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Dual structure challenge in GST determination


At present, State Value Added Tax (VAT) applies to the intrastate sale of goods, whereas Central Sales Tax (CST) is levied on the interstate sale of goods. Since revenue from these taxes is retained by the originating state, they are known as Origin-Based Taxes (OBT).

A Goods and Service Tax (GST) regime, however, is a dual structure of taxation. Both Central GST (CGST) and State GST (SGST) are levied on the intrastate supply of goods, while Integrated GST (IGST) applies to interstate supply of goods and services. With intrastate transactions, CGST revenue will accrue to the Centre whereas SGST revenue will accrue to the State. For interstate supplies, the destination state will be entitled to their share of IGST revenue.  Thus, in a GST regime, it is crucial to distinguish between ‘intrastate’ and ‘interstate’ transactions.

This blog discusses the importance of classifying each supply transaction as either interstate or intrastate. It also describes possible challenges arising from the dual GST structure in India.

Consuming states versus manufacturing states

At present, a major source of revenue for manufacturing states is CST, which is levied on interstate sales. CST is an origin-based tax (OBT), meaning it accrues to the state from which supplies are made. Since GST is a destination-based consumption tax (DBT), states that consume the taxed goods and services receive the tax revenue (e.g., IGST). In other words, the GST regime effectively replaces the OBT with the DBT.

Generally, GST benefits states that consume more goods and/or services than they produce. States currently dole out incentives, subsidies, etc. (such as packaged scheme of incentives) with an assumption that the tax benefits will accrue to the state in the subsequent period. As this won’t necessarily be the case under a GST regime, states will need to revisit their assumptions and re-evaluate their practices.

Potential loss of revenue

The GST has the potential to integrate the economy and unify the national market. Under a GST regime, states where the goods or services are consumed are entitled to GST, while states that produce more than they consume may earn less.

Manufacturing states are concerned about the potential loss of revenue. However, although states may lose revenue from CST and other taxes, they also stand to gain the power to tax services that, at present, are taxed only by the Centre. A tax on services will certainly increase state indirect tax revenue.  Additionally, under the GST regime, the entire supply chain will be required to register, as all assessees with a turnover above INR 20 lacs (INR 10 lacs in case they have presence in specified states) will be required to register and pay GST. Furthermore, most of the existing exemptions for products and services are expected to disappear under the GST regime. This will lead to additional tax revenue for the assessee base.

To address states’ concerns over a loss of revenue due to the introduction of the GST, the Central Government has proposed to compensate states for their lost tax revenue for a period of five years. The compensation will be funded by revenue generated from GST Compensation Cess, to be levied on specified products/ services.

Need for automation and robust IT systems

Model GST law casts the onus of determining whether a transaction is ‘intrastate’ or ‘interstate’ on the assesse, for payment Central GST (CGST) plus State GST (SGST) or Integrated GST (IGST), respectively. In this regard, section 70 of Revised Model GST law provides that if an assessee wrongly determines an intrastate transaction as an interstate transaction and in-turn pays IGST, then the taxpayer must pay the correct applicable tax (i.e., CGST plus SGST, perhaps along with a penalty) again and then claim a refund of the wrongly paid CGST plus SGST.

To determine whether a transaction is ‘intrastate’ or ‘interstate,’ the taxpayer must scroll through multiple scenarios. It’s easy to make the wrong choice.

Given the complexities involved — returns to be filed, documents and records to be maintained, etc. — it is unrealistic to expect a ‘flawless’ GST. Tax automation software can dramatically simplify GST implementation. Thus, it is prudent for companies to have a robust IT backbone for the determination and payment of the proper GST. In the long run, a robust GST automation system will give companies an edge over other competitors.

To learn more about how Avalara can help you with GST compliance automation, contact us through https://www.avalara.com/in/contact-us/.

This blog is contributed by CA Pritam Mahure.

Avalara Author
Pritam Mahure
Avalara Author Pritam Mahure
Mr Mahure is a practicing chartered accountant in indirect taxes in Pune. He is a renowned GST Trainer and has authored book on “GST – Supply Chain Perspective” for Confederation of Indian Industry (CII). He is working with Indian Government in rolling out tax reforms projects such as GST.