Implementing a destination-based GST could be complex     

The discussion paper on GST released by the empowered committee of state finance ministers on November 10, 2008 introduced a new model for levy of GST called inter-state GST (IGST). The model is founded upon what is known as destination principle for taxing goods and services. Before going to the destination principle and its economic rationale, let me make an attempt to illustrate how the model may work in real life with the help of the following simple example.

 

Suppose a dealer in state A (call him A) supplies a consignment of goods to a dealer in state B (call him B) on which IGST of Rs 100 is leviable. A can discharge this tax liability by taking credit from his three input accounts (SGST, CGST, and IGST) and/or by making cash payment from his pocket Assume that A utilised Rs 20 from his SGST credit account, Rs 20 from CGST credit account and Rs 20 from his IGST credit account. In other words, he pays Rs 40 from his pocket and Rs 60 from the three different accounts maintained by him.

Dealer B takes Rs 100 credit in his IGST account, which he can use for payment of SGST, CGST (and also IGST in case he sells goods outside the state to registered dealers). Suppose the consignment is consumed in state B and dealer B collects taxes leviable on them, which are, say, Rs 60 as CGST and Rs 60 as SGST.

Now, suppose that B utilises Rs 60 from his IGST account for payment of SGST in state B. Though the goods are consumed in state B, the net cash payment of SGST to state B is zero since payment through credit account does not yield any revenue to state B. This outcome of zero revenue yield to the consuming state B goes against the fundamental premise of the destination principle. Therefore, according to the proposed IGST model, the Centre will remit to state B Rs 60 paid as SGST by the consumers in state B from out of its IGST account.

The story of the model as narrated above is simple enough to understand. But the real life story may not be as simple. Because in the above narration we have not taken into account the fact that the Centre only got Rs 40 in its IGST account as that is the amount paid in cash. Then how can Centre give state B Rs 20 more than what it collected?

The destination principle provides solution to this problem. Recall that A utilised Rs 20 from his SGST account to partly discharge IGST liability on goods sold to B. This money is actually in the coffers of state A, but the goods for which credit of this sum was utilised by A were consumed in state B. Destination principle does not provide for such ‘mis-appropriation’ of Rs 20 by state A.

Therefore Centre, acting as a clearing house, collects Rs 20 from state A and remits the entire SGST tax of Rs 60 to state B.

Plainly speaking, destination principle provides for shifting the burden of taxation on goods and services to the point of their final consumption destination. A pure and perfect example of consumption taxation on the basis of this principle is the retail sales tax system as prevalent in the US. The entire chain of value addition activities preceding retail transactions is not subjected to tax in the US.

From the point of view of economic efficiency, retail sales tax system is the most efficient form of indirect taxation of goods/services. In this system producers and wholesale traders do not have to bear any financial burden on account of their responsibility to collect on behalf of government taxes leviable on goods/services they deal with. Only retail traders as registered dealers in this system are responsible for collecting taxes and they do not bear any burden as consumers pay taxes at nearly the same time as these goods/services are consumed at the point of final destination. The entire revenue from such consumption goes to the coffers of the destination states.

But the system of collecting tax at each stage of value addition is less risky and more revenue buoyant than the system of retail taxation as the entire revenue on a consignment is lost if its sales at retail stage is not accounted for by the dealer. Therefore VAT/GST based on destination principle serves the dual objectives of revenue buoyancy as well as economic efficiency.

IGST will be administered by the CBEC. From my reading of the model, for its effective enforcement the following broad administrative/policy measures are required to be taken.

• Complete harmonisation between the Centre and states in threshold limits for SSI exemptions; composition/compounding scheme; rates of duties for different goods; and schemes of tax exemptions

• IT systems compatibility between the states and Centre.

• Dealer-wise reconciliation of credit availed from SGST account to discharge IGST liability and of credit availed from IGST account to discharge SGST liability by each dealer in a state for inter-state transactions in order to calculate net remittance to be given by the Centre to each state from out of Centre’s IGST tax kitty.

• State-wise reorganisation of administrative formations.

Source: Economic Times, India, dated 22/12/2009