DECEMBER 23, 2009

By CA Pradeep Jain & Siddharth Rutiya

THE famous Hindi proverb “” (The disease increases as and when the treatment is undertaken) applies to inter state transactions. These inter state transactions has become non curable disease for the Centre. In the present scenario VAT is levied on transactions pertaining to sale of goods within the state wherein the credit of VAT paid by the buyer is allowed to him, which he can utilize for discharging his output VAT liability. But the transactions relating to Inter-State sale of goods are subject to levy of CST (Central Sales Tax). In this situation the credit of CST paid on inter state sale of goods is not allowed which leads to a huge cost burden on the seller or dealer. To overcome this cost burden and to be competitive in the market the dealers establish their branches and/or depots in other states and route their transactions in such a way that the transfer of goods to such branches and/ or depots does not attract CST levy and during the sale from these depots/branches, only VAT is payable, which in turn is allowed as credit to them. Thus, everyone prefers to purchase from intra state rather than inter state. The CST charged will add to the cost and no credit of the same is available.

To overcome this lacuna in the present scenario of indirect tax structure Government has recently initiated its efforts towards introduction of a new tax regime GST. With the introduction of First Discussion Paper on GST by the Empowered Committee of State Finance Ministers on November 10, 2009; Government placed its first stepping stone in bringing this new indirect tax scheme and making it a great success. Under the First Discussion Paper the Government has proposed to setup a dual structure of Central GST (CGST) and State GST (SGST) to be imposed on the manufacture of goods and on provision of services. A continuous chain of set-off would surely eliminate the burden of all cascading effects.

In this article we have made an effort to analyze the situations between GST tax scheme in case of transactions between two states (inter-state), commonly known by the name Inter State GST (IGST) and present situation under CST law. Further, we in this article have structured out the comparison between Inter-state transactions and Intra-state transactions under GST Scheme alongwith the pros and cons under both the scenarios.

Levy of GST on Transactions within the State

Transactions pertaining to manufacture and sale of goods and also including provision of services carried on within a state would attract the levy of CGST and SGST both and the assessee will be required to pay element of both CGST and SGST separately. Further as per the proposed scheme it is the Assessees obligation to maintain separate records for both SGST & CGST and deposit these duties separately in revenue accounts.

Simultaneously, the Assessee is required to avail the Input Tax Credit (ITC) separately for both these duties and more to he will be allowed to utilize the ITC in this respect individually without mixing the credit availed. In other words it can be said that the credit of CGST taken by the assessee will have to be utilised to pay CGST only and credit of SGST taken will be allowed to be utilized to pay SGST only. Cross adjustment of tax credit between CGST and SGST will not be allowed.

Levy of GST on Inter-State Transactions

Government has proposed a different tax structure for inter-state transactions of goods and services to be known as IGST (Inter-State GST). As discussed in First Discussion Paper, the Government has proposed that the said IGST will be levied by the Central Government and it would be a composite tax which would include both CGST and SGST in it.

However, as per the scheme drafted by the Government in regards to such Inter State transactions it is proposed that the inter-state seller will have to pay IGST on value addition after adjusting available credit of IGST, CGST and SGST on his purchases. Further, as far as the credit of SGST is used in payment of IGST is concerned, it will be transferred by the Centre to the Exporting state. Simultaneously, the Importing dealer will claim credit of IGST while discharging his output tax liability in his own State and the Centre will transfer to the importing State the credit of IGST used in payment of SGST.

Pros and Cons of IGST Model: -

The analysis of First Discussion Paper brings out the following pros and cons of IGST Model listed as under: -

Maintenance of uninterrupted ITC chain on inter-State transactions.

No upfront payment of tax or substantial blockage of funds for the inter-state seller or buyer.

No refund claim in exporting State, as ITC is used up while paying the tax.

Self monitoring model.

Level of computerization is limited to inter-State dealers and Central and State Governments should be able to computerize their processes expeditiously.

As all inter-State dealers will be e-registers and correspondence with them will be by e-mail, the compliance level will improve substantially.

Model can take ‘Business to Business' as well as ‘Business to Consumer' transactions into account.

Thus, in case of inter-state transactions, the credit can be adjusted in both CGST and SGST. The credit of IGST can be used to for payment of either CGST or SGST both.

Threshold Exemption for CGST and SGST

The First Discussion paper also proposes for various threshold exemptions from CGST and SGST levies separately. It proposes for an exemption limit of Rs. 150 Lakhs in CGST, which is at par with exemption limit for small scale manufacturers under the present Central Excise Act, 1944. However, the exemption from SGST is kept at par with the current VAT exemption limits.

Similarly, the discussion paper also proposes to provide for an exemption limit from CGST for the service provider, which are currently enjoying exemption of Rs. 10 Lakhs under Finance Act, 1994.

The discussion paper brings out a strange concept wherein it is proposed that the State Authorities will be empowered under their respective state GST statutes to exempt various goods that are of peculiar nature looking to the specificity existing in that state. These exemptions will be area specific and shall prevail for that state jurisdictions only. We are of the view that if such a power is being granted to the states then the situation will be that certain goods will be exempted by SGST in that state, however, CGST will be levied on those products.

The above peculiarity of exemption schemes as proposed under the First Discussion Paper leads to a situation where it is possible that various units might be availing separate exemptions for CGST and SGST individually. This will lead to a troublesome situation as if the CGST is exempt then the assessee will not be allowed to take the credit of CGST and similarly, if the SGST is exempt then credit of the same will not be allowed to him.

Analyzing the above situation we deduce that, in a case where an assessee is granted exemption from CGST but SGST is applicable, then the credit of CGST will not be available to him but he will be able to take the credit of SGST. From this aspect if we consider transactions from one state to another then IGST will be paid as it will be available as credit since SGST is payable on his final product or output services. Then he will be able to take the credit of IGST which is sum total of CGST and SGST. He will be more benefited as the CGST is not payable but he will be able to take the credit of CGST in garb of IGST. He will adjust the same in payment of SGST.

If this happens then it will lead to a circumstance where an assessee is exempted either from CGST or SGST and the other is payable. In such a situation he will like to procure goods or services from outside state rather than inside the state. This will reverse the position as existing now in the VAT. In current regime, if one purchase from outside state then he has to pay CST and the credit of same is not available. But if an assessee purchases goods inside the state then VAT is payable and credit of the same is available. As such, everyone intends to purchase the goods from inside the state.

Although the Discussion paper does not clear the situation in its entirety as to what will be the exact situation and what will be the law in case of IGST levy. At this present level it is very untimely to say anything with utmost surety as to what will be the exact position but we have prepared this article on our understanding of the said paper.

Conclusion

Thus, from the above discussion and analysis, we are of the view that the initiation by the Government to remove the deficiency under the present CST law has not resulted in a fruitful step. Earlier the dealers used to prefer sale transactions within the state so as to reduce their cost burden by availing the credit of VAT paid but if the GST law is introduced as such with the features as stated above in this article then it will be beneficial for the dealers to prefer Inter-State transactions as this will lead to levy of IGST and under GST tax regime full Credit of IGST is allowed along with cross utilization of same.

In a nut shell we can say that the situation that prevailed prior to introduction of GST will be completely reversed once the GST comes into picture. Under GST law Inter-State transactions will be more advantageous to the assessees/dealers who are providing output service or are manufacturing final product and are simultaneously availing exemption benefits under any threshold exemption.

The views expressed by us in this article are the views as understood by us while analyzing the recommendations of Empowered Committee of State Finance Ministers and in no way signifies the views of the Government. The scenario as analyzed by us above will be clear only after the Government releases a GST code or further clarification on this matter. From Government's side also, the utmost care has to be taken of this point while drafting the rules and regulations for GST.