goods and service tax

Tamil Nadu's GST Committee: Analyzing IGST Settlement Patterns and Impacts

Introduction

The Goods and Services Tax (GST) has significantly transformed India's financial framework, particularly in Tamil Nadu. To gain a deeper understanding of the Integrated Goods and Services Tax (IGST) settlement patterns, the Tamil Nadu government has formed a committee led by Thiru Arvind Subramanian. This committee is tasked with assessing the complexities associated with these settlements.

Understanding GST and Its Components

GST introduces a uniform taxation system, replacing the previous Value Added Tax (VAT). Unlike VAT, which consisted of both consumption and origin-based taxes, GST is exclusively focused on consumption. Tamil Nadu’s revenue primarily derives from two sources:

  • State Goods and Services Tax (SGST) paid by taxpayers.
  • Integrated Goods and Services Tax (IGST) settlements received from the Central Government.

IGST Settlement Explained

IGST settlements are determined based on three key components:

  1. Input Tax Credit (ITC) Adjustments: Tax liabilities arising from inter-state transactions (both Business to Business (B2B) and Business to Consumer (B2C)) are adjusted using ITC accrued from intra-state B2B transactions.
  2. Positive ITC Accruals: Generated through inter-state B2B transactions (inward supplies), these are adjusted against liabilities from intra-state deals.
  3. Unadjusted ITC: ITC accrued from inter-state B2B and B2C transactions without any adjustments.

The Need for a Committee

Since the implementation of GST, inconsistencies in IGST settlements have been observed. Although an ad hoc IGST settlement system was in place, it ceased after October 2022. Despite the increasing consumption patterns, the total IGST settlements to the state have not reflected a proportional rise. This gap is the reason for establishing a specialized committee to investigate these issues further.

Committee and Its Objectives

Under the leadership of Thiru Arvind Subramanian, the committee comprises experts from various domains. Its objectives include:

  • Studying how IGST is settled among states.
  • Analyzing aspects of IGST that impact Tamil Nadu's settlements amid rising consumption.
  • Assessing IGST's influence on SGST collections.
  • Identifying discrepancies in IGST settlements.
  • Investigating reasons for the cessation of ad hoc IGST settlements post-October 2022.
  • Recommending methods for digitally capturing IGST sales in Tamil Nadu as the place of supply.
  • Proposing strategies to monitor e-commerce and digital services for increased revenue.

Conclusion

Establishing a committee to examine IGST settlement patterns represents a strategic initiative by the Tamil Nadu government. This endeavor aims to enhance transparency and safeguard the state’s economic interests. With Thiru Arvind Subramanian leading the committee, its findings are expected to significantly influence the future financial policies of Tamil Nadu.

Government of Tamil Nadu Abstract

Goods and Services Tax – Constitution of a Committee – To study the Settlement pattern of Integrated Goods and Services Tax to the State of Tamil Nadu and its Terms of Reference – Committee under the Chairperson of Thiru Arvind Subramanian, formerly Chief Economic Adviser to Government of India with 5 Members – Constituted – Orders – Issued.

COMMERCIAL TAXES AND REGISTRATION (131) DEPARTMENT

ORDER

  1. In the GST framework, the State's revenue is generated through SGST payments made by taxpayers and through IGST settlements received from the Ministry of Finance, Government of India. This is based on the information provided by taxpayers in their monthly returns filed via the front-end portal.

  2. Unlike VAT, which includes consumption and origin-based taxes, GST is entirely consumption-based, occurring in two forms: business consumption and direct consumer consumption within the state.

  3. IGST Settlement is determined by three main components:

    • Input Tax Credit (ITC) accrued from intra-state B2B transactions, which is used to adjust tax liabilities from inter-state transactions (negative impact on the state).
    • ITC accrued from inter-state B2B transactions (inward supplies), which is used to offset liabilities from intra-state transactions (positive impact on the state).
    • ITC from inter-state B2B and B2C transactions (inward supplies) without adjustments (positive impact on the state).

  4. Following GST implementation, both regular and ad hoc IGST settlements were made; however, ad hoc settlements were discontinued as of October 2022. An analysis shows that there has been no proportional increase in total IGST settlements to the state despite rising consumption levels. Thus, the Principal Secretary/Commissioner of Commercial Taxes suggested the formation of a committee to study the IGST Settlement pattern for Tamil Nadu.

  5. Based on a meeting held on 17.07.2023 and in light of the Principal Secretary/Commissioner of Commercial Taxes' proposal, the government establishes the following committee with defined terms of reference:

Terms of Reference

The committee's objectives are to:

  1. Investigate how IGST settlements are conducted among states.
  2. Analyze IGST components affecting Tamil Nadu's settlement in light of increasing consumption.
  3. Evaluate the impacts of IGST on SGST collections, especially amidst industrial growth.
  4. Identify discrepancies between actual IGST settlements and SGST liabilities adjusted for returns.
  5. Understand why ad hoc IGST settlements ceased after October 2022, along with potential alternatives for fairness to Tamil Nadu.
  6. Recommend methods to capture IGST sales digitally in Tamil Nadu comprehensively.
  7. Propose strategies to increase revenue through close monitoring of e-commerce and digital services.