GST Updates

How Taxation Mechanism works in Multi point Taxation where tax is levied and collected by two different Government i.e. Origin or Destination Based Taxation

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How Taxation Mechanism works in Multi point Taxation where tax is levied and collected by two different Government i.e. Origin or Destination Based Taxation
In case of Inter-State movement of goods or supply of services from one state to another and tax is administered, levied and collected by different State Governments, issue arises for levy of tax and subsequent credit of the tax paid with regard to the inter-state movement of goods or supply of services.
There are Two principles for Levy of Taxes in such a scenario i.e. Origin and Destination Based Taxation
In a study “Economic Effects of Origin and Destination Principle for Value-Added Taxes” by Jesus E. S. Oliveira for School Of Business And Public Management George Washington University April 2001 the concept of Destination and Origin Based Taxation was aptly described as follows:
“Goods shipped from one state to another may or may not be subjected to VAT, both in the state of origin and that of destination. That leads to four possible combinations of inter-state taxation.
The first would be that the good be taxed in both states, giving rise to double taxation. The second would be that the good would not be taxed in either state. Both combinations are obviously undesirable. Double taxation is a strong deterrent to inter-state trade, making imported goods more expensive in the importing state, way beyond transportation costs. No taxation at all is just as bad, for it gives imports an advantage over domestic production that has no justification on the production efficiency of foreign manufacturers.
We are then left with two possibilities: either the good is taxed only in the state of origin or only in the state of destination. These two approaches to VAT taxation in inter-state trade are called, respectively, origin principle and destination principle.
Another way to think of these approaches is to consider that under the destination principle everything that is domestically consumed is taxed, whereas under the origin principle everything that is produced domestically is taxed.”
The basic difference between the two lies in the fact that origin based taxation seeks to levy and collect tax on the basis of location of production or point where the goods are sold and destination based taxation seeks to levy and collect tax on the basis of location of consumption or point where the goods are imported for consumption.
For Eg: A in Maharashtra (Originating State) sold the goods levying CST to B in Rajasthan (Destination State).
When Tax is levied and Collected in A i.e. Maharashtra it is origin Based Taxation i.e. Tax being Levied in CST
For Eg: A in USA (Originating State) sold the goods to B in India (Destination State).
As Exports are generally Tax Free therefore no Tax is levied on sale of Goods by A but as Imports are liable to Custom Duty, therefore Goods imported in India for Consumption are Liable for Tax in India with Levy of Custom Duty.
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