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Plugging Loopholes in Taxation of Interstate Sales
States may be hesitant to increase sales tax rates on petroleum products out of the goods and service tax’s ambit to cope with the Covid-19-led revenue shock. The risk of revenue loss on account of the interstate purchase of out-of-GST petroleum products at a concessional rate of 2% may not give an opportunity to state governments to enlarge fiscal space and lift the economy out of fiscal shock, given the fall in global price of crude petroleum.
One of the objectives to introduce the goods and services tax (GST) in India was to enshrine the destination principle of taxation in the indirect tax system. However, certain provisions of the new tax regime have created an environment conducive for erosion of tax base of the destination states. States are foregoing revenue on account of interstate purchases of out-of-GST petroleum products by businesses at a concessional rate of 2%. Taxes from petroleum products constitute a significant share in indirect tax collection of union as well as state governments in India. The importance of revenue from the petroleum sector has increased in the GST regime, as fiscal autonomy of the governments (both federal as well as provincial) to augment tax collection through unilateral policy decisions has been curtailed due to harmonisation of the tax system.
The Indian Constitution assigns power to tax interstate sales to the union government. Following the recommendation of the Taxation Enquiry Commission (1953–54), the enactment of the Central Sales Tax (CST) Act, 1956 empowers the union government to make laws related to interstate sales. The main objective behind the introduction of the CST Act, 1956 was to reduce compliance burden of taxpayers dealing in interstate trade. In the same spirit, the Constitution (One Hundred and First Amendment) Act, 2016 introduces Section 246A(2), according to which “Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of interstate trade or commerce” and assigns the union government power to make laws related to interstate trade in the GST regime. Therefore, both under the CST Act, 1956 and the Integrated Goods and Services Tax (IGST) Act, 2017, the union government enjoys the absolute power to make laws related to interstate transactions. Inevitably, it is the responsibility of the union government to take appropriate measures to plug loopholes of the new tax system and help destination states to protect their revenues.
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