IGST Framework – Constitutional Aspects

CONCEPT OF IGST UNDER THE INDIAN CONSTITUTIONAL SCHEME
The Indian constitutional system possess features of a federation with strong unitary elements making it a ‘Union of States’. On these lines, Article 246 of the Indian Constitution provides for the demarcation of legislative powers between the Union and States, with residuary powers resting with the Union. In the context of fiscal powers, the legislative lists clearly demarcate the fields of legislation between the Union and the States and restricts each of them from encroaching the other’s arena. This constitutional set up posed a mammoth task for policy and law makers in designing a suitable GST model for India; ultimately leading to the promulgation of the 101st Constitutional Amendment.

DEVIATION FROM THE CONSTITUTIONAL SCHEME PREVALENT UNTIL NOW
The taxation scheme prevalent after the 101st Constitutional Amendment is a fundamental departure from the mutual exclusivity of fiscal powers between the Union and the States. The policy makers were faced with a tight balancing act of harmonising the tax structure in India across States on the one hand and retaining their constitutional independence on fiscal matters on the other. Instead of granting mutually exclusive taxing powers to Governments by creating specific entries in their respective list of the Seventh Schedule to the Constitution, it was decided to confer parallel/ simultaneous powers (not part of the Concurrent List) through a specific article in 246A. The Union and the respective States would legislate and the corresponding Governments would administer the laws within their respective territory. A parallel power structure was a conscious attempt to ensure harmony in fiscal decisions among the Union and Group of States.
 
This gave rise to the next challenge over addressing the geographical jurisdiction of States specifically over transaction such as inter state transactions, export, import etc having an element of another geography. It also leads to a supplementary issue of revenue allocation between the States on such transactions. To avoid the tax chaos prevalent in the Pre Central Sales Tax period, ie multiple States seeking to tax the same transaction on the claim that one of many aspects of a sale transaction occurred in their State (such as delivery, transfer of property, etc), which resulted in overlap in taxation on the same event, the Parliament was placed with the responsibility of laying down a robust law governing principles over the jurisdiction of transaction between the States, Dispute Resolution and also international transactions. The idea of implementation of IGST model in India was mooted to tackle this particular problem.

ECONOMICS BEHIND THE IGST LAW
Economically speaking, IGST is a bridge enabling flow of the SGST component of revenue from the Supplier State to Recipient State. Under the erstwhile origin based scheme of CST/ VAT, the State collecting the tax at the point of origination retained the revenue arising from such sale, contrary to the principle of taxing consumption. On this count, it hampered the consuming state to give any tax credit on inter-state purchases and resulted in CST being loaded on the purchase costs.

The GST law, which is guided by consumption (elaborated later) has adopted a modified version of taxing such transactions enabling the flow of revenue to the State of Consumption. The broad modalities are as follows:

–    Inter-state supplier will collect the IGST and remit it after adjusting available credit of IGST, CGST and SGST on his purchases

–    Supplier state will transfer to the Union Government the credit of SGST payment, if any, used in payment of IGST

–    Union Government would apportion the SGST component to the State in which the consumption of the supply takes place (place of supply)

–    Importing consumer will consume the goods or services in the State and the State would be entitled to retain revenue on this consumption (B2C transactions)

–    Importing dealer will claim credit of IGST while discharging his output tax liability in his own state (B2B transactions) and the chain would continue until final consumption either in the same State or else-where.

Prior to venturing into the IGST laws and the specific provisions, it would be appropriate to understand the basic concepts/ definitions of the IGST Law which would have to be applied to IGST transactions. The concepts are sequentially examined.

1.    Territorial Jurisdiction v/s Extra-territorial Nexus

Section 1 of the IGST Act defines the extent of the law and states that the Act extends to the whole of India except to the State of Jammu and Kashmir. With the Integrated Goods and Services Tax (Extension to Jammu and Kashmir) Ordinance 2017, the words “except Jammu and Kashmir were omitted”. This Ordinance came into force w.e.f. 08-07-2017.

Without examining the scope of the term India and its statutory extensions, it would be important to examine the legislative limits of the enactment. The general principle, flowing from the sovereignty of States, is that laws made by one State can have no operation in another State. An issue arises in case of transactions which are said to be undertaken wholly or partly outside India. In the context of Income tax Act, 1922 a challenge was made to the vires of the then section 4(1)(b)(ii) of the said Act  which imposed income tax on a branch of the assesse which earned income outside of British India. The Privy Council examined pari-materia provisions of the Article 245(2)  (in the Government of India Act, 1935) and upheld the imposition stating:

“The resulting general conception as to the scope of Income tax is that given a sufficient territorial connection between the person sought to be charged and the country seeking to tax him Income-tax may properly extend to that person in respect of his foreign income.”

Subsequently, the Hon’ble Supreme Court in Electronics Corporation vs. CIT & Anr 1989 AIR 1707 (SC) was examining whether technical services provided abroad could be taxed in India on the ground of extra-territorial applicability of law. The Court upheld the doctrine that territorial nexus is an essential ingredient for exercising jurisdiction over a transaction though it left the parameters of determination of nexus slightly open ended.

Subsequently, on a reference made in the above case to the constitutional bench in 2017 (48) S.T.R. 177 (S.C.) GVK Industries Ltd vs. Income tax Officer  wherein the Court made detailed observations on the inter-play between territorial limits and exterritorial operation of a law. Furthering the case in Electronics Corporation of India, the Court set down four extreme views for consideration on the proposition of ‘nexus’:

i.    Rigid view – State would have powers if “aspects or causes that occur, arise or exist, or may be expected to do so, solely within India”.
ii.    Slightly liberal view – State would have powers if the event had significant or sufficient impact on or effect in or consequence for India
iii.    Even more liberal view – State would have powers as long as some impact or nexus with India is established or expected
iv.    Extreme view – State has powers to legislate for any territory without any limits.

The Court also explained the contextual meaning of the terms for purpose of application of the nexus theory:

–    “aspects or causes”
    events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like, in the social, political, economic, cultural, biological, environmental or physical spheres, that occur, arise, exist or may be expected to do so, naturally or on account of some human agency.

–   “extra-territorial aspects or causes”
    aspects or causes that occur, arise, or exist, or may be expected to do so, outside the territory of India

[1] [1948] 16 ITR 240
(PC) PRIVY COUNCIL Wallace Brothers & Co., Ltd. v.Commissioner of
Income-tax

[1] Article 245(2)
holds that any statute would not be declared invalid on the ground of
extra-territorial operation

–   “nexus with India”, “impact on India”, “effect in India”, “effect on India”, “consequence for India” or “impact on or nexus with India”

any impact(s)on, or effect(s) in, or consequences for, or expected impact(s) on, or effect(s) in, or consequence(s) for : (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of or security of inhabitants of India, and Indians in general, that arise on account of aspects or causes.

The Court finally held that the Parliament is certainly restricted from enacting laws with respect to extra-territorial aspects or causes which are not expected to have any direct or indirect tangible / intangible impact to the territory of India. The Court had also strongly refuted the reliance on Article 245(2) and distinguished extra-territorial ‘applicability’ from extra-territorial ‘operation’ of law.

2.    Territorial Aspects Theory

Furthering the point of the Court, we may now dissect the law to identify the ‘aspects’ the IGST law adopted in its structure:
•    Supply of Goods or services
•    Location of supplier
•    Place of supply which is inter-dependent on certain elements of a transaction
•    Location of recipient

In applying the territorial aspect theory, it may be fruitful to understand the conceptual role of each of these aspects in the GST law and look for clues which lead to a reasonable answer on the territorial nexus:

a)    Scope of Supply (Section 7 of CGST law) – while this is popularly referred as the definition of supply or as the ‘taxable event’, the placement and the verbiage do not clearly suggest so. In fact, the specific inclusion of ‘import of services’ within the scope perhaps may provide an indication that this provision also somewhere examines the situs.

b)    Location of Supplier (Section 8 and 9 of IGST Law) – this phrase assists in deciding the location of the supplier of goods or services. It plays a role in deciding the character of the transaction (inter-state or intra-state). Generally speaking, it is the supplier who is the taxable person in GST and the jurisdiction exercised by Central & State authorities is based on his location.

    While the location of supplier of goods has not been defined, the location of supplier of services has been defined. The definition states the location would generally be the place for which registration has been obtained. As it is defined, place of business refers to a physical and sufficiently permanent structures for which registration is obtained. It also states that where a service has been rendered from a fixed establishment, the said fixed establishment would be termed as the location of supplier. In case of such multiple  establishments, the establishment most concerned may be considered as the location. In the absence of any such location, the usual place of residence of the supplier. In effect, the said concept fixes the situs of the ‘from’ location of a supply of goods or services. It identifies the origination of a supply which is relevant for the purpose of collection of taxes.

c)    Place of Supply (Section 10-13 of IGST Law) – Place of supply represents the place of consumption (place of supply is a misnomer). In the context of goods, the IGST law is guided by the destination of goods to ascertain the place of supply except in stray cases where a destination cannot be pointed to a particular location (such as supply of goods on board a conveyance). Services, being an intangible activity cannot be fixed to a destination; but being an economic activity, it is generally presumed that the location of the recipient is its place of consumption (except for transaction where consumption can be clearly tagged to a location say immovable property services, etc.). Even in the context of cross border transactions, goods and services are generally considered as consumed at their destination or location of recipient of registered person.

    The Place of supply is also a proxy for the State which would be entitled to the SGST component of the revenue in terms of the Apportionment and Settlement Provisions of IGST Law (Section 17(2)(2) of IGST Law). This is significant from two counts (a) it enables transfer of GST revenue to the State of consumption; (b) enables the State to maintain the value added tax chain (in B2B transactions). Therefore, the place of supply determines the place of consumption (as per law) and the geography which is entitled to the revenue on account of its consumption. It is on this principle that exports are zero-rated as the place of consumption is said to occur outside India. Similarly, imports are taxed under reverse charge provisions on the basis that the place of consumption is in India. The IGST has pivoted on the place of supply for identification of consumption and assigning the revenues to the jurisdiction in which the consumption has taken place.

d)    Location of Recipient (Section 2(14) of IGST Law) – This aspect of a supply transaction is primarily inter-twined into the place of supply provisions for services. It is generally assumed internationally that services are consumed at the location where the recipient is located and registered. Where the services are consumed at an establishment elsewhere, the location of such establishment would be considered as the place of consumption. The location of recipient enables the law makers to fix the place of consumption of services.

GST is a fiscal law aimed at garnering revenues for a State. Among the four aspects stated above, it appears that the Place of Supply (i.e. consumption) assumes significant importance in the scheme of things. Though the place of the supplier is the point of ‘collection’ of taxes from the taxable person, it ultimately narrows down to the place of supply of every transaction. Even if a supplier state has collected taxes, it cannot retain this revenue and would have to transfer it to the account of the state where the ultimately consumption takes place. In the context of services, the State in which the recipient is located which would be entitled to revenue on this transaction.

Even placing an eye on export of goods and services, one gets a view that destination of such activity drives the benefits of zero-rating. In the context of import of services, the law makers through a provision of reverse charge directed the State of consumption itself to collect and retain the tax on such transactions.

In order to further cement one’s view on this proposition (having ramifications on cross border trade and commerce), it may be useful to extract further clues from the law on this front:
•    Proviso to section 5 of the IGST law carves out an exception from applicability of IGST law on imported goods until they cross the custom borders for home consumption. Therefore, even if goods arrive at the customs port for purpose of transhipment to another country, the IGST law refrains from taxing such transactions on the destination principle. Circular No. 33/2017-Cus dt. 01.08.2017 clarifies in the context of High seas transactions that only the last buyer of the chain would be required to pay IGST.
•    One may also test an out and out transaction from a State territory perspective and possibly extrapolate this to the Central law to examine international territorial aspects. Say A stationed in Mumbai buys goods from Madhya Pradesh and asks the transporter in Madhya Pradesh to directly deliver the same to a customer in Gujarat. Even-though the dealer is located in Maharashtra, the law makers have excluded this transaction from the purview of MH-GST and brought the same under the IGST law. Looking at it from a MH GST perspective (also see Article 286), this transaction would be an ‘outside State’ transaction for Maharashtra inspite of the supplier being located in Maharashtra. The limited point which emerges is that the location of the supplier is not a conclusive aspect for territorial nexus. Applying this at an international scenario, IGST law should also not tax goods movement from China to Singapore merely because the supplier is located in India. Now it seems simple for goods, it becomes slightly more complex for merchanting services in the absence of a physical trail of events.
•    While the law has placed dependence on the location of the supplier and recipient to identify the trail, in which case, it may be considered as import of services coupled with export of services, in cases where the services can be demonstrated to have been supplied outside India and consumed outside India, can these proxies result in a tax liability or will it amount to an extra-territorial jurisdiction?.
•    Under the IGST law, there is a residual clause (section 7(5)(c)) which deems a transaction as an inter-state transaction if it is neither classified as intra-state nor inter-state. Importantly, the clause uses the phrase ‘in the taxable territory’ implying that some aspect of the transaction (specifically the place of supply) should take place in the taxable territory for the law to apply. Simple example could be of services being delivered to off shore structures in the exclusive economic zone which would be termed as inter state supply on this count since the place of consumption is attached to the structure located therein.
•    In the context of cross border transactions (incl. tax on United Nation Organisations, and similar institutions), emphasis has been to tax the inward supply into India in the hands of the recipient. Inward supply refers to ‘receipt of goods or services’. Unless the goods or services are strictly received by the recipient of such supply, the transactions cannot be taxed in India.

In summary, among all the aspects of a transaction, is seems evident that the place of supply drives the taxability and among all aspects, the legislature intends tax on only transactions where the place of supply is in India. The location of the supplier though important in law for operation of law, it is only for the limited purpose of collection of tax. A transaction can be considered as extra-territorial if the place of supply is outside its fiscal limits.

3.    Meaning of India

“India” has been defined in section 2(56) of the CGST Act (reference from Section 2(24) of the IGST Act) to mean the territory of India as referred to in Article 1 of the Constitution, its territorial waters, seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976) (Maritime Zones Act) , and the air space above its territory and territorial waters .

As per Article 1 of the Indian Constitution, India is defined as a Union of the territories of the State and Union Territories specified in the First Schedule of the said constitution. India exercises sovereign rights over this land mass. International UN convention  has laid down principles for defining the territorial jurisdiction over international waters extending beyond the land mass of coastal States. Part V of the said convention (specifically article 57 and 60) specifically grant India exclusive jurisdiction in matters of customs, fiscal, health, safety, etc over the artificial islands, installation / structures for explorative and research activities in such zone. In line with the international UN Conventions, the aforesaid Act was legislated in 1976 giving India specific powers over these Maritime zones.

Section 7 of the Maritime Zones Act grants powers to India to exercise sovereign rights over the exclusive economic in line with the rights and limitations under the UN convention. Sub-section (7) grants powers to the Central Government to notify any enactment to extend over this territory and the area would be considered as part of India under the enactment.

A question arises on whether the Central Government has to necessarily issue a notification under the IGST law for it extend to the exclusive economic zone (similar to the Customs Act) or is the definition of India spreading its wings over to such maritime zones itself sufficient. Section 7 and 8 of the Maritime Zones Act, 1976 empowered India to exercise exclusive rights for specific purposes enlisted therein (such as exploration, research, etc). Sub-clause (6) of the said sections grant powers to the Central Government to extend any enactment for the time being in force to such maritime zones. The Customs Act 1962, Excise Act 1944 contained respective notifications extending itself to the said zones. However, the Central Sales Tax Act, 1956 (CST) did not contain such notifications on this aspect. A challenge was made in the Gujarat High Court on the applicability of CST on transactions which were moved to the off-shore rigs in the exclusive economic zone. The High Court in Larsen & Toubro vs. Union of India (2011) 45 VST 361 (Guj) struck down the imposition on the ground that no such notification has been issued under the CST law and the enactment cannot extend to such areas until such effect is given. In the context of service tax, the Bombay High Court in Greatship (India) Ltd. vs. CST, Mumbai 2015 (39) S.T.R. 754 (Bom.) was interpreting a subsequent notification which enlarged a preceding notification with respect to the exclusive economic zone. Since the preceding notification was limited to services rendered to off-shore rigs, services by off-shore rigs was held as not taxable. The Court stated that the subsequent notification both services to or by off-shore rigs or vessels cannot be read as clarificatory.

However, it may be noted that the above propositions held good in the context of the specific laws. It can be argued that no such notification is required under the CGST/ IGST law for the Act to apply to such maritime zones on account of the following reasons:

•    The Parliament has itself defined the extent of India’s area in the enactment to spread to such maritime zones, which power it derives under Article 297(3) of the Constitution
•    The Central Government has been empowered to extend an enactment for the law which is in force at the time of enactment of the Maritime Zones Act, for obvious reasons to avoid a legislative amendment to laws prevailing at that time. Subsequent enactments which itself covers such areas need not depend on a notification for its applicability
•    The Customs law had a restricted meaning to ‘India’ to its territorial waters and hence warranted such a notification. However, the IGST law itself expands its definition to such maritime zones. When Act itself has defined India, it need not seek any support from a delegated legislation to give effect unless the enactment states so.
•    The Maritime Zones Act and the UNCLOS itself state that India can exercise ‘sovereign rights’ for specific purposes which also includes in itself taxation rights provided it is limited to the specific purposes.

Therefore, the decision of the Gujarat High Court in Larsen & Toubro’s case can be distinguished in the context of the GST Law.

4.    Applicability of the above Concepts

We would apply the above concepts in a merchanting trade transaction. Assuming the IGST law has to be applied on A located in Maharashtra (India), certain variants have been tabulated and the possible views have been provided:

[3] The said Act was
legislated drawing powers from Article 297 of the Indian Constitution which
stated inter-alia that all resources of exclusive economic zone vest with the
Union of India

[4] Geneva Conventions
on Territorial Sea and Contiguous Zone, Continental Shelf and High Sea, and the
United Nations Conventions on the Law of the Sea (UNCLOS) which was adopted on
29 April 1958 and 10 December 1982

Note – CBEC Circular 46/2017-Cus has taken a contradictory stance while clarifying the taxability of Bond to Bond Transfers.

In short, the said Circular states that sales while the goods are under bonding are subject to IGST in the hands of the seller in terms of section 7(2) read with section 20 on the entire sale price. Further, the customs duty applicable on import transaction would be payable at the time of ex-bonding of goods for home consumption. The circular is incorrect in its interpretation on account of the following:

•    The circular failed to appreciate the presence of proviso to section 5(1) of the IGST law which excludes the applicability of GST until clearance of home consumption of such goods
•    It has also lost sight of its preceding Circular No. 11/2010-Cus., dated 3-6-2010 which categorically states that the levy of custom duty is fixed at the time of import and filing of the into-bond bill of entry and deferred until ex-bonding of such goods.

Incidentally, the Finance Bill, 2018 has proposed an amendment to the Customs Tariff Act, 1975 which requires that additional customs duty (in the form of IGST) in case of bonded goods would be calculated on the last transaction value of such goods prior to de-bonding (ie purchase consideration of the last buyer). Use of last transaction value as the basis of collection of IGST, by implication, affirms the stand that only the last buyer of the chain is liable to pay IGST. The law does not intend to tax the intermediate transactions under the IGST law. It is a case of deferment of payment of tax until clearance of such goods for home consumption.

5.    Implications from this conclusion

It should be appreciated that the IGST model is a novel idea for implementation of GST. Many federations across the globe have struggled to implement a hybrid model. India has taken the bold step of implementing such a model in the form of a IGST law. The Centre is given more importance in this scheme. It would receive its share of revenue (CGST component) one way or the other. The tussle would be on the SGST component wherein each State may claim to be the Consumption State and extract a share of the IGST revenue. While the industry would hope that it is not transported back to the pre-CST period, certain pockets of the IGST law would require intervention of the Courts, else the tax payer would be sandwiched in this tussle for tax revenue. Other detailed aspects of the law would be examined in a subsequent article. _