GST Basics-with Examples

IGST - Innovative way of handling Inter State Transactions

Hiral Raja The Empowered Committee of State Finance Ministers unveiled the First Discussion paper on Goods and Service Tax in ndia on !"th #ovem$er %""&' This discussion paper provides us with  $road contours of dual GST to $e implemented in ndia' t is proposed that Central GST (CGST) as well as State GST (SGST) will $e levied on all transactions of *oods and services made for a consideration (except the exempted *oods and services and transactions $elow the prescri$ed threshold limit)' Central GST will $e retained $+ the Centre and State GST will $e retained $+ the State' ,roposed GST is to $e $ased on the destination principle i'e' the state in which the *oods-services are consumed will *et revenue (i'e' SGST) in respect of that transaction' .hile this is $een easil+ wor/a$le for transactions within the state0 in case of interstate transactions0 clarit+ was re1uired in terms of how tax revenue (i'e' SGST) on a inter state transaction will move from ori*in $ased state to the destination $ased state' The possi$le options availa$le were2

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The seller in the ori*in state collects the tax revenue (i'e' SGST) and remits the tax to the ori*in state *overnment' The ori*in state Government then transfers this remittance to the destination state' This would have re1uired2 3 Hu*e co3ordination $etween the states' 3 Hu*e controls on movement of *oods in terms of chec/posts0 road permits0 etc in order to verif+ whether the *oods have reall+ moved out of the state'

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The seller in the ori*in state collects the tax revenue (i'e' SGST) and remits the tax directl+ to the destination state *overnment' This would have meant2 3 Sellin* dealer would have to *et re*istered in various destination states in order to remit the tax to the respective state *overnments 3 4ot of trou$le and hiccups to the trade and commerce'

5

The seller in the ori*in state collects the tax revenue (i'e' SGST) and remits the tax to the ori*in state *overnment' Centre acts as a clearin* a*ent and transfers the tax collected in respect of such transactions to the destination state' This option would mean the followin* advanta*es2 3 Simpler and hence preferred option from the trade communit+' 3 Stron* T nfrastructure ensurin* smooth of tax revenue to the destination state'

The discussion paper has su**ested the GST model for taxation of inter state *oods and services (in line with option 5 as mentioned a$ove)' GST model would wor/ as follows2 3 Centre would lev+ GST (CGST plus SGST) on all inter state transactions of taxa$le *oods and services' 3 6ppropriate provision will $e made for consi*nment or stoc/ transfer of *oods' 3 The inter state seller will pa+ GST on value addition after adjustin* availa$le credit of  GST0 CGST and SGST on his purchases' 3 The Exportin* State will transfer to the Centre the credit of SGST used in the pa+ment of  GST' 3 The importin* dealer can claim credit of GST while dischar*in* his output tax lia$ilit+ in his own state' 3 The Centre will transfer to the importin* state the credit of GST used in the pa+ment of  SGST' This model would ensure that the SGST amount will $e transferred to the destination state' .e will now tr+ to understand as to how GST actuall+ wor/s and how the SGST component of  the tax *ets transferred to the destination state' For the sa/e of simplicit+0 CGST rate has $een assumed at 780 SGST rate has $een assumed at &80 GST rate would wor/ out to!98 E'*' Dealer : in State 6 purchases *oods worth Rs' !"" locall+ and sells the *oods to the Dealer  ; in State < at Rs' !%"-3' Dealer A: Credits availa$le on local purchases of Rs' !""-3 CGST2 7 SGST2 &

Tax ,a+a$le on interstate sales of Rs' !%"-3 GST 2 Rs' %"'= (!98 on Rs' !%"-3) Computation of #et Tax ,a+a$le2 Total GST ,a+a$le 4ess2 Credit of2 CGST SGST  #et Tax ,a+a$le

2 7'" &'"

Credit of Rs. 8/ertainin to centre

%"'=

!9'" 5'=

Net IGST paid to the Centre

Total GST pa+a$le to the Centre $+ the Dealer 6 is Rs' %"'=' He will utilise the credit of CGST (pertainin* to Centre) of Rs' 7-3 and SGST (pertainin* to State 6) of &-3 and pa+ net GST of Rs' 5'= to the Centre' Then state 6 will transfer the credit of SGST utili>ed in the pa+ment of GST (i'e' Rs' &-3) to the Centre' <+ doin* this0 it has $een ensured that the entire tax revenue of Rs' %"'= (includin* SGST portion in it) in respect of this sale has $een transferred to the Centre' Hence state A has not retained any revenue in respect of this inter state sale at all.  #ow lets assume Dealer ; in state < sells these *oods to another dealer locall+ at Rs' !?"-3 Dealer B:

Credits availa$le on inter state purchases of Rs' !%"-3 GST2 Rs' %"'= Tax ,a+a$le on local sales of Rs' !?"-3 CGST2 Rs' !%'" (78 on Rs' !?"-3) SGST2 Rs' !5'? (&8 of Rs' !?"-3) State B has to receive revenue of s. !".# in respect of this sale.

Dealer has three options0 i Set off the GST first completel+ a*ainst the tax pa+a$le for CGST and $alance a*ainst tax pa+a$le for SGST ii Set off the GST first completel+ a*ainst the tax pa+a$le for SGST and $alance for  tax pa+a$le for SGST' iii Set off certain amount sa+ Rs' !" a*ainst CGST and remainin* amount i'e' Rs' !"'= a*ainst SGST' i

Set off the GST first completel+ a*ainst the tax pa+a$le for CGST and $alance a*ainst tax pa+a$le for SGST

n this case0 State < will *et SGST revenue of Rs' ?'! from the dealer : and Centre will pa+ the credit of GST utili>ed in pa+ment of SGST i'e' Rs' 7'=' Hence in total State < will receive total SGST of Rs' !5'?' ii

Set off the GST first completel+ a*ainst the tax pa+a$le for SGST and $alance a*ainst tax pa+a$le for CGST

n this case0 State < will not *et an+ SGST revenue from the dealer : and Centre will pa+ the credit of GST utili>ed in pa+ment of SGST i'e' Rs' !5' ?' Hence in total State < will receive total SGST of Rs' !5'?' iii

Set off certain amount sa+ Rs' !" a*ainst CGST and Rs' !"'= a*ainst SGST

n this case0 State < will *et SGST revenue of Rs' 5'! from the dealer : and Centre will pa+ the credit of GST utili>ed in pa+ment of SGST i'e' Rs' !"'=' Hence in total State < will receive total SGST of Rs' !5'?' Hence from the a$ove examples0 it can $e clearl+ seen that the end purpose of this entire exercise which was to ensure that the SGST revenue *oes to the destination state in a smooth wa+ has $een achieved' The manner in which this entire process is supposed to operate is reall+ innovate and surel+ *oes a lon* wa+ in ensurin* that dealers do not face undue difficult+ on account of chan*e of concept' The Empowered Committee of the State Finance Ministers reall+ deserves /udos for adoptin* this uni1ue s+stem' Further0 a ver+ important 1uestion that still remains unanswered is whether the stoc/  transfers from one state to another will $e taxed under GST in the ori*in state and credit of  the same will $e availa$le in the destination state or will there $e an exemption from lev+ of  GST on stoc/ transfers' n case stoc/ transfers are exempt0 then there is a possi$ilit+ of hu*e accumulations of SGST in certain states and the state *overnments will have to *ive refund of these tax credits' Hence it is imperative that the stoc/ transfers are also taxed under GST in the ori*in state and credit of the same is availa$le in the destination state so that the value chain remains intact' However0 we will have to wait to have further clarit+ on this issue'