provisions are also required for sale or purchase of goods declared by Parliament to be of special importance in interstate trade or commerce.

8. Rules are required for determination of value in case of transfer of goods to branches/ consignment agent/ inter related parties.

9. Measures are also required to avoid litigation which may arise due to fixation of situs. Revenue sharing arrangements among the states on inter state transactions are to be prescribed.

Above issues need to be resolved before GST is to be implemented. ‘Prevention is better than cure’ – same goes with GST. Every phase is to be looked seriously plus the ultimate consumer is not to be penalised anyhow. Then only, reform will be successful.

Warm Regards,
CA. Neha Gupta
B.Com, ACA, AIR (Final) 36
LNG & Associates
Chartered Accountants
Email: lng.cafirm@gmail.com