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Introduction: –

The indirect tax regime in India is evolving into GST in the year 2010. The steps towards introduction of GST have commenced. The Empowered Committee of State Finance Ministers has introduced the First Discussion Paper on GST in India on November 10, 2009. A dual structure of Central GST (CGST) and State GST (SGST) is proposed to be imposed on the manufacture of goods and on provision of services. A continuous chain of set-off from the original producer’s point and service provider’s point upto the retailer’s level would be established which would eliminate the burden of all cascading effects.

For sale or services transactions between two states (inter-state), the Government has proposed to impose Inter State GST (IGST) which will include both CGST and SGST. Between the Inter-state transactions and Intra-state transactions which will be more beneficial to the assessee is the topic of discussion of this Article.

Transactions with in a state: –

The manufacture and sale of goods as well as provision of services if carried within a state, then CGST and SGST will be leviable on such activities. As per the proposed plan, the assessee will be required to pay element of both CGST and SGST separately. Assessee is required to deposit both CGST and SGST in separate revenue accounts. The Input Tax Credit (ITC) is also allowed to be taken separately for CGST and SGST. The assessee is required to file the returns separately.

The credit of CGST taken by the assessee will have to be utilised to pay CGST only and credit of SGST taken is to be utilised to pay SGST only. Cross adjustment of tax credit between CGST and SGST will not be allowed.

Intra-State Transactions: –

For the inter-state transactions of goods and services, the Empowered Committee has adopted the IGST model. The scope of IGST model, as discussed in First Discussion Paper, is that the IGST will be levied by the Centre and it would be CGST plus SGST on all inter-state transactions of taxable goods and services.

It is proposed that the inter-state seller will pay IGST on value addition after adjusting available credit of IGST, CGST and SGST on his purchases. The Exporting state will transfer to the Centre the credit of SGST used in payment of IGST. The Importing dealer will claim credit of IGST while discharging his output tax liability in his own State. The Centre will transfer to the importing State the credit of IGST used in payment of SGST.

The major advantages of IGST Model as per discussion paper are as under: –

–         Maintenance of uninterrupted ITC chain on inter-State transactions.

–         No upfront payment of tax or substantial blockage of funds for the inter-state seller or buyer.

–         No refund claim in exporting State, as ITC is used up while paying the tax.

–         Self monitoring model.

–         Level of computerization is limited to inter-State dealers and Central and State Governments should be able to computerize their processes expeditiously.

–          As all inter-State dealers will be e-registers and correspondence with them will be by e-mail, the compliance level will improve substantially.

–         Model can take ‘Business to Business’ as well as ‘Business to Consumer’ transactions into account.

Thus, in case of inter-state transactions, the credit can be adjusted in both CGST and SGST. The credit of IGST can be used to for payment of either CGST or SGST.

In case Exemption is granted from CGST: –

It is also proposed in the said discussion paper that the exemption from CGST will be separate as that from the SGST. The exemption limit proposed in CGST is Rs. 150 Lakhs which is at par with exemption limit for small scale manufacturers under the Central Excise Act, 1944. But the exemption from SGST is kept at par with the current VAT exemption limit. Similarly, the discussion paper says that the service provider exemption from CGST should be kept high as currently they are enjoying exemption of Rs. 10 Lakhs. But there is no hint given for exemption limit for service providers from SGST.

Even the discussion paper brings out a peculiar situation wherein the State Authorities will be empowered under their respective state GST statutes to exempt various goods that are of peculiar nature looking to the specificity existing in that state. If such a power is being granted to the states then the situation will be that certain goods will be exempted by SGST in that state, however, CGST will be levied on those products.

Thus, it is clear that there will be separate exemption for CGST and SGST. Further, if the CGST is exempt then the assessee will not be allowed to take the credit of CGST. Similarly, if the SGST is exempt then credit of the same will not be allowed.

Now, suppose an assessee is granted exemption from CGST but SGST is applicable, then the credit of CGST will not be available to him but he will be able to take the credit of SGST. From this aspect if we consider transactions from one state to another then IGST will be paid as it will be available as credit since SGST is payable on his final product or output services. Then he will be able to take the credit of IGST which is sum total of CGST and SGST. He will be more benefited as the CGST is not payable but he will be able to take the credit of CGST in garb of IGST. He will adjust the same in payment of SGST.

If this happens then it will lead to situation where an assessee is exempted either from CGST or SGST and the other is payable, then in such situation he will like to procure goods or services from outside state rather than inside the state. This will reverse the position as existing now in the VAT. In current regime, if one purchase from outside state then he has to pay CST and the credit of same is not available. But if an assessee purchases goods inside the state then VAT is payable and credit of the same is available. As such, everyone intends to purchase the goods from inside the state.

Although it is very premature to say as only discussion paper is published for the GST but we have prepared the article on our understanding of the said paper. Looking to the recommendations as depicted in the discussion paper the situation as picturized by us in this article seems to be more factual but nothing can be expressed with utmost certainty as the law and GST code is yet to be released by the Government.

Before Parting: –

Thus, from the above discussion, the inter-state transactions appear to be more beneficial to the assessee who is providing output service or is manufacturing final product. This is because the assessee will not be paying the tax in cash and will be able to utilize the credit of IGST to do so. The views expressed by us in this article are the views as understood by us while analyzing the recommendations of Empowered Committee of State Finance Ministers and in no way signifies the views of the Government. The scenario as analyzed by us above will be clear only after the Government releases a GST code or further clarification on this matter. From Government’s side also, the utmost care has to be taken of this point while drafting the rules and regulations for GST.

Prepared By: – CA Pradeep Jain, Sukhvinder Kaur, LLB (FYIC), Siddharth Rutiya

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April 2024