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APPORTIONMENT OF ‘IGST’ AND SETTLEMENT OF FUNDS

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APPORTIONMENT OF ‘IGST’ AND SETTLEMENT OF FUNDS
Mr. M. GOVINDARAJAN By: Mr. M. GOVINDARAJAN
April 3, 2017
All Articles by: Mr. M. GOVINDARAJAN       View Profile
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Finance Commission

Article 280 of the Constitution of India provides for the establishment of the Finance Commission.  According to Article 280(1) the President of India shall, within four years from the commencement of the Constitution and thereafter at the expiration of every 5th year or at such earlier time as the President considers necessary constitute a Finance Commission.  14 Finance Commissions have so far constituted.  Currently the 14th Finance Commission is functioning.

Distribution of tax proceeds among Central and States

Among the various functions, the Finance Commission is to suggest the criteria of distribution between the Union and States of the net proceeds of taxes which are to be or may be divided between them and the allocation of shares of the proceeds of such taxes in percentages between them. The Finance Commission recommends to the President in the above matter.  The President normally will accept the recommendations of the Finance Commission, even though Article 262 of the Constitution of India provides that the recommendations made by the Finance Commission are only recommendatory. The Central Government can ignore these recommendations and if so wants, may propose its own criteria.

Each Finance Commission has its own methodologies to have allocation of the proceeds of the income tax and indirect taxes.   The following tables will indicate the pattern of distribution of taxes as recommended by the Finance Commission-

Recommendations of Finance Commissions on Income Tax

Finance Commission

State share of Income Tax

Distribution of income tax to the States on the basis of

Population and other criteria

Tax contribution

I Finance Commission

55%

80

20

II Finance Commission

60%

 90

10

III Finance Commission

65%

80

20

IV Finance Commission

75%

80

20

V Finance Commission

75%

90

10

VI Finance Commission

80%

90

10

VII Finance Commission

85%

90

10

VIII Finance Commission

85%

90

10

IX Finance Commisison

85%

90

10

X Finance Commission

77.5%

90

10

Source: Finance Commission Reports

Recommendations of Finance Commission on excise duty

Finance Commission

State share of Excise duty

Distribution of excise duty to the States on the basis of

Population

Backwardness of States % of the poor in the States etc.,

I Finance Commission

40% of 3 duties

40

60

II Finance Commission

25% of 8 duties

40

60

III Finance Commission

20% of 35 duties

40

60

IV Finance Commission

20% of 45 duties

80

20

V Finance Commission

20% of 45 duties

80

20

VI Finance Commission

20% of 45 duties

75

25

VII Finance Commission

40% of all duties

25

75

VIII Finance Commission

45% of all duties

25

75

IX Finance Commission

45% of all duties

25

75

X Finance Commission

45% of all duties

20

80

Source: Finance Commission Reports

Apart from the income tax, excise duty the Central has levied and collected additional excise duties and the entire proceeds after deducting the share of the Union territories are distributed among the States in accordance with the principles of distribution laid down by Finance Commission from time to time.

Apportionment of IGST

On the above line Section 17 of the Integrated Goods and Services Tax Bill, 2017 (‘Bill’ for short) provides for the appointment of IGST collected under this Act and settlement of funds, but without the recommendations of the Finance Commission.   The apportionment is between the Central Government and State Government.  This section not only deals with the apportionment of tax but also deal with the apportionment of interest, penalty and compounding amount realized in connection with the tax so apportioned.

Apportionment to Central Government

Section 17(1) of the Bill provides that out of the IGST paid to the Central Government-

  • in respect of inter-State supply of goods or services or both to an unregistered person to a registered person paying tax under Section 10 of the CGST Act;
  • in respect of inter-State supply of goods or services or both where the registered person is not eligible for input tax credit;
  • in respect of inter-State supply of goods or services or both made in a financial year to a registered person, where he does not avail of the input tax credit within the specified period and thus remains in the integrated tax account after expiry of the date for furnishing of annul returns for such year in which the supply was made;
  • in respect of import of goods or services or both by an unregistered person or by a registered person paying tax under Section 10 of CGST Act;
  • in respect of import of goods or services or both where the registered person is not eligible for input tax credit;
  • in respect of import of goods or services or both made in a financial year by a registered person, where he does not avail of the said credit within the specified period and thus remains in the integrated tax account after expiry of the due date for furnishing of annual return for such year in which the supply was received

the amount of tax calculated at the rate equivalent to the central tax on similar intra-State supply shall be apportioned to the Central Government.

Apportionment of State and Central

Section 17(2) of the Bill provides that the balance amount of integrated tax remaining in the integrated tax in respect of supply for which an apportionment to the Central Government has been done shall be apportioned to the-

  • State where such supply takes place; and
  • Central Government where such supply takes place in a Union Territory.

Where the place of supply made by any taxable person cannot be determined separately, the said balance amount shall be apportioned to-

  • each of the States; and
  • Central Government in relation to Union territories

In proportion to the total supplies made by such taxable person to each of such States or Union Territories, as the case may be in  a financial year. 

Where the taxable person making such supplies is not identifiable, the said balance amount shall be apportioned to all States and the Central Government in proportion to the amount collected as State tax or, as the case may be, Union territory tax, by the respective State or, as the case may be, by the Central Government during the immediately preceding financial year.

Apportionment of interest, penalty and compounding

Section 17(3) of the Bill provides that the provisions of Section 17(1) and 17(2) relating to appointment of integrated tax shall, mutatis mutandis apply to the apportionment of interest, penalty and compounding amount realized in connection with the tax so apportioned.

Transfer of apportioned amount

Section 17(4) provides that where an amount has been apportioned to the Central Government or a State Government, the amount collected as integrated tax shall stand reduced by an amount equal to the amount so apportioned and the Central Government shall transfer to the central tax account or Union territory tax account, an amount equal to the respective amounts apportioned to the Central Government and shall transfer to the State tax account of the respective States an amount equal to the amount apportioned to the State, in such manner and within such time as may be prescribed.

Treatment of refund

Section 17(5) provides that any integrated tax apportioned to a State or to the Central Government on account of a Union Territory, if subsequently found to be refundable to any person and refunded to such person, shall be reduced from the amount to be apportioned to such State or Central Government on account of such Union Territory, in such manner and within such time as may be prescribed.

 

By: Mr. M. GOVINDARAJAN - April 3, 2017

 

 

 

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