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New Delhi: The discussion paper on goods and services tax (GST) that was released by the empowered committee of state finance ministers on Tuesday has explained the administration of the proposed levy by the Centre and states. But it has left grey areas on the treatment of inter-state transaction of goods and services as well as the principle of taxing services of an inter-state nature like telecom and electricity distribution.
Sources explained that the discussion paper is mainly to elicit public opinion. The empowered committee is expected to float separate technical papers on taxation of services as well as the proposed concept of Inter-state GST (IGST) to explain how these will work.
The discussion paper has mooted the adoption of an IGST model for inter state transaction of goods and services, which would be levied by the Centre and will also transfer IGST credit to states availed for SGST. A central agency, which will act as a clearing house mechanism will verify the claims and inform the states of the transfer of funds.
While the rationale is to maintain an uninterrupted chain of input tax credit on inter state transactions, tax experts are concerned that the IGST model would not be conducive to a unified Indian market as it would tax branch to branch transfer of goods and services.
In essence, goods or services transferred between two units of a company in separate states would be taxed for IGST. While they would be later refunded for this, it is expected to add to their administrative complexities. Telecom companies are expected to be one of the worst hit by the move. It would be even more complex for a firm to transfer services between two branches.
“This is a design feature which will be complex and will have unforeseen consequences even if it doesn’t add to a company’s tax liability,” said Satya Poddar, partner Ernst and Young.
Similarly, the issue of taxation of services of an inter state nature has also not been explained in the discussion paper. There are a large number of services like telecom, electricity and transmission which is produced in one state and consumed in another state. The discussion paper is silent on whether such services would be taxed on an originating or end-use principle.
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