GST Updates

Place of Supply Rules:- Whether in India we would be having GST based on destination based taxation

The big question is whether in present scenario of GST in India, whether we are following destination based taxation and if we are not following ideal destination based taxation system, then how tax would accrue to the consuming state.

As per the proposed model, IGST would be levied in the state wherein the goods or services are supplied and the consumption state would not be taxing the import of goods and/or services just as we are doing in case of Imports. In an ideal destination based taxation system, origin state would not have levied any taxes and the importing state would have levied taxes in the same manner as we do not charge any taxes on the exports but levy import duty on the import of the goods.

Therefore, now two questions arises:

1. Whether Indian Model of GST is a destination based taxation or origin based taxation as taxes are being levied and collected in the origin state

2.If at all Indian model of GST is a destination based taxation, then how the place of supply rules would enable accrual of taxes to the consumption state.

The answer to the above questions is necessitated because, if we are following the destination based taxation then the revenue would have to accrue to the consumption state and place of supply rules would identify the place where the goods and/or services are being consumed and revenue would accrue to the place where the goods and/or services are being consumed. If we are adopting origin based taxation, then revenue would only accrue to the state where the transaction originated.

  1. What is IGST Model in India and how it works:

Lets first understand the model of GST being implemented in India:

  • The IGST Model has been referred to in “First Discussion issued paper on Goods and Services Tax in India” as follows:

“The scope of IGST Model is that Centre would levy IGST which would be CGST plus SGST on all inter-State transactions of taxable goods and services with appropriate provision for consignment or stock transfer of goods and services. 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 dealerwill 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 relevant information will also be submitted to the Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective governments to transfer the funds.”

Therefore, what was suggested was a levy of tax in the state where transaction originates and subsequent transfer of the amount by the selling state to the Importing State through a Central Agency acting as a clearing house mechanism.

  1. How the IGST Model turns the origin based taxation model of GST in India to a destination based taxation:
  • The Indian Model of GST discussed as given in the First Discussion paper above was discussed in the “Consumption Tax Trends 2012VAT/GST and Excise Rates, Trends and Administration Issues” published by OECD while dwelling upon the proposed structure in India for GST as follows:

“Inter-state Supplies of goods or services would be subject as well to a unified GST aggregating to CGST and SGST that is called integrated GST(IGST). However the IGST would be an origin-based tax. Therefore, IGST would apply in the state of the supplier although credit will be given to the consumer in the other state. Thus the Central Government will operate like a clearinghouse and compensate the consuming state according to the destination principle.”

It finally concludes that

“Therefore, although the supply is taxed at the origin, the clearing house mechanism ensures that IGST in effect destination based.”

IGST in India has been developed broadly on the concept as follows:

a) Under the destination based concept the imports are generally liable to tax in the consuming territory equivalent to the taxes being levied on the goods and services produced in that territory. Therefore under proposed model of GST in India, all goods and services which would be imported from outside India would be liable to tax equivalent to CGST and SGST.

b) One of the salient features of destination based taxation is that the revenue of the goods or services consumed should accrue to the Importing State so that the importing state may allow the credit to the dealer of the taxes paid earlier. If the revenue of the taxes paid earlier is not transferred to the importing state, then in such case it would not be possible for the importing state to give credit of the taxes paid earlier. Another salient feature of the destination based taxation is that the goods or services exported from one state to another should be taxed on zero rate of tax and power to charge tax should only lies with the importing state where they are ultimately consumed. Therefore, under Ideal Destination Based Taxation, this component of CGST and SGST under Inter State trade or commerce should have been levied and collected by the importing State to bring the taxation on goods and services imported equivalent to the taxation of goods and services produced in that state.

c) However, under the proposed Indian Model of GST particularly with respect to the Inter State Trade of goods and services, power to levy and collect tax has been given to the Centre under the nomenclature of IGST. IGST would be collected in the exporting state.

d) The Government intends that GST should be destination based and the revenue collected and levied by Central Government under IGST should be transferred to the Importing State.

e) Therefore, there were two options one either the exporting state to transfer the credit directly to the importing state to the extent credit allowed by the Importing State to the dealer of the importing state of the taxes paid in the exporting state as IGST or second was someone to act as an agency for transferring the amount to the importing state so that the credit may be allowed by the importing state to the dealer of the importing state of the taxes paid in the exporting state as IGST.

f) The government has preferred the second option and then came out with IGST which is nothing but the tax which would have been levied and collected by the Importing State in ideal destination based taxation but would now be levied and collected by the Central Government to ensure that the revenue accrues to the importing state and destination based taxation can be implemented in a modified manner.

Therefore IGST is not in principle, destination based taxation as goods and services are not zero rated at the time of export of goods and services from one state to another. IGST would be an origin based tax which through the working of the revenue sharing mechanism by the Central Government would be modeled and converted into a destination based taxation and tax would accrue to the consumption state.

To conclude the introductory part, we can say the as we are following a destination based taxation system in GST, place of supply rules would identify the place where the goods and/or services would be consumed and revenue would also accrue to that place only.

In the next update, we would discuss that how place of supply rules operate.

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