GST DISTRIBUTION BETWEEN CENTRE AND STATES

The Goods and Services Tax (GST) in India is a comprehensive indirect tax system that amalgamates various central and state taxes into a single tax structure. The distribution of GST revenue between the Centre and States is a crucial aspect of the GST framework, designed to balance fiscal powers and responsibilities between different levels of government.

GST Structure in India

1. Dual GST Model:
   • Central GST (CGST): Collected by the Central Government on intra-state transactions.
   • State GST (SGST): Collected by the State Governments on intra-state transactions.
   • Integrated GST (IGST): Collected by the Central Government on inter-state transactions and imports, which is then distributed between the Centre and States.

Revenue Distribution Mechanism

1. Intra-State Transactions:
   • CGST: Collected by the Central Government.
   • SGST: Collected by the respective State Government.

Example: If a business in Maharashtra sells goods worth ₹1,00,000 to a customer within Maharashtra, GST of 18% is levied. This 18% is split into 9% CGST and 9% SGST. The ₹9,000 CGST is collected by the Central Government, and ₹9,000 SGST is collected by the Maharashtra Government.

2. Inter-State Transactions:
   • IGST: Collected by the Central Government and later distributed between the Centre and the State where the goods are consumed.

Example: If a business in Gujarat sells goods worth ₹1,00,000 to a customer in Karnataka, GST of 18% is levied as IGST. The ₹18,000 IGST is collected by the Central Government. This IGST is then apportioned as follows:

2. CGST Portion: The central portion of the IGST is retained by the Central Government.
3. SGST Portion: The state portion is transferred to the Karnataka Government (destination state).

Distribution of IGST Revenue

1. Initial Collection:
   • The entire IGST is initially collected by the Central Government.
2. Settlement of IGST:
   • On Intra-State Sale: The central portion of IGST is retained by the Centre, and the state portion is transferred to the state of consumption.
   • On Interstate Trade: The IGST is settled between the Centre and the states based on a formula, ensuring that the state of consumption receives the appropriate share.

Example: For the ₹18,000 IGST on inter-state sale from Gujarat to Karnataka, the distribution might be such that ₹9,000 (the SGST portion) is transferred to Karnataka, while ₹9,000 (the CGST portion) is retained by the Central Government.

GST Compensation Cess

1. Purpose:
   • Compensation Cess: Levied on certain goods and services to compensate states for any revenue loss due to the transition to GST.
2. Distribution:
   • The Compensation Cess is collected by the Central Government and used to compensate states for any shortfall in revenue.

Example: If a state’s revenue from GST is lower than projected, the Compensation Cess collected on luxury or sin goods is used to compensate the state for this loss.

Example of GST Distribution

Scenario: A manufacturer in Maharashtra sells electronic goods worth ₹2,00,000 to a retailer in Karnataka.

1. Intra-State Sale (Maharashtra):
   • CGST: 9% of ₹2,00,000 = ₹18,000.
   • SGST: 9% of ₹2,00,000 = ₹18,000.
   • Total GST: ₹36,000 (₹18,000 CGST + ₹18,000 SGST).
   • Revenue Distribution: ₹18,000 goes to the Central Government and ₹18,000 goes to Maharashtra Government.
2. Inter-State Sale (Maharashtra to Karnataka):
   • IGST: 18% of ₹2,00,000 = ₹36,000.
   • Initial Collection: ₹36,000 IGST is collected by the Central Government.
   • Settlement: The ₹36,000 IGST is divided into ₹18,000 (SGST portion) transferred to Karnataka Government and ₹18,000 (CGST portion) retained by the Central Government.

Important Points

1. GST Council:
   • The GST Council, composed of the Union Finance Minister and State Finance Ministers, decides on GST rates, compensation mechanisms, and distribution principles.
2. Revenue Sharing Agreement:
   • The revenue-sharing arrangement ensures that states do not lose revenue due to the introduction of GST and provides mechanisms for compensation.
3. State Compensation:
   • The Compensation Cess fund helps to offset any revenue losses that states might experience, ensuring a smooth transition to GST.
4. Monthly Settlements:
   • The distribution of IGST revenue between the Centre and States is carried out monthly, ensuring that states receive their share on time.

Summary

1. GST Distribution:

• Intra-State: CGST and SGST are collected and distributed between the Centre and the State where the sale occurs.
• Inter-State: IGST is collected by the Centre and then split between the Centre and the State where the goods are consumed.

2. Example:

• Intra-State Sale: Manufacturer in Maharashtra selling to a customer in Maharashtra involves CGST and SGST.
• Inter-State Sale: Manufacturer in Maharashtra selling to a customer in Karnataka involves IGST, which is distributed between the Central Government and the Karnataka Government.

3. Compensation Cess:

• Collected to compensate states for revenue losses due to GST implementation.

The GST distribution mechanism ensures equitable revenue sharing between the Centre and States, facilitating a unified tax system that supports economic stability and growth.