Integrated Goods and Services Tax: EximGuru.com

Integrated Goods and Services Tax

1. The introduction of Goods and Services Tax (GST)

GST is a significantreform in the field of indirect taxes in our country. Multiple taxeslevied and collected by the Centre and the States will be replaced byone tax called the Goods and Services Tax (GST). GST is a multi-stagevalue added tax levied on the consumption of goods or services orboth.

A “Dual GST”

Dual GST ” model has been adopted in view of the federalstructure of our country. Centre and States will simultaneouslylevy GST on every supply of goods or services or both which, takesplace within a State or Union Territory. Thus, there shall be twocomponents of GST:

(i) Central tax (CGST)
(Levied & collected under the authority of CGST Act, 2017 passed bythe Parliament)

(ii) State tax (SGST)
(Levied & collected under the authority of SGST Act, 2017 passed byrespective State)

3. Why a third tax in the name of IGST?

Before discussing the IGST Model and its features, it is important tounderstand how inter-State trade or commerce is being regulated inthe present indirect tax system. It is significant to note that presentlythe Central Sales Tax Act, 1956 regulates the inter-State trade orcommerce (hereinafter referred to as “CST”), the authority forwhich is constitutionally derived from Article 269 of the Constitution.Further, as per article 286 of the Constitution of India, no State canlevy sales tax on any sales or purchase of goods that takes placeoutside the State or in the course of the import of the goods into, orexport of the goods out of the territory of India. Only the Parliamentcan levy tax on such a transaction. The Central Sales Tax Act wasenacted in 1956 to formulate principles for determining when a saleor purchase of goods takes place in the course of inter-State trade orcommerce. The Act also provides for the levy and collection of taxeson sales of goods in the course of inter-State trade.

4. The CST suffers from the following shortcomings

(i) CST is collected and retained by the origin State, which is anaberration. Any indirect tax, by definition, is a consumption tax,the incidence of which, is borne by the consumer. Logically, thetax must accrue to the destination State having jurisdiction overthe consumer.
(ii) Input Tax Credit (hereinafter referred to as ITC) of CST is notallowed to the buyer which, results in cascading of tax (tax ontax) in the supply chain.
(iii) Various accounting forms are required to be filed in CST viz., CForm, E1, E2, F, I, J Forms etc. which add to the compliance costof the business and impedes the free flow of trade.
(iv) Another negative feature of CST is the opportunity for“arbitrage” because of the huge difference between tax ratesunder VAT and CST being levied on intra-State sales and interStatesales respectively.

5. The IGST model would remove all these deficiencies.

IGST is a mechanism to monitor the inter-State trade of goods and servicesand ensure that the SGST component accrues to the consumer State.It would maintain the integrity of ITC chain in inter-State supplies.The IGST rate would broadly be equal to CGST rate plus SGST rate.IGST would be levied by the Central Government on all inter-Statetransactions of taxable goods or services.

IGST rate= CGST rate + SGST rate (more or less)

1. GST
   1. Sale Within Same State
      1. CGST
      2. SGST
   2. Inter State Tax
      1. IGST

6. Cross-utilisation of credit

It requires the transfer of funds between respective accounts. Theutilisation of credit of CGST & SGST for payment of IGST by “B”would require the transfer of funds to IGST accounts. Similarly, theutilisation of IGST credit for payment of CGST & SGST by “C” wouldnecessitate the transfer of funds from IGST account. As a result,CGST account and SGST (of, say, Rajasthan) would have Rs. 1300/-each, whereas, there will not be any amount left in IGST and SGST(of, say, Maharashtra) after the transfer of ITC.

7. Prescribed order of utilisation of IGST/CGST/SGST credit

The IGST payment can be done by utilising the ITC. The amount ofITC on account of IGST is allowed to be utilised towards the paymentof IGST, CGST and SGST, in that order.

8. Nature of Supply

It is very important to determine the nature of supply – whetherit is inter-State or intra-State, as the kind of tax to be paid (IGST orCGST+SGST) depends on that.

(i) Inter-State Supply:
Subject to the place of supply provisions, where the location of thesupplier and the place of supply are in:
(a) Two different States;
(b) Two different Union territories; or
(c) A State and a Union Territory.
Such supplies shall be treated as the supply of goods or services inthe course of inter-State trade or commerce.

Any supply of goods or services in the taxable territory, not beingan intra-State supply, shall be deemed to be a supply of goods orservices in the course of inter-State trade or commerce. Supplies toor by SEZs are defined as inter-State supply. Further, the supply ofgoods imported into the territory of India till they cross the customsfrontiers of India or the supply of services imported into the territoryof India shall be treated as supplies in the course of inter-State tradeor commerce. Also, the supplies to international tourists are to betreated as inter-State supplies.
(ii) Intra-State supply:
It has been defined as any supply where the location of the supplierand the place of supply are in the same State or Union Territory.

Thus, the nature of the supply depends on the location of the supplierand the place of supply. Both these terms have been defined in theIGST Act.

9. Location of Supplier

Broadly, it is the registered place of business or the fixedestablishment of the supplier from where the supply is made.Sometimes, a service provider has to go to a client location forproviding service. However, such place would not be consideredas the location of the supplier. It has to be either a regular placeof business or a fixed establishment, which is having sufficientdegree of permanence and suitable structure in terms of human andtechnical resources.

10. Place of supply

10.1 (i) Places of supply provisions have been framed forgoods and services, keeping in mind the destination/consumptionprinciple. In other words, the place of supply is based on the placeof consumption of goods or services. As goods are tangible, thedetermination of their place of supply, based on the consumptionprinciple, is not difficult. Generally, the place of delivery of goodsbecomes the place of supply. However, the services being intangiblein nature, it is not easy to determine the exact place where servicesare acquired, enjoyed and consumed. In respect of certain categoriesof services, the place of supply is determined with reference to aproxy.

10.2 (ii) A distinction has been made between B2B (Businessto Business) & B2C (Business to Consumer) transactions, as B2Btransactions are wash transactions since the ITC is availed by theregistered person (recipient) and no real revenue accrues to theGovernment.

10.3 (iii) Separate provisions for the supply of goods and serviceshave been made for the determination of their place of supply.Separate provisions for the determination of the place of supply inrespect of domestic supplies and cross border supplies have beenframed.

A. Place of supply of goods other than import and export[Section-10]

B. Place of supply of goods in case of Import & Export[Section-11]

C. Place of supply of services in case of Domestic Supplies [Section12]

(Where the location of supplier of services and the location of therecipient of services is in India)
(i) In respect of the following 12 categories of services, the placeof supply is determined with reference to a proxy. Rest of theservices are governed by a default provision.

(ii) For the rest of the services other than those specified above, adefault provision has been prescribed as under:

D. Place of supply of services in case of cross-border supplies:(Section 13)

(Where the location of the supplier of services or the location of therecipient of services is outside India)

(i) In respect of the following categories of services, the place ofsupply is determined with reference to a proxy. Rest of the servicesare governed by a default provision.

(ii) For the rest of the services other than those specified above, adefault provision has been prescribed as under:

11. Supplies in territorial waters

Where the location of the supplier is in the territorial waters, thelocation of such supplier, or where the place of supply is in theterritorial waters, the place of supply is deemed to be in the coastalState or Union Territory where the nearest point of the appropriatebaseline is located.

12. Export/Import of services

A supply would be treated as import or export, if certain conditionsare satisfied. These conditions are as under:

13. Zero rated supply

Exports and supplies to SEZs are considered as ‘zero rated supply’on which no tax is payable. However, ITC is allowed, subject to suchconditions, safeguards and procedure as may be prescribed, andrefunds in respect of such supplies may be claimed by followingeither of these options:
(i) Supply made without the payment of IGST under Bond andclaim refund of unutilied ITC or
(ii) Supply made on payment of IGST and claim refund of the same

14. Refund of integrated tax paid on supply of goods to touristleaving India

Section 15 of the IGST Act provides for refund of IGST paid to aninternational tourist leaving India on goods being taken outside India,subject to such conditions and safeguards as may be prescribed. Aninternational tourist has been defined as a non-resident of India whoenters India for a stay of less than 6 months. IGST would be chargedon such supplies as the same in the course of export.