Paying heed to expert opinion that a less-than-optimal goods and services tax (GST) would yield little economic reward, the Centre has proposed “zero-rating” of the tax on inter-state transactions. This would come with a facility for states to levy taxes within a narrow band over and above their component of GST on petroleum products.
By this innovative suggestion made to states recently, the Centre intends to not only overcome the states’ resistance to inclusion of petroleum products in the GST, but also address their concern over the imminent removal of the central sales tax (CST). CST is a major revenue source for states at present.
Since CST is an ‘origin-based’ tax benefiting the exporting or producing state, it goes against the ‘destination-based taxation principle’ followed worldwide in GST, under which consuming states get the tax revenue.
If states agree to the proposal, in what is seen as a last-ditch effort to implement GST during the current government's tenure, it would bring an instant solution to the two most thorny issues that have so far hampered progress in introducing a unified indirect tax regime in India.
Zero rate for inter-state transactions is based on the EU model of zero tax on inter-country sales.
Inter-state transactions are at present taxed through CST at the rate of 2% and the proceeds are appropriated to states. The states have been very reluctant to replace it with inter-state GST (i-GST), the collection of which was originally meant to go to the Union government exclusively. The second benefit of the new proposal, according to official sources, is that it may help secure the states' consent to keeping petroleum products within GST with input tax credit facility (ITC). This will help reduce the tax burden on a host of products as petroleum by-products are building blocks in a large number of industries.
“The Union government’s proposal to keep i-GST zero rated is based on the fact that it is actually not meant to be a tax but a two-way settlement system. The tax paid by a businessperson on purchase of goods or service from a neighbouring state will be claimed by him as an input tax credit when he has to meet his tax liability,” said an official source.
IGST is not a tax per se, but a T+2 clearing system. Eventually, the iGST pool will have nothing but the unpaid input tax credit, the source explained.
"We will allow