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CST credit
One of the key issues
under the current tax regime is non-availability of
credit of the Central Sales Tax (CST) paid on
inter-State procurement of goods. Thus, where a trader
in Punjab purchases goods from a dealer in Haryana, the
CST of 2 per cent charged by the Haryana dealer on his
inter-State sales was not available as credit to the
Punjab trader. Consequently, this amount was lost in the
supply chain and resulted in an additional cost to the
traders. With the introduction of GST, this issue should
get resolved.
Keeping in mind India’s unique federal structure, a
novel and an innovative concept of an integrated GST (IGST)
has been proposed for taxing inter-State transactions of
goods and services. Under the IGST model, the Centre
alone will levy IGST (typically a sum of CGST and SGST)
on all inter-State transactions of goods and services.
The seller will charge IGST from the customer and pay to
the Government. While paying the output IGST to the
Government (charged from his customer), the seller will
be allowed to recover and deduct the input tax credit of
IGST, CGST and SGST. For monitoring this entire process
of credit movements, a Central Agency shall be set-up.
The exporting State shall transfer to the Central
Government the amount of SGST credit utilised by the
seller to discharge his output IGST liability in that
State. The inter-State purchaser can recover the entire
IGST charged by the seller as input tax credit to
set-off against his output IGST (charged on inter-State
supplies) and CGST and SGST liability (for supplies
within the State). To tax the value addition by the
purchaser in his State, the Central Government shall
transfer to the destination State the amount of IGST
used in the payment of state GST.
An illustation
To illustrate, if a
trader in Maharashtra supplies goods worth Rs 1,000 to a
dealer in Delhi and presuming a rate of 8 per cent each
for CGST and SGST, he will have to charge an IGST of 16
per cent, i.e., Rs 160 (CGST – Rs 80 and SGST – Rs 80).
Assuming some of the goods sold were bought inter-State
by the seller and some were procured locally, his input
credit pool was IGST (Rs 60), CGST (Rs 40) and SGST (Rs
50).
For paying Rs 160 (collected from the Delhi dealer) to
the Government, the seller deducts the available credit
of Rs 150 (60+40+50) from his credit pool of IGST, CGST
and SGST and pays the balance (Rs 10) in cash.
As per the proposed mechanism, the Maharashtra
Government will have to transfer Rs 50 (SGST credit) to
the Central Government as the latter would have only
received Rs 110 in the form Rs 60 (CGST), Rs 40 (IGST)
and Rs 10 in cash.
This is based on the destination principle of taxation
and on the assumption that no value addition was carried
out in Maharashtra, no tax should accrue to it.
Consequently, the SGST of Rs 50 (already paid to the
Maharashtra Government on procurement of goods by the
seller) will have to be returned by the Maharashtra
Government to the Central Agency.
Simultaneously, the Delhi dealer will be able to recover
Rs 160 (IGST charged and paid by him to the seller) as
input tax credit. This amount of Rs 160 can be used by
the Delhi dealer to set-off his IGST liability (arising
on his inter-State supplies of goods and services) and
the CGST and SGST liability (arising on his intra-state
supplies of goods and services).
Where the Delhi trader further makes inter-state sales
of the procured goods, the above chain would continue.
However, if the Delhi trader makes some sales within
Delhi, the Central Agency shall then transfer to the
Delhi government the portion of credit of IGST used for
payment of Delhi’s GST liability (arising on sales
within the state of Delhi). For illustration, where
subsequent to the above transaction, the Delhi dealer
makes a sale within Delhi and charges CGST and Delhi GST
of Rs 30 each, and for making this payment of Rs 60 to
the Delhi government he utilizes the input IGST of Rs
60, then Rs 30 (portion of IGST used for payment of
Delhi GST) shall be credited by the Central Agency to
Delhi government. This is basically to compensate the
Delhi government for the tax accruing on the portion of
sales made within Delhi.
In summary, the IGST doesn’t break the credit chain and
at the same time each State gets its share of revenue
arising from the value added in that state.
The concept of IGST thus, not only allows a seamless
movement of credits throughout the supply chain which is
not available under the current CST regime but also does
away with the painful refund mechanism which was earlier
being contemplated by the Empowered Committee. Taking
the above illustration, the selling dealer currently is
not allowed to recover the amount of Rs 40 paid towards
his inter-State purchases, whereas the input IGST
(replacing the erstwhile CST) of Rs 40 shall be
recoverable against the output tax liability.
Further, it would also be interesting to watch out for
the tax treatment of inter-State branch transfers,
though with this model approach, the fear of credit
losses should be dispensed off and thus doing away with
the need to plan for credit leakages.
However, what is not clear from the Discussion Paper is
the tax treatment of inter-state supply of services,
though the required groundwork of framing the place of
supply rules etc seems to have been completed. Perhaps,
even for services the tax treatment should remain
similar with the place of supply rules determining the
state eligible for the tax revenue.
Indeed, the forthcoming discussion papers covering these
other topics would be of great interest and we hope the
government continues to come out with such new and
innovative concepts which not only remove the painful
refund mechanism but also makes the entire GST regime
tax-payer friendly.
Source :
The
Hindu BusinessLine,
India,
dated
19/11/2009
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