Implications of GST as a Destination Based Tax

Indirect taxes can be either origin based or destination based. Origin based tax (also known as production tax) is levied where goods or services are produced. Destination based tax (consumption tax) are levied where goods and services are consumed. In destination-based taxation, exports are allowed with zero taxes whereas imports are taxed on par with the domestic production.

In case of the inter-state trade of goods and services, there may be two undesirable instances of double taxation or tax avoidance due to origin and destination based taxes. Firstly, some goods might be taxed in both the states of origin and destination, leading to double taxation. Secondly, the goods might skip tax in both the states thus leading to tax evasion. The first instance of double taxation in India is so high that importing goods from abroad is cheaper than importing it from other state.

The 13th finance commission had recommended that GST may be either origin based or destination based. If it is destination based, revenue should belong to the states where the goods are finally consumed and not to the State where the goods are produced. If its origin based tax, should accrue to state, where the goods or services are produced and not to the State where they are consumed. As per current proposals, the GST will be a destination-based tax. This implies that all SGST collected will generally accrue to the State where the consumer of the goods or services sold resides. This simply means that the producing state gets nothing if produced goods are sold outside that state.

There are several implications of this, discussed as below:

• Firstly, destination based GST would be very much beneficial for the states which consume more goods / services than they produce. The more they consume the more revenue they get from inter-state trade but such benefits that come via increased consumption are not good for overall economy of the state.
• Secondly, the destination based tax may not be very encouraging for the states which produce these goods because nothing will accrue to them.
• Thirdly, to discourage consumption, some states might put restriction on inter-state movement of goods. Such move might adversely affect the economy.

The move from origin based to destination based indirect tax regime would lead to drop in revenues of some states. This was the reason that some states such as Gujarat have opposed GST, which is a destination based tax.  The central government has promised to compensate such states for a period of five years.

There are counter arguments to the revenue loss concept of producer states. The increased exports will increase the income of the producer state and the increased income may increase the consumption and thereby the revenue of the state will improve.