Why Integrated GST still remains a grey area under goods and services tax

This part of the new tax has not still been fully resolved, and many states do not even know how it is being shared between them and the Centre

The goods and services tax (GST) has come a long way, from being disruptive in the beginning and difficult to comply with in the initial years. It was also unable to generate expected revenue earlier. A lot of that has changed now, with the tax having moved to a seemingly sustained revenue trajectory at the start of FY20.

Under the GST law, states have been guaranteed compensation to ensure that a 14 per cent growth in revenue is 'protected' every year till 2022, in case collections under State GST (SGST) fall short. A separate GST Compensation Cess is collected for it. The Centre has no such revenue protection, and as a result, it took the entire brunt of revenue shortfall in FY19.

However, one area that still remains unexplored in the GST domain relates to the sharing of Integrated GST (IGST) among the states and the Centre. This part of the new tax has not still been fully resolved, and many states do not even know to the last decimal, how the IGST sharing is happening.

Of the overall IGST settled, the Centre got a 49 per cent share in April 2018, while the SGST (all states put together) got 51 per cent. The Centre's share in settled IGST has risen gradually to 56 per cent in April 2019, reducing the SGST share to 44 per cent. The Centre is this a bigger beneficiary of IGST settlement.

However, this does not show the full picture. Let us understand in detail.

GST monthly collection can be divided in four parts: that collected as CGST and SGST (I and II), that collected as IGST (III) and then settled between CGST and SGST, part of IGST refunded back to exporters and part of it lying idle, and finally, that collected as Compensation Cess (IV).

In the first and second parts, tax collected as SGST is always higher than CGST every month, data analysed by Business Standard from the monthly press releases shows. This is because of the inherent structure of GST. Till FY19, the GST rules mandated the use of IGST credit to dispose of IGST liability first, followed by CGST and then SGST. Naturally, all businesses use credit to pay off liabilities first, before using cash to pay taxes. As CGST was higher in order than SGST, it was generally paid more often using IGST credit. Hence the share of CGST in IGST settlement rose to 56 per cent.

In the months where CGST share was almost equal to SGST share in IGST settlement, experts said that the transitional credit available was being used to set off CGST liabilities in the first year of GST. As a part of CGST liability was paid using transitional credit, there was a lower need to use IGST credit to pay off CGST.

On the other hand, as SGST was at the bottom in the order of utilisation of IGST credit, the credit usually exhausted itself when the turn of SGST came, and the taxpayer had to pay the SGST in cash (online, but a direct payment from bank account, rather than settlement from credit). This explains how the direct SGST collection was more than CGST in the first place.

IGST is levied on inter-state transactions and imports, and the average monthly collection has been nearly Rs 50,000 crore in FY19. Of this, nearly 60-70 per cent, or Rs 30,000-35,000 crore gets settled between the Centre and states via “regular settlement”. This is when there is a B2B transaction between two entities in two different states, or a B2C transaction between them above a certain value. In these cases, the exact place of supply (where the good or service is consumed) can be identified, and that particular consuming state gets half the IGST, while Centre getting the other half.

The IGST collected on imports is treated in two ways: that paid on items used in exports gets refunded to the taxpayer (since exports are zero rated) while that paid on items consumed within India remains in the IGST account. About 10 per cent, or nearly Rs 5,000 crore of monthly collection is refunded.

The portion of IGST that remains unsettled has generally been about Rs 10,000 crore a month, because the place of supply/consumption cannot be ascertained. While in FY18, this kept getting accumulated till the end of the financial year, it is now being settled between the Centre and states in an ad hoc or provisional manner, generally once every two months, in the ratio 50:50. This is primarily being done to help cash flow to states and Centre, rather than keeping the amount idle.

It is this part, where there is no basis to the 50:50 sharing, and no clarity on the method with which the 50 per cent share of states is divided among states, which still remains the grey area. States are still not sure how the ad hoc settlement is being done.

“There is a lot of confusion among states on how ad hoc settlement happens. There is no clear methodology as far as we know,” said a senior finance department official from Kerala.

Many states have time and again raised this issue in the meetings of GST Council. Telangana's finance secretary said in one meeting that the weights used for states to distribute the revenue from ad hoc settlement are based on the ratios of revenue to be protected of all states. He had proposed that the inter-state distribution of ad hoc IGST settlement to SGST should be done using the ratios of IGST settlement to states in the previous year to make it more just.

States had had also pointed out in GST Council meetings that a separate analysis on IGST distribution among states should be commissioned by the Council.

As to the utilisation of IGST credit, the rules were recently changed to allow businesses to use the IGST credit to set off CGST or SGST liabilities in any order and any proportion. This will help businesses pay SGST using credit in equal ease as CGST. This, experts are saying, might change the IGST settlement ratio among Centre and states to near 50:50 soon.

However, unless there is a clear, foolproof, Council-approved and a transparent method of distributing IGST between Centre and states, and among states, the haze will remain.