INTRODUCTION
The indirect tax system in India, both at the Centre and the
States’ level, remains unduly complex, unfair, distortionary and structurally
flawed, with a narrow base and susceptible to tax avoidance and evasion. This
is despite the sincere and painstaking efforts made in the past two decades to
bring structural changes in the design of the present tax system.
Needless to say, the basic objective of any tax reform in the
‘Indirect Tax Regime’ would be to address the problems of the current system.
It should not only establish a system that is economically efficient and
neutral in application and simple to administer, but at the same time, be
capable of broadening the tax base while maintaining the autonomy of the
taxation powers of the Centre and the States guaranteed under the Constitution.
The switchover to ‘Goods and Services Tax’ (“GST”) is justified as it is
viewed that GST is capable of addressing the problems associated with the
current tax system and of achieving the above objectives.
After a long and painful wait, GST is finally knocking at the
door of every business entity in the country..! This eagerly-awaited, grand,
‘game-changer’ and gargantuan ‘Tax-reform’ is set to be implemented in the
country from July 1, 2017. If one goes by the oft-repeated, confident and clear
utterances – that brooks ‘no nonsense’ – of the top echelon of the North Block,
GST will certainly meet its destiny on this date..!
‘Place of Supply’ Provisions – Current Tax Regime vis-à-vis
GST Regime
The current Indirect Tax Regime in India is ‘origin-based’
and therefore, a formal concept of ‘Place of supply of goods’ is, as such, not
prevalent. The major principle for determining the ‘situs of sale of
goods’ as prescribed under the Central Sales Tax Act, 1956 (‘CST Act’) is the
‘location of the origin of the goods’. Thus, Central Sales Tax (CST) being
levied under the CST Act is an ‘origin-based tax’ that is against the
‘destination principle’.
Under the Service Tax regime, no doubt, ‘Place of Provision
of Services Rules’ are prescribed which are based on the ‘destination
principle’. However, a close look at these Rules would reveal that their
relevance is primarily in the context of the cross-border i.e. international
transactions in services. Since ‘Service Tax’ is a Central levy, the
determination of ‘place of supply of service’ in case of the domestic
transactions is never an issue.
However, as GST is ‘destination based consumption tax’,
it is essential that an elaborate set of principles governing ‘Place of
Supply’ (POS) for goods or services is provided. The federal character of
Indian Republic also poses another challenge when one contemplate the POS
provisions. (Please refer the discussion in the ensuing paragraphs). The
provisions for determining ‘Place of Supply’, therefore, are critical to the
whole design of GST.
The POS provisions – which are distinct for goods and
services – are contained in the Integrated Goods and Services Act, 2017
(‘IGST Act’). The POS provisions are largely based upon the ‘International
VAT/GST Guidelines’ (‘Guidelines’) issued by OECD in November, 2015. These
important Guidelines merit a brief discussion here.(For the ease of reading,
the terms ‘VAT’ & ‘GST’ are used as synonymous terms throughout the
article.)
OECD’s VAT/GST Guidelines & its significance
The Guidelines are the culmination of nearly two decades of
efforts to provide internationally accepted standard for consumption taxation
of cross-border trade, particularly in services and intangibles. The Guidelines
aim at reducing the uncertainty and risks of double taxation and unintended
non-taxation that result from inconsistencies in the application of VAT in
cross-border context.
a. Overarching purpose of a VAT: a broad-based
tax on final consumption
The overarching purpose of a VAT is to impose a broad-based
tax on consumption, which is understood to mean final consumption by
households. A necessary consequence of this fundamental proposition is that the
burden of the VAT should not rest on businesses.
The Central design feature of a VAT: staged collection
process
The central design feature of a VAT, and the feature from
which it derives its name, is that tax is collected through a staged process.
This central design feature of the VAT, coupled with the fundamental principle
that the burden of the tax should not rest on businesses, requires a mechanism
for relieving businesses of the burden of the VAT they pay when they acquire
goods, services or intangibles. There are two principal approaches to implementing
the staged collection process of VAT, one is invoice-credit method
(which is a ‘transaction-based method’) and other is subtraction
method (which is ‘entity based method’). Almost all VAT
jurisdictions (including India) of the world have adopted the invoice-credit
method.
This basic design of the VAT with tax imposed at every stage
of the economic process, but with a credit for taxes on purchases by all but
the final consumer, gives the VAT “its essential character in domestic trade as
an economically neutral tax”. As the introductory chapter to the Guidelines
explains:
“The full right to deduct
input tax through the supply chain, except by the final consumer, ensures the
neutrality of the tax, whatever the nature of the product, the structure of the
distribution chain, and the means used for its delivery (e.g. retail stores,
physical delivery, internet downloads). As a result of the staged payment
system, VAT thereby “flows through the businesses” to tax supplies made to
final consumers”.
POS Provisions : ‘A crucial cog in the GST Wheel’
The principal aim of VAT (or GST) and its central design
demand that VAT system must have mechanisms for identifying the jurisdiction of
consumption, by connecting the supplies to the jurisdiction where final
consumption of the goods or services or intangibles to take place. VAT systems,
thus, need ‘Place of Taxation’ (or ‘Place of Supply’) Rules to implement the
destination principle, not only for business-to-consumer (B2C) supplies, which
involve final consumption, but also for business-to-business (B2B) supplies,
even though such supplies do not involve final consumption. POS provisions,
thus, act as a crucial cog in the GST wheel and keeps it running
uninterruptedly and smoothly.
POS Provisions under GST Regime: Different Perspectives
The POS Provisions under GST regime can essentially be viewed
from the following perspectives, viz:
– Constitution Perspective
– Destination Perspective
– Taxability Perspective
– Seamless Credit Perspective
These are briefly discussed below:
I. Constitution Perspective
As stated above, India is a federal republic where the Centre
and the States enjoy distinct taxation powers. This division of taxation powers
between the Centre and the States is guaranteed under the Constitution of India
vide Article 246 read with Schedule VII thereof. This Constitutional Scheme of
taxation powers for the Centre and the States has ensured that the Centre
cannot levy tax on the distributive trade and the States cannot levy tax on
services.
However, the core feature of GST requires that both, the
Centre and the States have concurrent jurisdiction to levy tax on all supplies
of goods or services or both and on the same tax base. This objective is
achieved through ‘The Constitution (One Hundred and First Amendment) Act, 2016’
vide which certain significant amendments have been carried out in the
Constitution, paving a way for ultimate introduction of GST in the country.
The inevitability of maintaining the autonomy of taxation
powers of the Centre and the States as guaranteed under the Constitution has
also compelled India to adopt a ‘Dual GST structure’ rather than a ‘unified
GST structure’. Under Dual GST structure, both the Centre and the States
would concurrently levy Central GST (CGST) and State GST (SGST) respectively on
all supplies on a comprehensive basis.
In order to ensure a smooth implementation of GST regime,
keeping in mind the ‘destination principle’ and with a view to avoid any
possibility of conflicting interpretations, the powers to enact the laws
governing ‘Inter-state supplies’ are vested with the Centre only. Thus, the
statutory framework governing Inter-State supplies, imports and exports is
provided by the IGST Act that also contains the principles of determining
‘Place of Supply’ of goods or services or both.
II. Destination Perspective
The fundamental issue of economic policy in relation to the
application of the VAT/GST is whether the levy should be imposed by the
jurisdiction of origin or destination. Under the destination principle, tax is
ultimately levied only on the final consumption that occurs within the taxing
jurisdiction. Under the origin principle, the tax is levied in the various
jurisdictions where the value was added. The key economic difference between
the two principles is that the destination principle places all the firms
competing in a given jurisdiction on an even footing whereas the origin
principle places consumers in different jurisdictions on an even footing.
The application of the ‘destination principle’ in VAT
achieves neutrality in cross-border trade. Thus, in international trade,
applying this principle, exports are not subject to tax with refund of input
taxes (that is, “free of VAT” or “zero-rated”) and imports are taxed on the
same basis and at the same rates as domestic supplies. By contrast, under the
‘origin principle’, each jurisdiction would levy VAT on the value created
within its own borders.
For these reasons, there is a widespread consensus that the
destination principle, with revenue accruing to the country of import where final
consumption occurs, is preferable to the origin principle from both a
theoretical and practical standpoint. In fact, the destination principle is the
international norm and is sanctioned by World Trade Organization (‘WTO’) rules.
Because of the widespread acceptance of the destination
principle for applying VAT to cross-border trade, most of the POS provisions
are generally intended to tax supplies of goods, services and intangibles
within the jurisdiction where consumption takes place.
In theory, POS Provisions or Place of Taxation Rules should
aim to identify the actual place of business used for B2B supplies (on the
assumption that this best facilitates implementation of the destination
principle) and the actual place of final consumption for B2C supplies. However,
the Guidelines recognise that Place of Taxation Rules (or POS Provisions) are
in practice rarely aimed at identifying where business use or final consumption
actually take place. This is a consequence of the fact that VAT must in principle
be charged at or before the time when the object of the supply is made
available for business use or final consumption. In most cases, at that time,
the supplier will not know or be able to ascertain where such business use or
final consumption will actually occur. VAT systems therefore generally use
proxies for the place of business use or final consumption to determine the
jurisdiction of taxation, based on features of supply that are known or
knowable at the time that the tax treatment of the supply must be determined.
For this purpose, B2B supplies are assumed to be supplies where both the
supplier and the customer are recognised as businesses, and B2C supplies are
assumed to be supplies where the customer is not recognised as a business.
III. Taxability Perspective
POS Provisions, when viewed from ‘taxability perspective’,
involve the following considerations, viz:
– nature of supply, that is, whether the
‘supply’ is ‘Inter-state’ or Intra-State’?
– subject of supply, that is, whether supply is
of ‘goods’ or ‘services’ or ‘both’?
– category of supply that is, whether the
supply is ‘business-to-business’ or ‘business-to-consumers’?
I. ‘Inter-State Supply’ and ‘Intra-State Supply
Section 7 and Section 8 of the IGST Act define, in an
elaborate manner, the terms ‘Inter-State supply’ and ‘Intra-state supply’
respectively.
To summarise, an ‘Inter-state Supply’ of goods or services,
within the terms of Section 7, is:
i. Where the location of the supplier and the
place of supply are in two different States or two different Union Territories
or a State and a Union Territory;
ii. Supply of goods into the territory of India,
till they cross the customs frontiers of India;
iii. Supply of services imported into the territory
of India;
iv. Supply of goods/services to or by an SEZ
Developer or an SEZ Unit;
v. Supply when supplier of goods or services or
both is located in India and the place of supply is outside India;
vi. Any other supply in the taxable territory, not
being an Intra-state supply and not covered elsewhere u/s. 7.
On the other hand, an ‘Intra-state supply’ of goods or
services in terms of section 8 is where the location of the supplier and the
place of supply of goods/services are in the same State or same Union
Territory. However, ‘Intra-state supply’ shall not include:
i. supply of goods/services to or by a SEZ
Developer or SEZ Unit;
ii. supply of goods imported into the territory of
India till they cross the customs frontiers of India; and
iii. supplies made to a tourist referred to in
Section 15.
In order to determine whether the supply of goods or services
qualify as ‘Inter-state’ or ‘Intra-State’, one has to first determine the
location of the supplier and the place of supply in terms of POS provisions.
Viewed from another angle, it is also important to determine
whether a ‘supply’ is an ‘Inter-state’ or ‘Intra-state’ so as to ensure
discharge of appropriate tax liability and that is, IGST or CGST/SGST. The
adverse consequences in terms of section 19 of the IGST Act or section 77 of
the CGST Act may follow in the event of the wrong determination of the
character of supply and the consequential inappropriate discharge of tax
liability.
POS provisions facilitate the proper determination of the
‘nature or character of supply’.
II. Subject of ‘supply’: Whether ‘goods’ or
‘services’ or ‘both’?
Implementation of the destination principle i.e. adopting
practical place-of-taxation-rules (or POS rules) that identify the jurisdiction
in which final consumption occurs, raises a host of additional questions
because identification of the jurisdiction in which final consumption occurs
can be effectuated only through proxies that reflect one’s “best guess” where
final consumption is likely to occur since ‘in many (if not most) cases consumption
is not directly observable.’
Implementing the destination principle with respect to
cross-border trade in goods is relatively straight forward, based on the
assumption that the destination of the goods determined by physical flows is a
reasonable proxy for where consumption of the goods is likely to occur. Thus,
exported goods are commonly ‘zero rated’ and imported goods are taxed at the
border.
However, implementing the destination principle is more
complicated with respect to the taxation of cross-border trade in services and
intangibles than with respect to cross-border trade in goods. Until fairly
recently, cross-border trade in services attracted relatively little attention
because most services were consumed where they were performed. Consequently,
there was not much cross-border trade with respect to which a ‘destination’
needed to be identified.
This state of affairs changed dramatically with the enormous
growth in cross-border trade in services, driven by forces of globalisation and
facilitated by technological innovation. With the increasing “disconnect”
between performance and consumption or use of services in a territorial sense,
the traditional rule for determining the place of taxation of services by
reference to the service provider’s establishment becomes problematic. The
problem was exacerbated by the growth of multinational corporations, which
render services in myriad locations through complicated legal structures. The problem is not merely confined to
designing an appropriate regime for taxing cross border trade in services and
simply adopting a destination-based rule for the place of taxation of services
akin to the rule for the place of taxation of goods.
The more fundamental problem is that the enormous growth in
services involving suppliers in one jurisdiction and customer in another often
involves services that are intangible in nature, making it more difficult both
to determine the appropriate jurisdiction of ‘destination’ and to enforce the
tax on the basis of that determination, because such services are not amenable
to border controls in the same manner as goods. Such services circularly
defined as services “where the place of consumption may be uncertain” or,
perhaps, a bit more precisely, as ‘services and intangible property that are
capable of delivery from a remote location’ include services such as
consultancy, accountancy, legal and other intellectual services, banking and
financial transactions, advertising, transfer of copyright, provision of
information, data processing, broadcasting, telecommunication services, online
supplies of software and software maintenance, online supplies of digital
content, digital data storage and online gaming.
The above challenges, in
fact, raised by cross-border trade in services and intangibles are the raison
d’etre of the OECD’s VAT/GST Guidelines which also is the bedrock on which
the POS Provisions of the IGST Act rest.
III. Category of Supply: Whether B2B or B2C?
The approaches used by VAT systems to implement the
destination principle for B2B supplies and the tax collection methods used for
such supplies are often different from those used for B2C supplies. This
distinction is attributable to the different objectives of taxing B2B and B2C
supplies: taxation of B2C supplies involves the imposition of a final tax
burden, while taxation of B2B supplies is merely a means of achieving the
ultimate objective of the tax, which is to tax final consumption. Thus, the
objective of place of taxation rules (or POS Provisions) for B2B supplies is
primarily to facilitate the imposition of a tax burden on a final consumer in
the appropriate country (and/or the State) while maintaining neutrality within
the VAT system. The overriding objective of place of taxation rules (or POS
Provisions) for B2C supplies, on the other hand, is to predict, subject to
practical constraints, the place where the final consumer is likely to consume
the services or intangible supplied.
In addition, because of the different characteristics of
supplies to businesses and supplies to households, VAT systems often employ
different mechanism to collect the tax in connection with B2B and B2C supplies,
and these different mechanisms in turn often influence the design of place of
taxation rules (or POS Provisions) and of the compliance obligations for
suppliers and customers involved in cross-border supplies.
IV. Seamless Credit Perspective:
One of the many meanings ascribed to GST reads as under:
“A destination-based Value Added Tax which is levied on
‘Value Added’ to goods and services at each stage in the economic chain of
supply. Therefore, all different stages of production and distribution act as
mere ‘Tax Pass-through’ and the tax essentially sticks on the final consumption
within the taxing jurisdiction. Credit is made available across goods and
services and even across the States. GST thus, operates as a pure VAT.”
It is thus, evident that
all types of supplies, whether Inter-state or Intra-state, of goods or services
or both are likely to be covered within the tax net with only minimal
exclusions. It is therefore imperative to ensure ‘seamless credit’ across the economic
chain of supply of goods or services which is the chief aim of GST or VAT. The
availability of seamless credit will also ensure that tax is not imposed nor
does it rest on the businesses but is ultimately imposed only on the final
consumption in the hands of the final consumer. Since, in principle, GST is a
creditable/refundable tax, it shall not be a cost for the business nor a
revenue proposition for the Centre or the States.
This ‘wash-through’ nature of GST or VAT has a significant
bearing, not only on the conceptual design of IGST and its operative mechanism,
but also the designing of the POS Provisions, particularly in the context of
Inter-state transactions.
Conclusion:
A careful reading and analysis of the POS Provisions
contained in the IGST Act would reveal that the provisions are broadly in
conformity with the OECD International VAT/GST Guidelines as well as prevalent
practices in many VAT /GST jurisdictions of the world. The Guidelines are based
on certain generally accepted principles of tax policy applicable to
consumption taxes and also recognised by the Ottawa Taxation Framework
Conditions (1998). These principles are as follows:
– Neutrality: Taxation should seek to be
neutral and equitable between forms of electronic commerce and between
conventional and electronic forms of commerce. Business decisions should be
motivated by economic rather than tax considerations. Taxpayers in similar
situations carrying out similar transactions, should be subject to similar
levels of taxation.
– Efficiency: Compliance costs for
businesses and administrative costs for the tax authorities should be minimised
as far as possible.
– Certainty and Simplicity: The tax
rules should be clear and simple to understand so that taxpayers can anticipate
the tax consequences in advance of a transaction, including knowing when,
where, and how the tax is to be accounted.
– Effectiveness and Fairness: Taxation
should produce the right amount of tax at the right time. The potential for tax
evasion and avoidance should be minimised while keeping counteracting measures
proportionate to risks involved.
– Flexibility: The systems for taxation
should be flexible and dynamic to ensure that they keep pace with technological
and commercial developments.
POS Provisions will certainly be an unknown and unchartered
area for the distributive trade though a section of the manufacturers and
service providers may have some familiarity with the concept in view of the
‘Place of Provision of Services Rules’ currently in vogue under Service Tax
Regime. POS Provisions are like veins of the GST body, carrying both tax and
corresponding credit throughout the body. It is, therefore, not only essential
but also inevitable for all the stakeholders, whether taxpayers or tax
administrators or tax professionals, to gain sufficient understanding of these
provisions so as to be able to comply with the GST law correctly.
Acknowledgements:
1. International
VAT/GST Guidelines by OECD (April 2014)
2. Discussion Drafts for Public Consultation –
International VAT/GST Guidelines by OECD (Dec. 2014 – Feb. 2015)
3. A Hitchhiker’s Guide to the OECD’s
International VAT/GST Guidelines by Walter Hellerstein, University of Georgia
School of Law (18 FLA Tax Rev 589 (2016))
4. Interjurisdictional Issues by Keen &
Hellerstein
5. Jurisdiction to Tax in the New Economy by
Walter Hellerstein (38 GA.L. Rev. I. 28(2003))
