When you buy from another state, which government gets the tax?

If you buy a car through a dealer in Punjab that was built in Tamil Nadu, two governments could tax it: Tamil Nadu, where it was made, or Punjab, where it will run. The GST gives it to Punjab, where the car is used, not where it was built. This is the “destination principle.”

Why the consuming state? Because the tax is meant for the consumer, and the money should follow them home. That car will run on Punjab’s roads; the tax on it should fund the government that serves the family who bought it, not the one a thousand kilometres away where the car happened to be built. Taxing at the destination keeps the link between paying a tax and being governed by the state you pay.

It also lets exports leave untaxed. A good consumed abroad bears no Indian tax, so exports are “zero-rated”: the exporter charges no GST and reclaims the GST paid on its inputs, and Indian steel or software reaches world markets carrying none of India’s domestic taxes. Imports are taxed on arrival, so foreign and domestic goods meet the Indian buyer on equal terms. Origin-based taxation would invert this, taxing exports while waving imports through, exactly the wrong way round for a trading economy.

The arrangement was fought over. Under the old Central Sales Tax the revenue on an inter-state sale went to the producing state, which suited manufacturing states like Maharashtra, Gujarat, and Tamil Nadu, since they taxed goods consumed elsewhere in the country. Moving to a destination basis handed that money to consuming states instead. The producer states’ fear of that loss is why the Centre had to promise them years of compensation to get GST passed at all, a promise that later curdled into a bitter fight (see “Who runs GST, and why does the GST Council matter so much?”).

Making this work in a federation took some plumbing. When a Punjab dealer buys the car from a Tamil Nadu factory, it pays tax on the purchase, and it will charge tax again when it sells the car to you. Within one state that nets out: what a business pays on its purchases and what it owes on its sales go to the same government, so one is set against the other and only the gap is paid over. Across a state line it does not. The Punjab dealer paid Tamil Nadu’s tax but owes its own tax to Punjab, and Punjab will not cancel its tax for money that went to Tamil Nadu’s treasury. Unable to recover it, the dealer folds that tax into the car’s price, and you are charged tax on top of it. The car costs more than the rate implies: the old “tax on tax” returning at the border.

The Integrated GST is the fix. On an inter-state sale the Centre, not either state, levies one combined tax, which the dealer credits like any other, so nothing is taxed twice. The Centre, standing between the two states, then passes the destination state its share (see “Did GST really create ‘one nation, one market’?”).