Welcome GST IGST and Place of Supply Rules

1.1. Goods and Service Tax (“GST”) is a landmark indirect tax reform knocking at our doors. The Constitution Amendment Bill has been assented recently paving the way for introduction of dual GST to replace a plethora of indirect taxes. In June 2016, the Government had released a set of model GST laws for public comments, thereby reinforcing its commitment to introduce GST at the earliest opportune time. The Finance Minister has indicated his willingness to implement this landmark reform with effect from 01.04.2017.

1.2. Under the proposed dual GST Model, both the Central and the State Governments would levy Central GST (“CGST”) and State GST (“SGST”) respectively on the same comprehensive base of all supplies.

1.3. Since the State Governments would also have jurisdiction to levy tax on supplies, the need for addressing issues related to interstate supplies arises. As an integral part of the design, GST is proposed to be a destination based consumption tax and therefore in case of interstate supplies, the tax on the interstate supply must accrue to the Destination State. This would also enable seamless flow of credit in case of interstate supplies for business purposes.

1.4. Extending the principle of destination based consumption tax, supplies imported into the country would attract GST whereas supplies exported from the country need to be zero rated (i.e. not liable for payment of GST with unfettered input credit).

1.5. To enable a smooth implementation of the above propositions and to avoid conflicts of differing interpretations, the powers to enact provisions relating to inter-state supplies rests with the Centre. Accordingly, interstate supplies, imports and exports are to be governed by an Integrated GST (“IGST”) Law. The IGST rate is proposed to be determined by considering the CGST and SGST Rates. Effectively, in IGST, there would be two components i.e. CGST and SGST, out of which, the portion of CGST will be held by the Central Government and the portion of SGST will be transferred to the destination State Government. Thus, for IGST, the Central Government will work as a clearing house for the States where consumption takes place. IGST will also enable smooth flow of credits between the origin and the destination States by permitting cross utilisation of credits.

1.6. The spirit of GST being a tax on consumption and not a tax on business is achieved through the process of granting seamless credits. Accordingly, for transactions between businesses, essentially the tax charged by the supplying business is automatically eligible for credit to the receiving business. This basically implies that GST remains a creditable tax and therefore not a cost for any business. Since it is not a cost for any business, it is also not a revenue proposition for any Government (either Central or any of the State Governments)

1.7. This ‘wash’ nature of the tax across businesses has been an important driving principle in the formulation of the concept of IGST, its’ settlement matrix to the consuming State and the formulation of the Place of Supply Rules.

1.8. Therefore, to the extent that the inter-state supply is for a creditable purpose at the recipient’s end, the IGST payment stays in the common pool with the Central Government. It is only when the inter-state supply is not for a creditable purpose at the recipient’s end, the settlement provisions and allocation of the tax to the Central Government and the consuming State Government takes place. Similarly, the general rule for the place of supply of services and many of the specific rules determine the place of supply to be the location of the address of the registered person.

2. Levy

2.1. Section 7(1) of the CGST/SGST Act prescribes the levy under the respective enactments as under:

There shall be levied a tax called the Central/State Goods and Services Tax (CGST/SGST) on all intra-State supplies of goods and/or services at the rate specified in the Schedule . . . to this Act and collected in such manner as may be prescribed.

2.2. Similarly, Section 4(1) of the IGST Act prescribes the levy as under:

There shall be levied a tax called the Integrated Goods and Services Tax on all supplies of goods and/or services made in the course of inter-State trade or commerce at the rate specified in the Schedule to this Act and collected in such manner as may be prescribed.

2.3. From the above provisions, it is very clear that the levy under either of the enactments is dependent on the classification of the supply as either an intra-State Supply or an Inter-State Supply.  The principles to determine whether a supply is an intra-state supply or an inter-state supply are provided under Sections 3 and 3A of the IGST Act.

2.4. Section 3 of the IGST Act states as under:

(1) Subject to the provisions of section 5, supply of goods in the course of inter-State trade or commerce means any supply where the location of the supplier and the place of supply are in different States.

(2) Subject to the provisions of section 6, supply of services in the course of inter-State trade or commerce means any supply where the location of the supplier and the place of supply are in different States.

2.5. Similarly, Section 3A of the IGST Act states as under

(1) Subject to the provisions of section 5, intra-state supply of goods means any supply where the location of the supplier and the place of supply are in the same State.

(2) Subject to the provisions of section 6, intra-state supply of services means any supply where the location of the supplier and the place of supply are in the same State.

2.6. Based on the above provisions, it is evident that the anchor point for determining whether a supply is an intra-state supply or an interstate supply is dependent on the location of the supplier and the place of supply. If the location of supplier and the place of supply is in the same State, it is to be treated as intra-state Sale and therefore liable for a combination of CGST and SGST whereas if the location of supplier and the place of supply are in different States, then the supply has to be treated as inter-state supply and liable for IGST

2.7. It may be noted that though the CGST as well as the IGST Acts apply to the whole of India, the levies under both the laws are anchored on the aspect of the “State”. Therefore, there would be challenges in interpretation of the place of supplies in case of territories which are not a part of any State (though a part of India). For example, it may be difficult to consider supplies to the extended continental Shelf either as intra-state or inter-state. It may however be noted that the definition of States includes Union Territories with Legislature (For example, Delhi and Puducherry)

3. Place of Supply for Goods

3.1. Section 5 of the IGST Act defines the place of supply of goods. The said provisions are fundamentally different from the current provisions since they are based on the destination principle rather than the origin principle.

3.2. The following table summarizes the place of supply of goods as defined under the GST Act and under the IGST Act:

Where the supply involves movement of goods, whether by the supplier or the recipient or by any other person, the place of supply of goods shall be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient.

3.4. The above prescription is based on ‘supply involving movement of goods’ and not ‘supply causing movement of goods’. Further, the anchor point is the location where the movement of goods terminates for delivery to the recipient and not a generic termination of movement of goods. This can present some challenges in taxation of supplies on Ex-Works principle

3.5. Under the current provisions of the Central Sales Tax Act, 1956, if a transaction causes a movement of goods from one State to another, it is considered as an inter-state supply even if the said transaction per se does not involve the movement of goods. Therefore, Ex-Works Sales are treated as inter-state sales if the supplier is able to establish an inextricable nexus of the delivery at the factory gate, with a subsequent movement of the said goods by the buyer to another State. However, since the model GST law determines the place of supply on the basis of location at which the goods are delivered to the receiver, it is possible that the place of supply of such ex-works sales shall be considered as the factory gate itself.

3.6. Section 5(2A) of the IGST Act deals with the place of supply of goods in cases where three persons are involved in the supply. The rule states as under:

Where the goods are delivered by the supplier to a recipient or any other person, on the direction of a third person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to the goods or otherwise, it shall be deemed that the said third person has received the goods and the place of supply of such goods shall be the principal place of business of such person.

3.7. The above provision will cover various situations. A very commonplace situation is that of direct delivery of goods to a third person under instructions of the buyer. This is commonly referred to as the “Bill To”/ “Ship To” Model. For example, if A in Mumbai places an order to B in Gujarat and tells him to directly deliver the goods to C in Karnataka, there would be two supplies involved, supply by B to A and another supply by A to C. The supply by B to A will be governed under Section 5(2A) and the place of supply will be Maharashtra (principal place of business of A). B in Gujarat will charge IGST to A in Maharashtra. Further, the second supply by A to C will be governed by Section 5(2) and the place of supply will be Karnataka (place where the goods are finally delivered). A in Maharashtra will charge IGST to C in Karnataka and claim the corresponding credit of the tax charged to him by B in Gujarat.

3.8. Section 5(2A) will also cover various other situations like sale in transit, sale in bonded warehouse, high seas sales, etc.

3.9. However, in situations where the supply does not involve movement of goods, whether by the supplier or the recipient, the place of supply shall be the location of such goods at the time of the delivery to the recipient. This is specifically provided under Section 5(3)

3.10. Section 5(4) provides that where the goods are assembled or installed at site, the place of supply shall be the place of such installation or assembly. Under the current tax regime, we have issues in determination of situs of sale in case of composite works contracts. The Originating States demand a tax based on the theory of inextricable link between the movement of goods from their State and the final accretion at the Site. The Destination States also demand a tax if there is some intermediary processing or fabrication prior to the final accretion at the Site. Further, in most of the cases, taxes are deducted in the Destination State. The proposed Section 5(4) brings to rest these controversies and associated cash flow issues and is therefore a welcome change.

3.11. Section 5(5) states that where the goods are supplied on board a conveyance, such as a vessel, an aircraft, a train or a motor vehicle, the place of supply shall be the location at which such goods are taken on board

3.12. The above provision applies only in cases where the supply is made on board a conveyance and not to cases where the supplier supplies to the owner/representative of the conveyance when the conveyance is not in motion.

3.13. Consider the example of a person (X) who sells food to an airline and delivers the same to the crew of the aircraft at the loading point, such that the airline thereafter sells to the passengers during the flight. The supply of food by X to the airline would not be governed by Section 5(5) but will be governed by Section 5(2). However, the subsequent sale by the airline to the passenger will be governed by Section 5(5).

4. Place of Supply for Services – Objectives and Relevance

4.1. As stated earlier, the concept of IGST serves multiple objectives. Since the services are essentially intangible in nature, the place of supply rules for services are drafted considering these objectives in mind.

4.2. Some extracts from the Education Guide at the time of introduction of the negative list based taxation of services are very relevant and hence are reproduced below

The essence of indirect taxation is that a service should be taxed in the jurisdiction of its consumption. In terms of this principle, exports are not charged to tax, as the consumption is elsewhere, and services are taxed on their importation into the taxable territory. However, this determination is not easy. Services could be provided by a person located at one location, actually performed at another while being delivered to a person located at a third location, and occasionally actually consumed at a third location or over a larger geographical territory, falling in more than one taxable jurisdiction.

As a result it is necessary to lay down rules determining the exact place of provision, while ensuring a certain level of harmonization with international practices in order to avoid both the double taxation as well as double non-taxation of services.

It is also a common practice to largely tax services provided by business to other business entities, based on the location of the customers and other services from business to consumers based on the location of the service provider. Since the determination in terms of above principle is not easy, or sometimes not practicable, nearest proxies are adopted to provide specificity in the interpretation as well as application of the law.

4.3. Further to the above objectives, the place of supply rules under IGST also need to deal with situations of supplies amongst two or more States, where also the guiding principle is ensuring a seamless flow of credits amongst businesses and transfer of tax to the correct State of Consumption.

5. Place of Supply for Services – General Principle

5.1. Section 6 defines the place of supply of services. The general rules in relation to services arereproduced below

Section 6(2) (IGST)

The place of supply of services, except the services specified in sub-sections (4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14) and (15), made to a registered person shall be the location of such person.

Section 6(3) (IGST)

The place of supply of services, except the services specified in sub-sections (4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14) and (15), made to any person other than a registered person shall be

   (i) the location of the recipient where the address on record exists, and

   (ii) the location of the supplier of services in other cases

5.2. The above provisions are tabulated below for ready reference:

5.3. The above rulesare subject to various exceptions, which are explained later.

5.4. Section 6(2) deals with cases where the supply is between two businesses. In that case, the place of supply is defined to be the location of the service receiver. For example, if a consultant located in Maharashtra provides a consultancy service to a client who is registered in the State of Gujarat, the place of supply will be considered as Gujarat and the consultant will charge IGST to the client. Since the client is registered in Gujarat, he would be eligible to claim the credit of this IGST in the State of Gujarat and therefore, essentially, the tax is not a cost to either of the parties and is not a revenue for any of the Governments.

5.5. It may be noted that the rule does not require any further analysis on what is the end purpose of the consultancy or who is the beneficiary of the consultancy service. For example, the consultant could have provided an advice on whether the client should set up a base in Maharashtra and also advised on various laws which might be applicable to him if the client sets up the base in Maharashtra. In another situation, the service may be connected with due diligence review of a target company located in Maharashtra (to help the acquiring company located in Gujarat take a decision on acquisition or otherwise). These underlying activities may be performed in Maharashtra. The perceived benefits may accrue in the territory of Maharashtra. However, these factors will be irrelevant in the determination of the place of supply of service. The place of supply of service will be determined by the general rule which is the location of the service recipient.

5.6. Under the current service tax regime, there have been disputes on this aspect (in the context of cross border transactions) and Courts have time and again laid down a few principles. The first principle is that the recipient of service will have to be determined based on the contractual obligation and not based on the ultimate beneficiary. The second principle is that actual performance of an activity cannot determine the location of the recipient of service. Useful reference may be made to the cases of Paul Merchants Ltd. [2013 (29) S.T.R. 257 (Tribunal)], Microsoft Corporation (I) Pvt. Ltd. 2014 (36) S.T.R. 766 (Tribunal), Vodafone India Limited [2015 (37) STR 286 (Tri – Mum)], British Airways [2014 (36) S.T.R. 598 (Tri. – Del.)], Jet Airways Ltd. [2014 (36) S.T.R. 290 (Tri. – Mumbai)], Infosys Ltd. [2015 (37) S.T.R. 862 (Tri. – Bang.)], Tech Mahindra Ltd. [2014 (36) S.T.R. 241 (Bom.)], etc.

5.7. In fact, the definition of recipient of service provided under Section 2(80) of the CGST/SGST Acts also strengthens the above line of thought. The said section defines the recipient of service as the person who is liable to pay the consideration.

5.8. Section 6(3) deals with situations where the service recipient is not a registered person. Here also, the primary emphasis is on the address on record in the books of the supplier. Therefore, in all cases where the supplier has the customer’s address on record, the place of supply is determined to be the location of the recipient. However, if the supplier does not have the address on record, the location of the supplier will determine the place of supply of service.

5.9. The multiple objectives of enacting the place of supply rules highlighted earlier are clearly satisfied when one reads the general rule of place of supply of services. The same is explained in the table below:

6.2. The following table provides an exhaustive list of exceptions to the general rule:

· Exceptions where the Source Principle is in full play (Example, immoveable property related services) – “Pure Source Principle”

· Exceptions where the Source Principle is in play only for unregistered persons (example, passenger/goods transportation services), whereas the destination principle applies for registered persons – “Hybrid Principle”

6.4. The underlying themes and objectives of these two baskets are analysed in detail in subsequent paragraphs.

7. Place of Supply for Services –Pure Source Principle

7.1. The following are important examples of services which would get classified under this principle

· Services in relation to Immovable property

· Hotels , Mandap-keeper services

· Restaurant, catering, personal grooming, fitness, beauty treatment, health services, cosmetic and plastic surgery

· Services in relation to admission to an event

· Services supplied  on board of a conveyance

7.2. While there are specific tests for each of these examples, the underlying theme is to enforce Source State Taxation. This impacts the objectives which were laid down for the general place of supply rule. The same is explained through the example of immoveable property where the test is based on the location of immoveable property. Similar principles will apply for other examples listed above as well.

This is tabulated in the table appearing hereafter:

8. Place of Supply for Services –Hybrid Principle

8.1.As stated earlier, this basket of exclusions covers cases where the source principle is in play only for unregistered persons (example, passenger/goods transportation services) whereas the destination principle applies for registered persons.

8.2.The following are important examples of services which would get classified under this principle

· Training and Performance Appraisal

· Organisation of events and ancilliary services including sponsorship

· Transportation of Goods including mail and courier

· Passenger Transportation Services

8.3. The objectives of these tests are two fold – to ensure seamless credit flow amongst registered persons and at the same time enforce the source principle vis-à-vis the Indian territory as a whole. Again, there are specific tests for each of these examples, but the underlying theme is explained through the example of goods transportation where the test is based on the place from where the goods are loaded (only in cases where the customer is not registered). Similar principles will apply for other examples listed above as well

9.1. The concept of IGST and the place of supply rules in respect of inter-state transactions are totally new and unique to the Indian context. While the policy makers have tried their best to keep the rules as simple as possible and also achieve the multifarious objectives embedded therein, there could be many areas where the situation may not have been foreseen by the Government resulting in unintended hardship.

9.2. The determination of the location of the supplier or the recipient in case of entities which are located in multiple States is based on the test of ‘establishment most directly connected with the supply’. The determination of such establishment can be a challenge and may also be subjective to a large extent. However, since the said determination is similarly worded in many jurisdictions, the international jurisprudence in this regard may assist the tax payers and the consultants till the time the judiciary reiterates some fundamental propositions in this regard.  In the interim, it definitely appears that the prescribed model laws represent a good start on the topic.