Provisions pertaining to place of supply under GST
The concept of place of supply (i.e., supplier location) helps in determining whether a transaction is interstate or intrastate. This in turn helps decide which type of tax to apply — Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST), or Integrated Goods and Services Tax (IGST).
In this blog, we will explore the provisions pertaining to place of supply under GST.
Importance of place of supply
The concept of place of supply is not new to indirect taxation. It is already in use in service tax law under the Place of Provision of Service Rules (POPS Rules). Since service tax law treats the whole of the country as one single tax jurisdiction, place of provision is relevant only in deciding if a transaction qualifies as an export of services. In the case of value added tax (VAT), movement of goods broadly determined which tax would be charged. If goods moved from one state to another, Central Sales Tax (CST) was charged. If goods remained within the state, VAT was charged. Since the tax was origin based, the tax revenue generally remained with the state of the supplier.
Under Goods and Services Tax (GST), taxes will go to the recipient — not the supplier — state, but it’s not always easy to determine who the recipient is. There could be a difference between the recipient state and the state of the recipient.
In fact, in the case of services, it is often very difficult to determine who the recipient actually is. Take, for example, a father taking his son for a haircut; is the son the recipient, or is it the father who pays for the haircut? Whether an online hotel booking portal provides services to the traveler or to the hotel oftentimes comes into question.
In the case of goods, it is much easier to identify the suppliers and recipients, but there are still some situations that present confusion. For example, a typical bill-to ship-to transaction, where A sells goods to B but ships to C per B’s instructions. In such cases, it is necessary to decide who the recipient is and which state should get the revenue. This is where place of supply comes into play, to help decide which state gets the tax revenue.
Since the place of supply is so crucial for the states, it is going to be the main point of dispute between the state and the taxpayer. Thus, it is very important to understand the concept and apply it judiciously to all transactions.
Scheme of place of supply of goods
Sections 10 and 11 of the IGST Act deal with place of supply for goods. Section 11 deals with import/export transactions while section 10 deals with all other transactions. While they are part of the IGST Act, these sections and their provisions equally apply to CGST/SGST act as well.
For import transactions, place of supply is the location of the importer. For export transactions, it is the location outside India.
For domestic transactions covered under section 10, the law broadly visualizes five situations into which it tries to fit all transactions. If there are situations that do not fit, separate rules could be prescribed to determine place of supply [section 10(2) of the IGST Act].
Understanding these five situations, and the connection among them is important to understanding the mind of lawmakers. This could help in deciding place of supply in real-life situations.
1. Simple transaction involving movement
Most B2B transactions and many B2C transactions involve the movement of goods. A car company sells cars to its dealers by moving them to a dealer’s premises; steel is transported from the steel depot to the factory of the customer. In B2C transactions, the movement may not be part of the supply. A customer may buy goods in a grocery shop and then decide whether and to where he wants to move them. The first situation under place of supply (Section 10) covers only those cases when movement is part of the supply — e.g., A sells goods to B and ships them to B’s premises.
2. A complex transaction involving movement
The next situation involves goods moving from supplier to another person, but the persons who receives the goods is not the buyer. This is a typical bill to ship-to transaction where A ships goods to C at the behest of B.
3. When goods do not move
Quite often in the auto industry, moulds and tools are manufactured in-house by a component manufacturer. Once these are manufactured, he may sell them to the OEM but retain them in his own factory. In such cases, goods do not move but supply still takes place. Such situations are covered here.
4. When components of goods move
Take furniture assembled at a new office. The planks and fasteners would be shipped to the customer’s office by the furniture manufacturer and assembled there by his people. Such cases are covered in this fourth situation.
5. When goods and consumers both move
When we travel on a Rajdhani train or on a flight, food or merchandise like a luxury pen or a power bank are purchased while the train or the plane is moving. It would be very difficult to pinpoint which state it is passing through at the time the transaction takes place. Therefore in such cases, place of supply is decided based on where such goods were loaded on the train or the flight.
The difficult task now is to fit all business transactions into these five situations. And that is not so easy. Whether an ex-works sale would fit into the first or third situation is debatable. There could be cases where a transaction may fit into more than one scenario. For example, a lease finance company may ask a manufacturer to assemble goods at the factory of its customer (covering situations two and four).
There could be situations where words in the law may not be defined, e.g., “delivery” in situation one. And there could be situations where words may be defined in the GST Act but the flavor coming from the provision is something different — e.g., the word “recipient” in situation two refers to the receiver of goods but the law defines it as the person who pays for the goods. Since the government has not come out with any rules to specify place of supply in situations other than these five, we have to interpret these five situations and come to a harmonious conclusion.
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