GST and Commodity Trading

The introduction of Goods and Service Tax (GST) in 2017 has been a very significant step in the field of indirect tax reforms in India. GST is a comprehensive tax levied on manufacture, sale and consumption of goods and service at national level. By amalgamating a large number of Central and State level taxes into a single tax, it mitigates cascading or double taxation and paves the way for a common national market.

GST is applicable on ‘supply’ of goods or services as against the earlier concept of tax on the manufacture of goods or on sale of goods or on provision of services.

GST is based on the principle of ‘destination’ – a ‘consumption’ based tax as against the earlier principle of ‘origin’ based taxation.

A unique ‘Integrated GST (IGST)’ is levied in the case of inter-State supply of goods or services. This is collected by the Centre.

A Goods and Services Tax Council (GSTC) has been constituted to recommend on the GST rate, exemption, thresholds, etc.

Central Taxes: Central excise duty, Additional duties of excise, Excise duty levied under Medicinal & Toiletries Preparation Act, Additional duties of custom (CVD & SAD), Service tax, Surcharge and Cess

State Taxes: State VAT, Central sales tax, Purchase tax, Luxury tax, Entry tax (all forms, Entertainment Tax (except those levied by local bodies), Taxes on advertisements, Taxes on lottery, betting, gambling; State cess and Surcharges

GST envisages a “One India – One Tax – One Market” and with removal of differential state-specific taxes, a larger pan-India market for commodities is being created. This is already enabling near-seamless movement of commodities across state borders, building more efficient linkages between the spot and derivatives markets and enhancing the relevance of exchange discovered prices to the entire ecosystem. In simple terms, the levels of correlation in prices that exists among the spot markets and between spot and their derivatives traded on exchanges are fast improving with the creation of a nation-wide market. Further, the tax is also helping connect the exchanges’ delivery with more buyers from across the nation as the logistics facility improves, thus boosting derivatives trading in commodities.

Take bullion, for instance. In the pre-GST regime, there was no VAT (varied across states) setoff available in case of interstate transfer of Gold / Silver and the tax (VAT) could be setoff only if it was transacted in the same state. The GST regime now facilitates a smooth flow of tax credit and uniformity in tax, thereby encouraging free movement of gold/ silver from the place of delivery to the ultimate destinations.

Credit of input tax, being the crux of GST initiative, ensures wider inclusion of taxpayers in the supply chain. Under-invoicing is naturally dis-incentivized and the chain from primary sellers to the final consumers leaves little room for tax evasion leading to increase in the share of organized participants.

Merging of all the different state taxations into GST can strongly support achieving the goal of creating and operating electronic spot markets for commodities, including the e-NAM. The ease of movement of agricultural goods, particularly, across state borders can improve the inter-state trade in physical commodities and also support the growth of the commodity derivatives market. Warehousing and logistics sectors, which are mostly unorganized, are getting overhauled and becoming far more structured and organized.

The underlying principle in some initiatives such as GST and e-NAM, is to create a common national market for commodities, facilitating trade and transparency across the country. Hopefully, as they gain more traction, these initiatives will lay a strong platform for the formation of an integrated national commodity market.

This is a partnered post.