GST Basics-with Examples

7/18/2019 GST Basics-with Examples

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IGST - Innovative way of handling Inter State Transactions

Hiral Raja

The Empowered Committee of State Finance Ministers unveiled the First Discussion paper on

Goods and Service Tax in ndia on !"th #ovem$er %""&' This discussion paper provides us with $road contours of dual GST to $e implemented in ndia'

t is proposed that Central GST (CGST) as well as State GST (SGST) will $e levied on all

transactions of *oods and services made for a consideration (except the exempted *oods and

services and transactions $elow the prescri$ed threshold limit)' Central GST will $e retained $+the Centre and State GST will $e retained $+ the State'

,roposed GST is to $e $ased on the destination principle i'e' the state in which the

*oods-services are consumed will *et revenue (i'e' SGST) in respect of that transaction' .hile

this is $een easil+ wor/a$le for transactions within the state0 in case of interstate transactions0clarit+ was re1uired in terms of how tax revenue (i'e' SGST) on a inter state transaction will

move from ori*in $ased state to the destination $ased state' The possi$le options availa$le were2



! The seller in the ori*in state collects the tax revenue (i'e' SGST) and remits the tax to theori*in state *overnment' The ori*in state Government then transfers this remittance to the

destination state' This would have re1uired2

3 Hu*e co3ordination $etween the states'3 Hu*e controls on movement of *oods in terms of chec/posts0 road permits0 etc in

order to verif+ whether the *oods have reall+ moved out of the state'

% The seller in the ori*in state collects the tax revenue (i'e' SGST) and remits the tax

directl+ to the destination state *overnment' This would have meant2

3 Sellin* dealer would have to *et re*istered in various destination states in order toremit the tax to the respective state *overnments

3 4ot of trou$le and hiccups to the trade and commerce'

5 The seller in the ori*in state collects the tax revenue (i'e' SGST) and remits the tax to theori*in state *overnment' Centre acts as a clearin* a*ent and transfers the tax collected in

respect of such transactions to the destination state' This option would mean the

followin* advanta*es23 Simpler and hence preferred option from the trade communit+'

3 Stron* T nfrastructure ensurin* smooth of tax revenue to the destination state'

The discussion paper has su**ested the GST model for taxation of inter state *oods and services

(in line with option 5 as mentioned a$ove)' GST model would wor/ as follows2

3 Centre would lev+ GST (CGST plus SGST) on all inter state transactions of taxa$le

*oods and services'3 6ppropriate provision will $e made for consi*nment or stoc/ transfer of *oods'

3 The inter state seller will pa+ GST on value addition after adjustin* availa$le credit of

GST0 CGST and SGST on his purchases'3 The Exportin* State will transfer to the Centre the credit of SGST used in the pa+ment of

GST'

3 The importin* dealer can claim credit of GST while dischar*in* his output tax lia$ilit+in his own state'

3 The Centre will transfer to the importin* state the credit of GST used in the pa+ment of

SGST'

This model would ensure that the SGST amount will $e transferred to the destination state'

.e will now tr+ to understand as to how GST actuall+ wor/s and how the SGST component of the tax *ets transferred to the destination state'

For the sa/e of simplicit+0 CGST rate has $een assumed at 780 SGST rate has $een assumed at

&80 GST rate would wor/ out to!98

E'*' Dealer : in State 6 purchases *oods worth Rs' !"" locall+ and sells the *oods to the Dealer ; in State < at Rs' !%"-3'

Dealer A:

Credits availa$le on local purchases of Rs' !""-3CGST2 7

SGST2 &



Tax ,a+a$le on interstate sales of Rs' !%"-3

GST 2 Rs' %"'= (!98 on Rs' !%"-3)

Computation of #et Tax ,a+a$le2

Total GST ,a+a$le 2 %"'=4ess2 Credit of2

CGST 7'"

SGST &'" !9'" #et Tax ,a+a$le 5'=

Total GST pa+a$le to the Centre $+ the Dealer 6 is Rs' %"'=' He will utilise the credit of CGST

(pertainin* to Centre) of Rs' 7-3 and SGST (pertainin* to State 6) of &-3 and pa+ net GST of Rs'5'= to the Centre' Then state 6 will transfer the credit of SGST utili>ed in the pa+ment of GST

(i'e' Rs' &-3) to the Centre' <+ doin* this0 it has $een ensured that the entire tax revenue of Rs'

%"'= (includin* SGST portion in it) in respect of this sale has $een transferred to the Centre'

Hence state A has not retained any revenue in respect of this inter state sale at all.

#ow lets assume Dealer ; in state < sells these *oods to another dealer locall+ at Rs' !?"-3

Dealer B:

Credits availa$le on inter state purchases of Rs' !%"-3GST2 Rs' %"'=

Tax ,a+a$le on local sales of Rs' !?"-3CGST2 Rs' !%'" (78 on Rs' !?"-3)

SGST2 Rs' !5'? (&8 of Rs' !?"-3)

State B has to receive revenue of s. !".# in respect of this sale.

Dealer has three options0

i Set off the GST first completel+ a*ainst the tax pa+a$le for CGST and $alancea*ainst tax pa+a$le for SGST

ii Set off the GST first completel+ a*ainst the tax pa+a$le for SGST and $alance for

tax pa+a$le for SGST'iii Set off certain amount sa+ Rs' !" a*ainst CGST and remainin* amount i'e' Rs' !"'=

a*ainst SGST'

i Set off the GST first completel+ a*ainst the tax pa+a$le for CGST and $alancea*ainst tax pa+a$le for SGST

Credit of Rs. 8/-

ertainin to centre

Net IGST paid

to the Centre



n this case0 State < will *et SGST revenue of Rs' ?'! from the dealer : and Centre will pa+the credit of GST utili>ed in pa+ment of SGST i'e' Rs' 7'=' Hence in total State < will

receive total SGST of Rs' !5'?'

ii Set off the GST first completel+ a*ainst the tax pa+a$le for SGST and $alance

a*ainst tax pa+a$le for CGST

n this case0 State < will not *et an+ SGST revenue from the dealer : and Centre will pa+ the

credit of GST utili>ed in pa+ment of SGST i'e' Rs' !5'?' Hence in total State < will receivetotal SGST of Rs' !5'?'

iii Set off certain amount sa+ Rs' !" a*ainst CGST and Rs' !"'= a*ainst SGST

n this case0 State < will *et SGST revenue of Rs' 5'! from the dealer : and Centre will pa+the credit of GST utili>ed in pa+ment of SGST i'e' Rs' !"'=' Hence in total State < will

receive total SGST of Rs' !5'?'

Hence from the a$ove examples0 it can $e clearl+ seen that the end purpose of this entire

exercise which was to ensure that the SGST revenue *oes to the destination state in a smooth

wa+ has $een achieved' The manner in which this entire process is supposed to operate isreall+ innovate and surel+ *oes a lon* wa+ in ensurin* that dealers do not face unduedifficult+ on account of chan*e of concept' The Empowered Committee of the State Finance

Ministers reall+ deserves /udos for adoptin* this uni1ue s+stem'

Further0 a ver+ important 1uestion that still remains unanswered is whether the stoc/

transfers from one state to another will $e taxed under GST in the ori*in state and credit of

the same will $e availa$le in the destination state or will there $e an exemption from lev+ of GST on stoc/ transfers'

n case stoc/ transfers are exempt0 then there is a possi$ilit+ of hu*e accumulations of SGST

in certain states and the state *overnments will have to *ive refund of these tax credits'Hence it is imperative that the stoc/ transfers are also taxed under GST in the ori*in state

and credit of the same is availa$le in the destination state so that the value chain remains

intact' However0 we will have to wait to have further clarit+ on this issue'

Documents

GST Basics-with Examples