Understanding the dual model of GST

Understanding the dual model of GST

In the year 2000, India first dreamt of the GST law. However, it took eight years for the Indian Government to conclude that India would need a dual GST model to befit the political structure and the allocation of tax revenues.

What is the dual model of GST?

The dual model of GST is where both the State and the Centre levy tax on one transaction simultaneously. This model of GST has been implemented and experienced in countries like Brazil and Canada. The dual model of GST is  different from the Single model of GST or the unified model of GST. In some countries, like Australia, only the Centre levies tax on transactions and later may distribute the tax revenue to states. In other countries like the USA, the individual States have the power to levy tax on transactions and the Centre does not interfere. These are the single or the unified models of GST. However, in a federal structure like ours where the States and the Centre have segregated sources of revenues, it is important to have a dual structure of GST.

Typically, there are two types of dual GST models viz.:

  • Concurrent model of GST- Under the concurrent model, tax is levied on the supply of goods and/or services by both the Centre and the State.
  • Non-concurrent model of GST- Under this model, the Centre levies tax on services and the State levies tax on goods.

In the erstwhile VAT regime, each state had the autonomy to frame its VAT acts and laws, and decide upon the applicable VAT rates on goods. Whereas service tax was levied on services by Centre. Therefore, it can be said that India was following the non-concurrent model of levying indirect taxes.

However, this underwent a change once GST was introduced. Vide the Constitutional (122nd Amendment) Bill, the Parliament and the State legislatures were granted concurrent powers to levy GST on both goods and/or services. The said bill provided for levy of GST on all goods and/or services except alcohol for human consumption. However, the powers to levy GST has been segregated as follows:

Type of levy

Power to levy 

Transaction

Central Goods and Service Tax (CGST) Central Government On intrastate supply of goods and/or services
State Goods and Service Tax (SGST) and Union Goods and Service Tax (UTGST) State or Union Territory Government   On intrastate supply of goods and/or services
Integrated Goods and Service Tax (IGST) Central Government On interstate supply of goods and/or services

GST is a destination-based tax, which means that the place of supply is determined on the basis of the location where the goods and/or services are meant to be consumed. Accordingly, the place of supply is established once the location of supplier and recipient is fixed. If both the parties are in the same state, the supply will be said to be an intrastate supply and would attract CGST and SGST/UTGST. However, if the supplier and the recipient are located in different states, the supply shall be an interstate supply attracting IGST. In case of intrastate supplies, the CGST component is levied by the Centre and there is an equal and corresponding levy of SGST/UTGST by the State or the Union Territories. Further, on all interstate transactions, including import of goods and/or services, IGST is levied by the Centre.

Certain important points to remember :

  • In terms of  input tax credit , unlike the previous regime, the credit of goods can be set off against services and vice versa. However, the cross utilization of CGST and SGST is not permitted. The cross utilization of input tax credit that is permitted is as follows:
Levy Set off against (in the order as stated)
CGST CGST and IGST
SGST SGST and IGST
UTGST UTGST and IGST
IGST IGST, CGST and SGST/UTGST
  • Even though the powers to levy CGST and SGST rests with different administrations, the respective laws and procedures are identical.
  • The GST returns are filed in a combined fashion. This means that a taxpayer does not have to furnish different returns to different authorities. Similarly, assessments are also conducted by only one authority depending on the allocation of assessee.

Benefits of dual model of GST

After much deliberation, the Country has implemented dual model of GST. This is because it has its own advantages, some of which are listed below:

  • Simplified tax regime with streamlined compliances
  • Eliminated cascading of taxes
  • Reduced effective tax rate on goods and/or services due to streamlined availability of input tax credit

Conclusion

With four years of age, the GST regime of India has seen many ups and downs. Nonetheless, the advantages seem to have outweighed the disadvantages. Further, the dual model of GST has resolved the issue of cascading of taxes to a large extent. Although it may be too soon to judge, but businesses can certainly experience the tax benefits in their supply chain models and otherwise. Hence, the dual model can be said to have worked in favor of the taxpayers.

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