Understanding GST (Part II)..

While Central GST (CGST) and State GST (SGST) should be easier to implement, the challenge would be to track the flow of goods and and implement inter-state GST (IGST). In case of inter-State sales, under the present system, the Centre levies a tax (Central Sales Tax) but the tax is collected and retained entirely by the originating states.

However, under GST, while centre will continue to collect IGST, it will now be passed on to the state where it is being consumed. Similarly, import of goods would also be treated as inter-State supplies and companies will have to pay IGST in addition to the applicable customs duties.
The system of consumption or destination based instead of origin or production based marks an important departure from the existing system and its implication may not have been fully appreciated. States, so far, used to take several measures including developing support infrastructure such as roads, power etc, to attract investments in manufacturing sector. One reason was that it would help generate revenue for the state. However, with GST, the manufacturing state would have to pass on the tax collected if goods moves to another state. Further, the consuming states would get more tax revenue now without having made any effort to draw investment. How this aspect plays out in the longer run would be interesting to see and may require some tweaking of laws in the years to come..
An interesting provision of the law is introduction of an anti-profiteering clause to ensure that business passes on the benefit of reduced tax rates to the consumers. While it may be difficult to monitor this, it does show nation’s commitment to its preamble of being a “socialist” republic and not a laissez faire economy.
And a word on its benefits.. The most important benefit would be in terms of elimination of trade barriers between states truly making the country ‘One market’. Other than the elimination of trade barrier due to entry taxes, it would also remove the tax rate differential between neighboring States reducing the tax evasion. From the companies perspective, it is going to eliminate the need to make separate accounts for numerous different types of taxes, tallying it all and all related tasks, making tax compliance that much easier. This should also make exports more competitive, a benefit not fully captured, since the goods would be subjected to lower tax liability due to higher benefit of input tax credit. While this is also expected to reduce tax evasion, nothing can beat the ingenuity of Indian minds; If it finds a way to beat the system, it would not be a big surprise..!
However, there are serious implementation challenges lying ahead before the benefits are fully realised.
(Image courtesy of CBEC website)

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