Much is being talked about GST being a destination based tax, and how it will benefit the lesser developed states by increasing its tax revenues. Today’s article will focus on this new change from origin based tax to destination based tax under GST.
What is Destination based taxation?
Destination based taxation as the name suggests is the taxation based on destination or consumption of the goods or services. This principle seeks to tax the goods and services on simple theory that the goods or services should be taxed at the stage where their consumption takes place rather than the point where their origin takes place ie production and the entire revenue relating to the goods or services should accrue in the jurisdiction where they are being ultimately consumed.
For example if Anthony in Maharashtra produces the goods and sells the goods to Swami in Kerala, then in such case the tax should be levied and collected and should accrue on the goods in the state of Kerala and not in the state of Maharashtra. The revenue in the case of destination based taxation belongs to the place, where the goods are finally consumed and not to the state where the goods are produced.
Origin Based Taxation:
Origin based taxation as the name suggests is the taxation based on origin or source where the goods and services are produced. This principle seeks to tax the goods and services on the basis of the principle that the goods and services should be taxed at the stage where their production or origination takes place rather than where their consumption takes place. Therefore, in case of origin based taxation, the revenue accrues to the jurisdiction where goods and services are produced.
For example if Anthony in Maharashtra produces the goods and sells the goods to Swami in Kerala, then in such case the tax should be levied and collected in the state of Maharashtra and not in the state of Kerala. The revenue in the case of origin based taxation should accrue to the place, where the goods or services are produced and not to the state where they are consumed.
The basic difference between the two lies in the fact that origin based taxation seeks to levy and collect tax on the basis of location of production and destination based taxation seeks to levy and collect tax on the basis of location of consumption.
Confusion of twists and turns:
All is well in case the goods and services are produced and consumed in the same state, because in such a case tax is levied and collected by one state and the entire revenue accrues to a single state government within which the goods and services are produced and sold. However problem arises when production and consumption takes place in two separate states. As per The Model Goods and Service Tax law, Integrated Goods and Service tax (IGST) is levied on interstate sales, as per the understanding of destination based tax no tax should be levied by the seller from the producing state and all taxes should be levied and collected by the buyer from the importing state in the form of IGST as GST is a consumption based tax. But as per the provisions of model GST, the seller from the producing state will levy GST in the form of IGST and collect it on behalf of the central government who in turn will transfer it to the importing state to the extent importing state gives credit to its dealer of the tax paid in the exporting state as IGST. This can be better understood with the help of an example.
Satish in Gujarat manufactures and sells TV’s to Crystal in Goa, as per the principle of destination based tax Satish (producer) cannot levy any tax at the time of sale as he belongs to the manufacturing state, and therefore all taxes should be charged and collected by Crystal from Goa where eventually the consumption will take place. But as per the provisions of model GST Satish would collect GST from Crystal in the form of IGST which will go to the central government, who in turn will compensate the importing state ie Goa to the extent of credit availed by Crystal from IGST paid by her to the exporting state.
From the above we can conclude that IGST will be origin based tax which through the working of the revenue sharing mechanism by the Central Government would be modelled and converted into a destination-based taxation.
