Consumption- led states get an advantage
THANKS TO THE FORMULA TO DETERMINE COMPENSATION TO STATES, MANUFACTURING STATES WILL NOT LOSE OUT ON THEIR REVENUES
GST is a destination- based tax on supply. Generally, the place of supply of goods under GST is determined by where the movement of good terminates. The place of supply of services is generally governed by where the service recipient is located.
Of course, there are variations in special cases, but largely GST is structured in such a way that the place of supply is determined by the seat of consumption of such supply.
It was initially contemplated that because of the inherent construct of the GST, states that are net consumers will be greatly benefited over manufacturing states. It was also feared that this would dissuade states from investing time and resources in attracting investments and promoting commerce in their respective region. Overall, the assumed proposition did not seem good for the economy. With state levies such as VAT and entry tax subsumed into GST, the states were n a t u r a l l y apprehensive of loss of revenue. Further, as IGST revenues are tagged to the c o n s u m i n g state, proportionate IGST allocation can happen based on place of supply.
H o w e v e r, thanks to the scientific methodology to determine compensation to states under the Goods and Services Tax ( Compensation to States) Act, 2017, manufacturing states will not entirely lose out on their revenues as calculation of compensation amount payable in a financial year is based on the base year revenue and projected revenue for a state.
The government has accordingly introduced additional compensation cess on imports and sin goods to mobilise adequate funds and ensure all states are fairly and adequately compensated. Lastly, the states get a chance to get revenues from the services consumed within the state as well.
It appears that the GST has brought in a competitive edge for consumption- led states.
One may note here that significant portion of IGST refunds and credits have not been claimed by assessees yet, and the situation may get worse once they start doing so. The real report card of the states can be perused after all settlements for the first year are finally closed for the IGST between the Centre and the states.