IGST – Innovative way of handling Inter State Transactions

CA Hiral Raja

The Empowered Committee of State Finance Ministers unveiled the First Discussion paper on Goods and Service Tax in India on 10th November 2009. This discussion paper provides us with broad contours of dual GST to be implemented in India.

It is proposed that Central GST (CGST) as well as State GST (SGST) will be levied on all transactions of goods and services made for a consideration (except the exempted goods and services and transactions below the prescribed threshold limit). Central GST will be retained by the Centre and State GST will be retained by the State.

Proposed GST is to be based on the destination principle i.e. the state in which the goods/services are consumed will get revenue (i.e. SGST) in respect of that transaction. While this is been easily workable for transactions within the state, in case of interstate transactions, clarity was required in terms of how tax revenue (i.e. SGST) on a inter state transaction will move from origin based state to the destination based state. The possible options available were:

1. The seller in the origin state collects the tax revenue (i.e. SGST) and remits the tax to the origin state government. The origin state Government then transfers this remittance to the destination state. This would have required:

– Huge co-ordination between the states.

– Huge controls on movement of goods in terms of checkposts, road permits, etc in order to verify whether the goods have really moved out of the state.

2. The seller in the origin state collects the tax revenue (i.e. SGST) and remits the tax directly to the destination state government. This would have meant:

– Selling dealer would have to get registered in various destination states in order to remit the tax to the respective state governments

– Lot of trouble and hiccups to the trade and commerce.

3. The seller in the origin state collects the tax revenue (i.e. SGST) and remits the tax to the origin state government. Centre acts as a clearing agent and transfers the tax collected in respect of such transactions to the destination state. This option would mean the following advantages:

– Simpler and hence preferred option from the trade community.

– Strong IT Infrastructure ensuring smooth of tax revenue to the destination state.

The discussion paper has suggested the IGST model for taxation of inter state goods and services (in line with option 3 as mentioned above). IGST model would work as follows:

– Centre would levy IGST (CGST plus SGST) on all inter state transactions of taxable goods and services.

– Appropriate provision will be made for consignment or stock transfer of goods.

– 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 the payment of IGST.

– The importing dealer can 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 the payment of SGST.

This model would ensure that the SGST amount will be transferred to the destination state.

We will now try to understand as to how IGST actually works and how the SGST component of the tax gets transferred to the destination state.

For the sake of simplicity, CGST rate has been assumed at 8%, SGST rate has been assumed at 9%, IGST rate would work out to17%

E.g. Dealer X in State A purchases goods worth Rs. 100 locally and sells the goods to the Dealer Y in State B at Rs. 120/-.

Dealer A:

Credits available on local purchases of Rs. 100/-

CGST: 8

SGST: 9

Tax Payable on interstate sales of Rs. 120/-

IGST : Rs. 20.4 (17% on Rs. 120/-)

Computation of Net Tax Payable:

Total IGST Payable   :		20.4
Less: Credit of:
CGST	8.0		Credit of Rs. 8/- pertaining to centre utilized.
SGST	9.0	17.0
Net Tax Payable		3.4	Net IGST paid to the Centre

Total IGST payable to the Centre by the Dealer A is Rs. 20.4. He will utilise the credit of CGST (pertaining to Centre) of Rs. 8/- and SGST (pertaining to State A) of 9/- and pay net IGST of Rs. 3.4 to the Centre. Then state A will transfer the credit of SGST utilized in the payment of IGST (i.e. Rs. 9/-) to the Centre. By doing this, it has been ensured that the entire tax revenue of Rs. 20.4 (including SGST portion in it) in respect of this sale has been transferred to the Centre. Hence state A has not retained any revenue in respect of this inter state sale at all.

Now lets assume Dealer Y in state B sells these goods to another dealer locally at Rs. 150/-

Dealer B:

Credits available on inter state purchases of Rs. 120/-

IGST: Rs. 20.4

Tax Payable on local sales of Rs. 150/-

CGST: Rs. 12.0 (8% on Rs. 150/-)

SGST: Rs. 13.5 (9% of Rs. 150/-)

State B has to receive revenue of Rs. 13.5 in respect of this sale.

Dealer has three options,

(i) Set off the IGST first completely against the tax payable for CGST and balance against tax payable for SGST

(ii) Set off the IGST first completely against the tax payable for SGST and balance for tax payable for CGST.

(iii) Set off certain amount say Rs. 10 against CGST and remaining amount i.e. Rs. 10.4 against SGST.

(i) Set off the IGST first completely against the tax payable for CGST and balance against tax payable for SGST

CGST Payable	12.00		SGST Payable	13.5
Less: IGST Credit	12.00		Less: IGST Credit (Rs. 20.40 Less Rs. 12)	8.4
Net CGST Payable	—		Net SGST Payable	5.1

In this case, State B will get SGST revenue of Rs. 5.1 from the dealer X and Centre will pay the credit of IGST utilized in payment of SGST i.e. Rs. 8.4. Hence in total State B will receive total SGST of Rs. 13.5.

(ii) Set off the IGST first completely against the tax payable for SGST and balance against tax payable for CGST

CGST Payable	12.00		SGST Payable	13.5
Less: IGST Credit (Rs. 20.40 Less Rs. 13.50)	6.9		Less: IGST Credit (Rs. 20.40 Less Rs. 12)	8.4
Net CGST Payable	5.10		Net SGST Payable	5.1

In this case, State B will not get any SGST revenue from the dealer X and Centre will pay the credit of IGST utilized in payment of SGST i.e. Rs. 13.5. Hence in total State B will receive total SGST of Rs. 13.5.

(iii) Set off certain amount say Rs. 10 against CGST and Rs. 10.4 against SGST

CGST Payable	12.00		SGST Payable	13.50
Less: IGST Credit	10.00		Less: IGST Credit	10.40
Net CGST Payable	2.00		Net SGST Payable	3.10

In this case, State B will get SGST revenue of Rs. 3.1 from the dealer X and Centre will pay the credit of IGST utilized in payment of SGST i.e. Rs. 10.4. Hence in total State B will receive total SGST of Rs. 13.5.

Hence from the above examples, it can be clearly seen that the end purpose of this entire exercise which was to ensure that the SGST revenue goes to the destination state in a smooth way has been achieved. The manner in which this entire process is supposed to operate is really innovate and surely goes a long way in ensuring that dealers do not face undue difficulty on account of change of concept. The Empowered Committee of the State Finance Ministers really deserves kudos for adopting this unique system.

Further, a very important question that still remains unanswered is whether the stock transfers from one state to another will be taxed under IGST in the origin state and credit of the same will be available in the destination state or will there be an exemption from levy of IGST on stock transfers.

In case stock transfers are exempt, then there is a possibility of huge accumulations of SGST in certain states and the state governments will have to give refund of these tax credits. Hence it is imperative that the stock transfers are also taxed under IGST in the origin state and credit of the same is available in the destination state so that the value chain remains intact. However, we will have to wait to have further clarity on this issue.