As GST is a destination-based levy, states will not be able to waive it to encourage industry
With the goods and services tax (GST) being destination-based, states might be unable to provide incentives to encourage local industry.
At the GST Conclave in New Delhi, Revenue Secretary Hasmukh Adhia on Tuesday said, “States are wondering how to continue with promised benefits. Any incentive has to be by way of the Budgets.”
States offering the incentives might not even be able to collect taxes, he added. In inter-state sale of goods, the destination states would collect the tax.
Some states currently offer incentives through refunds. As the value-added tax is origin-based, some states pay back the producers, irrespective of whether or not goods move out of the state.
Once the new indirect tax regime is rolled out, states may only be able to offer business-to-consumer (B2C) incentives, but not business-to-business (B2B) ones.
Adhia gave the example of goods produced in Gujarat but consumed in Bihar “What right will Gujarat have to forgo the tax of Bihar?” he said.
The Centre would continue with area-based exemptions to hilly and Northeastern states by way of refunds, the revenue secretary said.
Pratik Jain, leader, indirect tax, PwC-India, said incentives offered by states would likely get limited to goods consumed within the states.
“Besides, the effective rate of VAT may also go down from 13-14 per cent to 9 per cent on most products under the GST, narrowing the relative advantage industry enjoys,” said Jain.
Service tax rate to remain unchanged
Although the service tax rate will go up from 15 per cent to 18 per cent, Adhia said the effective rate would remain the same, as service providers would be allowed input tax credit for goods used by them to providing services. “Currently, a bank does not get an input tax credit for the stationary or office supply it uses. Under the GST, it will get that, so the effective tax rate will remain the same,” he said.
Author: Microvista-Team
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