The ultimate dream of every business is growth and expansion. One starts a business, earns profit, re-invests, earns more profit – and the cycle continues. You get your first customer, then 10, then 100. You start off in your immediate locality, and as you grow, you expand your operations to your city, your state, neighbouring states – till the entire country is your playground.
However, in the current taxation regime, this is easier said than done. Apart from the obvious finances and efforts that businesses with customers in multiple states invest, there are also a fair amount of compliance costs and complications which are incurred – both by seller and buyer.
Selling Goods to Customers in Other States
|Current Regime||GST Regime|
|The Centre levies Central Sales Tax (CST) on interstate sales, which is collected and retained by the state from where the sale has happened.||IGST will be levied on interstate sales. Here, the incidence of the taxation shifts from “sale” to “supply”.|
|Once the goods crosses state borders, it is subject to verifications and checks at border check posts. Further, entry taxes are levied, which is borne by the buyer i.e., your customer.||Once the goods reach and cross state borders – there will be relatively less verifications and checks, and no entry tax will be charged. This will reduce the price for the buyer i.e., your customer.|
|When you make an interstate sale to your B2B customer, the CST charged is a cost to him. This is because – when he in turn, makes a local sale, he cannot claim tax credit for the CST he has paid. Consequently, he passes on the value of CST paid to his end customers – for whom the cost of goods increases. Thus, both you and your customer, are at a competitive disadvantage compared to those dealers who procure locally, and thus, can offer goods at a lower price.||Your B2B customer will be able to claim credit of the IGST charged on interstate sales and set-off the same against his GST liability towards the State in the order prescribed by the Law. Thus, he will not incur any additional cost, and this will eventually reduce the cost for his end customers. Thus, you will not be at any disadvantage when compared to local dealers, and can compete with them with ease.|
|To maintain their competitive prices, most interstate sellers set up branches/warehouse in the states where they generally operate – so that their buyers need not bear the brunt of CST. However for the seller, it means extra infrastructure cost, and that too, this cost is incurred more for the purpose of compliance rather than operational efficiency.||Selling from another state and selling within the state, both will be equally conducive to the buyer due to seamless availability of input credit. Hence the seller need not invest in excess infrastructure, just for compliance – rather, he can now decide to set up branches/warehouses for the sole purpose of operational efficiency.|
Ram Enterprises is a dealer of shoes in Uttar Pradesh selling to a dealer in Karnataka
When Ram Enterprises raises the invoice:
- Product Price = INR 5000
- CST @ 2% = INR 100
- Final Price = INR 5000 + 100 = INR 5100
In addition, the dealer in Karnataka needs to bear entry tax @ 2% (average rates for footwear in Karnataka) = INR 102
Total cost to the dealer in Karnataka = INR 5100 + INR 102 = INR 5202
When the dealer in Karnataka sells to an end customer locally, he will sell the shoes at INR 5202 + profits (since credit of CST and entry tax is not allowed, and that is passed on to the end customer).
When Ram Enterprises raises the invoice:
- Product Price = INR 5000
- IGST @ 18% = INR 900
- Final Price = INR 5000 + INR 900 = INR 5900
When the dealer in Karnataka sells to an end customer locally, he will sell the shoes at INR 5000 + profits (since credit of IGST is allowed, and is not passed on to the end customer).
Thus, GST will surely simplify the compliance processes for interstate sales of goods, and prove to be a boost. First of all, the input tax credit chain will remain uninterrupted on interstate transactions, leading to elimination of the cascading effect – thus, benefitting both seller and buyer. However, to ensure that this entire cycle flows smoothly, the GST law stipulates a compulsory GST registration for all dealers making taxable interstate supplies, irrespective of threshold limit. In other words, composition scheme will not be an option for interstate sellers.
Supplying Services to Customers in Other States
In the current regime, Service Tax is levied on the interstate supplies of services. Service Tax is levied and collected by the centre, and thus the registration for the same is also unified and central.
In the GST regime, with goods and services facing the same treatment, IGST will be applicable when there is an inter-state supply of services. However, the complication lies somewhere else – in the GST regime, the taxation is dependent on place of supply of services. Thus, if you being a service provider, are providing services from your state to a client in a different state – IGST will be applicable. However, if the type of service requires your presence at the location of the client itself i.e. at the state of the client, it will be treated as an intra-state supply of service; in other words SGST/UTGST and CGST will be applicable and not IGST. And for that to happen, you will need to take registration in the state of the client.
Consider a CA Mr. Prasad, who is registered at New Delhi, but also having clients at Gurugram (Haryana) and Noida (Uttar Pradesh) – since all 3 cities are part of the National Capital Region and are extremely close to each other.
To his Client 1 based out of Gurugram in Haryana, he provides consultancy services remotely.
To his Client 2 based out of Noida in UP, he provides internal audit services, for which he visits the client and provides services by travelling to client’s location.
In this scenario, there is only one unified, central registration for service tax, irrespective of the fact that he is providing services across 2 or 3 states. Also, in the current regime, Mr. Prasad needs to file returns under service tax only 2 times a year.
Under GST, Mr. Prasad, is liable to file returns 13 times a year (including annual returns) – for his registered location at his home state i.e. Delhi. But now, if he wishes to provide services to clients in Gurugram and Noida via physical presence – he will now need to, not only take registration under Haryana and UP, but file 39 returns in the year! Thus, with GST coming in, all service providers will have to face a trade-off – revenue flowing in from clients across multiple states, versus, the corresponding compliance burden in terms of multiple registrations and multiple filings.
The Final Say
In conclusion, selling goods or supplying services to customers in other states – does seem like a mixed bag. While the situation is definitely better for interstate sales of goods – with state barriers potentially dissolving and free-flowing credit for businesses – the situation is exactly the opposite when it comes to supply of services. Under GST, all service providers will now have to move from a centralized registration to a state-wise registration – if they wish to continue providing services via physical presence in all states where they have clients. Another potential roadblock is the inability to use the CGST + SGST / UTGST credit accumulated in one state against the CGST + SGST / UTGST liability of another state – which is bound to impact cash outflow.
So, while GST surely intends to provide a multitude of benefits in the long run, it does however come along with a bagful of challenges, which need to be tolerated and addressed for the greater good.
Contributors: Pugal T and Pramit Pratim Ghosh