GST Updates

How Destination Based Taxation allows seamless flow of credit from one business to another

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Lets discuss how Destination Based Taxation allows seamless flow of credit and how B2B supplies and B2C supplies play their part in determining the jurisdiction to which revenue would accrue.

Businesses to be relieved of Tax burden and allowed credit of tax paid in case of Business to Business supplies and final burden of tax to be borne by consumer in Business to Consumer supplies

Before, moving on this discussion, following things stands crystallized

1. Transaction between Business to Business i.e. B2B

a) Tax should never be added to the cost of the product until it reaches to the final consumer i.e. it should be fully creditable where supply is between two business i.e. B2B

b) In case of B2B supply, revenue accrues to the Jurisdiction where the goods and/or services are consumed for the sole purpose of facilitating seamless flow of Input Tax Credit to the person making further supply of the goods and/or services acquired in B2B transaction.

  1. Transaction between Business to Consumer i.e. B2C

a) Tax forms part of the cost of the goods and/or services wherein they are finally consumed, i.e. where the supply is between business and consumer i.e. B2C

b) In case of B2C supply, revenue accrues to the Jurisdiction where the goods and/or services are finally consumed and as the goods and/or services acquired in the transaction would not be used for making further supply of goods and/or services, therefore revenue would finally accrue to the state where the goods and/or services are finally consumed.

We take an example for better understanding the above conclusion, wherein goods are supplied by A in Maharashtra to B in Rajasthan. The goods are again supplied by B in Rajasthan to C in Delhi. C in Delhi consumes the goods for his personal use.

  1. Transaction between A and B i.e. Maharashtra to Rajasthan-

a) Implications on B: It is a Business to Business supply, therefore B would be getting credit of the entire taxes paid by him and it would not be added to the part of cost of

b) Implications for Rajasthan: Rajasthan would be the state where the goods would not be finally consumed but would be as an intermediary in the course of the supply chain. However, since revenue in the transaction accrues to Rajasthan, therefore Rajasthan would be able to give the credit of the taxes to B in the given transaction. However, if the revenue would not have been transferred to Rajasthan and would have been kept with Maharashtra, then in such case Rajasthan would not have been able to provide credit to B.

The reason that Rajasthan is able to provide credit of the taxes paid by B in the transaction is because under destination based taxation, revenue accrues to the jurisdiction where the goods and/or services are consumed. If it would have been an origin based taxation, then revenue would have accrued to Maharashtra and Rajasthan would not have been able to provide credit to B of the taxes paid in the transaction.

c) Whether Rajasthan retains the revenue: The transaction in question is a B2B supply therefore, Rajasthan would not be able to retain any revenue and it would only be a pass through for them as entire taxes would be allowed as credit to B and therefore, Rajasthan will not be left with any revenue in the instant case.

2. Transaction between B and C i.e. Rajasthan to Delhi:

a) Implications on C: It would be a Business to Consumer Supply i.e. B2C and tax would form part of the cost of the product and no Input credit would be allowed to C in the instant case as the goods would not be used in the course or furtherance of business by C.

 b) Implications for Delhi: Delhi would be the place in this transaction where the goods would be finally consumed by C and would not be used as an intermediary in the supply chain. Therefore, no input credit would be allowed by Delhi.

c) Whether Delhi retains the Revenue: The transaction question is a B2C transaction , therefore revenue in this transaction would accrue to Delhi and as no input credit would be required to be allowed by Delhi, therefore final revenue in the entire supply chain between A, B and C would be retained by Delhi.

In the entire transaction, between A, B and C and between Maharashtra, Rajasthan and Delhi, the revenue chain would be as follows:

a) Maharashtra: No Revenue as it’s the origin state and under destination based taxation, no tax revenue accrues to the state from where the transaction originates.

b) Rajasthan: Revenue accrues to Rajasthan in transaction between A and B but as the supply is a B2B supply, therefore it would work as an intermediary and allow credit of the entire taxes paid to B.

 c) Delhi: Revenue accrues to Delhi in transaction between B and C and as the transaction is B2C and C has procured the goods for final consumption and not for further supply, therefore entire revenue accrues to Delhi as no credit would be allowed by Delhi.

What we can summarize is as long as there is a B2B transaction, no revenue would be retained by the consuming state as they would be allowing Input Credit to the person but as soon as a transaction becomes B2C, the supply chain would break and the revenue in the entire supply chain rests with the state where the last consumption in B2C transaction happens and till then it’s only a pass through between the states.

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