Management of state GST credits in cross-border supply

Abstract

The proposed Goods and Services Tax (GST) in India will replace State VAT, Central Excise (CENVAT), Service Tax and a few other indirect taxes. It is a broad-based and comprehensive value added tax (VAT) levied on consumption of goods and services. However management of Tax credits corresponding to Cross-Border transactions has always been a challenging task in Federal Systems. If State GST is zero rated then the most prevalent fraud is Missing Trader fraud1 like that in EU. This menace can be ideally controlled only if the rate of tax both for intra and interstate transactions is same. Therefore for India, for interstate transactions, an integrated GST (IGST) model has been proposed. The IGST would be a combination of CGST (Central GST) and SGST (State GST) levied by the central government on all interstate supply of goods and services. The interstate supplier would collect the IGST and take appropriate input credits, and the interstate buyer would take credit for IGST paid in the output tax return. The IGST would be remitted to the Central government, which would act as aclearinghouse2 and transfer the SGST component of the IGST to the destination state where the goods or services are to be consumed. From the state s perspective, the transfer of tax credits on interstate supply would pose a great challenge for State administrations because for them it would not be possible to verify on real-time basis the input tax credits included in the output tax for each and every transaction of transfer of credit to other States. The clearing house model was also proposed for EU long back but it could not be implemented because of the complexity of the model. The second best alternative could be the upfront payment of compensating Central VAT (CVAT) by making State VAT zero rated but it involves blockage of funds for taxpayers as both Central and State administrations would have to grant refunds of CVAT and Input tax respectively, which seems to be difficult to manage efficiently in the present scenario for developing countries. This research analyses the issues of management of tax credits particularly of SGST corresponding to cross-border transactions in the context of Maharashtra which is a net supplying/exporting State for goods and services. It establishes the fact that GST demands a well-designed and robust IT system for realizing its potential in reforming indirect taxation in India. The Central IT system will verify the tax payments corresponding to interstate transactions only to a certain extent (mis-matching) for granting of tax credits. This research emphasises and recommends certain checks and controls from State s perspective so as to maintain domestic Audit Trail for granting tax credits, inwards and outwards, against interstate supply transactions for which benefits are greater than the costs of monitoring under GST regime.