Month: July

Introduction

In any taxation matter, the classification of any items plays
an important role in determining the quantum of tax payable by the taxable
person. The GST Council has also approved four slabs of rates which are 5%,
12%, 18% and 28%. The different rates have been approved for different products
by the GST Council in their meeting held on 19/05/2017 and 20/05/2017. The
appropriate classification of goods or services will determine the rate of GST
payable.

The Tribunal and Courts have laid down different principles
of classification of goods or services. These principles are very helpful in
classifying the goods and services and accordingly determining the rate of tax.

Principles of Classification

The various principles are summarised below:

(a)
Commercial/Trade Parlance

(b)
Definition given in statute or chapter note/section note etc.

(c)
Description in HSN has persuasive value

(d)
Most specific description to be preferred over general description

(e)
Functional use of the product

(f)
Essential characteristics of goods or service

(g)
Importance of expert opinion and other evidentiary value

(h)
Importance of ISI specification

(i)
Importance of Finance Ministers speech

(j)
Importance of trade notice, circulars etc.

(k)
Chemical examination only provides content and not classification

(l)
Provision of relevant time

(m)
Burden to prove classification on department

(n)
Exemption notification cannot interpret tariff heading or sub heading

(o)
Beneficial classification

(p)
Jurisdiction to decide classification

Each of the above principles are discussed as follows:

a)  Commercial/Trade Parlance

    If meaning of goods/service is not defined
in relevant places in GST Act, then, meaning of the goods/service has to be
judged in the manner understood by the people dealing with it, i.e., the
goods/service should be understood in the commercial sense. This rule has been
consistently applied by various courts to decide the classification of the
product. For example, whether the product should be classified as cosmetic or
medicament shall be judged by the manner in which the people dealing the
product understand.

     The observation of the Supreme Court in
paras 29 & 34 in the case of Dunlop India vs. UOI 1983 (13) ELT 1566
(SC) substantiate this principle. The Supreme Court has observed as follows:

     “29. It is well
established that in interpreting the meaning of words in a taxing statute, the
acceptation of a particular word by the trade and its popular meaning should
commend itself to the authority.”

     “34. We are, however,
unable to accept the submission. It is clear that meanings given to articles in
a fiscal statute must be as people in trade and commerce, conversant with the
subject, generally treat and understand them in the usual course. But once an
article is classified and put under a distinct entry, the basis of the
classification is not open to question. Technical and scientific tests offer
guidance only within limits. Once the articles are in circulation and come to
be described and known in common parlance, we then see no difficulty for statutory
classification under a particular entry.”

     The above Principle of classification has
been followed consistently by the Supreme Court in the following cases:

          
Indian Aluminium Cables Ltd. vs. UOI 1985 (37)

           E.L.T (S.C)

           Collector of Central Excise,
Kanpur vs. Krishna

           Carbon Paper Co.1988 (37) E.L.T
480 (S.C)

     Commissioner vs. Pio Food Pack 1980
(6) ELT 353 (SC)

     Reliance Cellulose Products Ltd.,
Hyderabad vs. Collector of Central Excise, Hyderabad 1997 (93) E.L.T 646
(S.C)

This is the basic principle to determine the classification
of goods or service. Affidavits from persons like customers, distributors,
dealers along with purchase orders from customer, description of product in
invoice raised by supplier, normally substantiate the manner in which the
product is understood in the commercial parlance.

b)  Definition given in statute or chapter
note/section note etc.

     The principle of classification of product
as per trade parlance is not absolute principle. The statute making authority
has the power to define the product in a particular manner. The Hon. Supreme
Court in the case of Akbar Baharuddin vs. Collector of Central Excise, 1990
(47)ELT 161 (SC) has held that tariff entry shall not only be based on trade
parlance and understanding between the person in the trade. The said doctrine
of commercial understanding should be departed where the statute either in the
act or chapter note or in schedule or anywhere else defines the product in a
particular manner. The definition in the statute will take precedence over the
commercial understanding of the product in the trade.

c)  Description in HSN has persuasive value

     Under the General Agreement for Trade and
Tariff, commonly known as GATT agreement, World Trade Organization (WTO) has
been formed.The Customs Coordination Council (CCCN) working under WTO has
published Harmonized System Nomenclature (HSN) which is normally adopted by all
countries who have signed the GATT Agreement for the purpose of classification of
the products for Customs. In India, classification under Central Excise and in
various state VAT is also basedon HSN. The classification made in GST is also
based on HSN. Harmonized System Nomenclature published by CCCN gives a detailed
description of various products which are covered under a particular heading or
sub-heading. The description in HSN is very helpful in deciding the
classification of the product. The Hon. Supreme Court in the case of Wood
Crafts Products Ltd., 1995 (77) ELT 23 (SC) has held that the description
in HSN Explanatory Note has persuasive value.The Supreme Court has observed in
paras 12 and 18 as follows:

     “12. It is significant, as
expressly stated, in the Statement of Objects and Reasons, that the Central
Excise Tariffs are based on the HSN and the internationally accepted
nomenclature was taken into account to “reduce disputes on account of tariff
classification”. Accordingly, for resolving any dispute relating to tariff
classification, a safe guide is the internationally accepted nomenclature
emerging from the HSN. This being the expressly acknowledged basis of the
structure of Central Excise Tariff in the Act and the tariff classification
made therein, in case of any doubt the HSN is a safe guide for ascertaining the
true meaning of any expression used in the Act. The ISI Glossary of Terms has a
different purpose and, therefore, the specific purpose of tariff classification
for which the internationally accepted nomenclature in HSN has been adopted,
for enacting the Central Excise Tariff Act, 1985, must be preferred, in case of
any difference between the meaning of the expression given in the HSN and the
meaning of that term given in the Glossary of Terms of the ISI.

     18. We are of the view that the
Tribunal as well as the High Court fell into the error of overlooking the fact
that the structure of the Central ExciseTariff is based on the internationally
accepted nomenclature found in the HSN and, therefore, any dispute relating to
tariff classification must, as far as possible, be resolved with reference to
the nomenclature indicated by the HSN unless there be an express different
intention indicated by the Central Excise Tariff Act, 1985 itself. The
definition of a term in the ISI Glossary, which has a different purpose, cannot,
in case of a conflict, override the clear indication of the meaning of an
identical expression in the same context in the HSN. In the HSN, block board is
included within the meaning of the expression “similar laminated wood” in the
same context of classification of block board. Since the Central Excise Tariff
Act, 1985 is enacted on the basis and pattern of the HSN, the same expression
used in the Act must, as far as practicable, be construed to have the meaning
which is expressly given to it in the HSN when there is no indication in the
Indian Tariff of a different intention.

The same principle is repeated in the case of Business
Forms Ltd., 2002-142-ELT-18 (SC). Thus, description given in HSN is
very useful indetermining classification of the product.

d)  Most specific description to be preferred over
general description

     It is a general principle of classification
that most specific description shall be preferred over a more general
description. The judgements laying down the principle that most specific shall
be preferred to general in the matter of classification are discussed below:

     In
the case of Dunlop India Ltd. vs. Union of India 1983 (13) ELT1566 in
para 37, the Supreme Court has observed ‘when an article has by all standard
a reasonable claim to be classified under an enumerated item in the Tariff
Schedule, it will be against the very principle of classification to deny it
the parentage and consign it to the orphanage of the residuary clause.’

      In the case of Moorco (India) Ltd. vs. CCE
(supra), the Supreme Court has observed ‘in either situation, the
classification which is most specific has to be preferred over the one which is
not specific or is general in nature. In other words, between the two competing
entries one nearer to the description should be preferred. Where the class of
goods manufactured by the assessee falls, say, in more than one heading, of
which one may be specific, other more specific, 3^rd most specific
and 4^th general, the rule requires the authorities to classify the
goods in the heading which gives most specific description.’

e)  Functional use of the product

     Functional use of the product can certainly
be one of the factors in determining the classification, but cannot be the sole
criteria for determining the classification. Normally use of the product is not
relevant as the product is required to be classified in the condition in which
it is supplied. However, sometimes, tariff heading itself provides the use of
the product. In such a case, the ultimate use of the product is very important
for classifying the product. For example, entry No. 2309 in Central Excise
Tariff Act is “preparation of a kind used in animal feeding”. It is evident
from the description itself that preparation shall be used in animal feeding.
Where the description itself specifies the use of the product, classification
will be based on the ultimate use of the product. The Hon. Supreme Court in the
case of Atul Glass Industries vs. Collector of Central Excise, 1986 (25)
ELT 473 has held that in such a case, the goods are to be classified on the
basis of their primary function.

f)   Essential characteristics

     The product is purchased and sold due to
its essential characteristics. The principles for determining the essential
characteristics are –

     (a) Cost of components of the
product.

     (b) Functionality of the product.

     These are discussed below:

     (i) 
Cost of components of the product—

     The Hon’ble Supreme Court in the case of Xerox
India Ltd. vs. Cenvat Credit 2010 (260) ELT 161 has determined the
classification of multifunctional printing machines on this basis. The assessee
claimed classification under Chapter heading 8479.89 whereas the revenue
claimed classification under Chapter heading 8471.60. The machine performs
various functions of printer, fax, copier and scanner. The court observed that
printing function emerges as principal function and gives the machine its
essential character. In arriving at the principal function, the court held
that, in case of product Xerox Regal 5799, 85% of its total parts and
components and manufacturing cost is allocated to printing. Similarly, in case
of product Xerox XD 155df model, 74% of the parts and components along with
cost are allocated to printing. Similar principle of determining the essential
characteristic based on cost has been laid down in various other judgments.
Therefore, this is one of the criteria which can be applied for the purpose of
determining the essential characteristic.

     (ii) 
Functionality of the product—

     In the case of CCE, Hyderabad vs.
Bakelite Hylam Ltd. 1997 (91) ELT13 (SC) the issue was regarding
classification of decorative laminate sheet where paper constituted 60% to 70%
of the total weight and other input was plastic which constituted 30% to 40% of
the total weight. The Hon’ble Supreme Court in para 25, reproduced below, held
that the essential characteristic is given by plastic. The quality of plastic
like rigidity, strength, resistance to heat provide essential characteristic to
the product. Therefore, the product merits classification as plastic.

     “25. Rule 1 does not help to
classify the goods in the present case because Note 1(f) in Chapter 48 is not
applicable to these goods. The other relevant rule of interpretation is Rule
3(b) which provides that mixtures or composite goods consisting of different
materials which cannot be classified with reference to Rule 3(a) as in the
present case, are to be classified as if they consisted of the material or
component which gives them their essential character. In the present case, the
essential character of a decorative laminated sheet is its rigidity or strength
and its resistance to heat and moisture. These are essentially characteristics
which are imparted by resins. Paper does not possess any of these
characteristics.Therefore, applying Rule 3(b) and going by the essential
characteristicsof such laminated sheets, these goods are more appropriately
classifiable under Chapter 39.”

     Thus, in determining the essential
characteristics,   the above two factors
can be considered as guidelines. 

g)  Importance of expert opinion and other
evidentiary value

     Very often, when there is dispute regarding
nature of goods, it will be advisable for the authorities as well as the
taxable person to obtain opinion from technical experts or person dealing in
the goods to know the true character of the goods. It has been consistently
held that expert opinion is to be taken to understand the nature of product but
cannot decide the classification of the goods. It has no binding effect, but
only guiding effect on the authorities because ultimately, decision of proper
classification of the product is to be decided by the jurisdictional authority.
The Delhi Tribunal in case of Guest Keen William 1987 (29)ELT 68 has
observed in para 23 as follows:

     23. ……………………We have also
examined Shri Gujral’s argument that the opinion of the expert should be considered.
He cited the case of ‘K. Mohan & Co., Bombay vs. Collector of Customs,
Madras’ reported in ‘1984(15) E.L.T. 430’, and also cited ‘1984 E.C.R. 1086’
and ‘1986 (6) E.C.R. 334’. While we agree that expert opinion should be
considered, we observe that it is the language of the notification and the
facts of the matter whichshould be examined. An expert’s opinion has to be
given due respect but it cannot be the deciding, or binding factor.

     The above judgement has been maintained by
the Supreme Court in case of Guest Keen Williams Ltd. vs. Collector – 1997
(95) E.L.T. A144(S.C)

     It is also held that expert opinion
expressed by specialised institution has to be preferred over the opinion of
individual experts obtained at the instance of the assessee. These expert
opinions are not ignorable particularly if they are given by public
authorities. Opinion of any other persons who have knowledge in the field
regarding the product shall be given due importance for deciding the
classification of the product. The opinion of authorities like Textile
Commissioner, Law Ministry, etc. are to be given due importance for
classification of the product.

h)  Importance of ISI specification

     In many cases, the product is manufactured
as per ISI specification. Sometimes, the taxable person also affixes ISI mark
on the product.The ISI specification certifies the quality of the product and
not the name or character. View of the ISI shall be looked at some amount of
credibility for deciding the classification. It can be used as specialised
material in expert opinion, but other tangible consideration should also weigh
while determining the classification. Therefore, description of product in ISI
has limited value in determining the classification of goods.

i)   Finance Minister’s speech

     In some case, Finance Minister in the
Finance Bill may make certain reference while introducing the changes. Speech
of the Finance Minister represents the manner in which the authorities have
understood the change. Therefore, the speech of the Finance Minister can be
helpful in deciding the classification as held by the Hon. Gujarat High Court
in the case of ECHJAY Industries vs. UOI 1988 (34) ELT 42 (Guj)

j)   Importance of Trade Notice/Circulars, etc.

     Section
168 of GST Act empowers the Board or the Competent Authority of the State
wherever it considers necessary for the purpose of uniformity in implementation
of the Act to issue such orders, instructions or directions to GST Officers as
may deem fit. Similar provisions are contained in section 37B of Central Excise
Act. It has been consistently held that trade notices, tariff advices,
circulars, press notes etc. issued by the authorities are hardly
relevant for the purpose of classification of the product under Central Excise
Act as it cannot override the true meaning or interpretation underlined
statutory provisions. The classification has to be decided by the authorities
based on the description of relevant tariff entry and not on the basis of
tariff advice or instructions or circulars etc.

k)  Report by Chemical Examiner

     Very often, the authorities insist upon
testing of the product in order to determine the true composition of product
and nature of the product. Section 154 of GST Act also provides taking of
samples. It has been consistently held that the role of Chemical Examiner is
only to provide the content of the product or the nature of the product, but
not to decide classification of the product. Mention of classification in the
test report shall be ignored.The Hon. Gujarat High Court in the case of Stadfast
Paper Mills vs. Dr.Kohli, Former Collector of Central Excise, Baroda and
others 1983 (12)ELT 744 (Guj) has held that Chemical Examiner is required to
provide the constituent of different material contained in the article to
substantiate the nature of product. If the report mentions the classification
of product, the same shall be ignored. The relevant Extract of the above
judgment is as follows:

     12………………… Here it should
be recalled that the evidentiary value of the report of the Chemist lies only
in so far as it supplies the data obtained by him through the Chemical
analysis. It is none of the functions of the Chemists to give an opinion as to
whether the goods in question would be covered by a particular item of the
Tariff Schedule.

l)   Provision at the relevant time

     Sometime, the tariff description of the
entry may be amended over a period of time. While classifying the product, the
tariff description of relevant period should only be used for classification.
For example, say, goods are supplied in the month of August 2017. Further
assume there is amendment in the tariff entry in April 2018. The classification
of the product based on tariff description in August 2017 should only be
considered while classification for supplies made in August 2017. Subsequent
amendment will not be relevant for the purpose of deciding the classification.

m) Burden to prove classification is on department

     It has been held under Central Excise Act
that burden to prove is primarily on the excise authorities to establish
whether particular products falls under one tariff heading or another when the
manufacturer has classified the product in a particular tariff heading and the
department intends to classify it in a different heading. The department  must produce enough evidence to substantiate
that the product must classify differently. In other words, the burden of proof
of particular classification is on the department. This burden can be shifted
to the assessee when the classification adopted by him is not totally correct.

n)  Exemption notification cannot interpret the
tariff entry

     Sometimes, the department provides
exemption to a particular product and specifies the tariff entry for that
product. In such cases, the department has been taking plea that the product
should be classified under the heading mentioned in the exemption notification.
It has been consistently held that exemption notification cannot interpret the
tariff entry nor it can provide norms for the purpose of classification. The
classification of product must be decided based on description of tariff entry.
The Hon. Bombay High court in case of Mechanical Packing Industries vs.UOI
1987 (32) ELT 35 (Bom) has observed in para 11 as follows:

11.Secondly,
this is exactly what the Government cannot do by virtue of an exemption
notification. If there has to be any exemption, or classification that
necessarily must be done by the legislature and not by virtue of any power to
issue exemption notification under Rule 8(1) or (2) of the Central Excise
Rules.

o)  Beneficial classification

     It is a well established principle that when
the goods are classified under two different items or said items or ambiguous
sentences leave reasonable doubt about its meaning, then benefit of doubt is
given to the manufacturer and the classification should be adopted which is
beneficial to the manufacturer. This is based on the principle that when the
legislature has not clearly laid down the provisions of law benefit of doubt is
given to the manufacturer. The Hon. Bombay High Court in the case of Garware
Nylons Ltd. vs. UOI 1980 (6) ELT 249 (Guj) has held that the classification
beneficial to the assessee should be adopted.

p)  Jurisdiction to decide classification

     The jurisdiction to decide the
classification is on the jurisdictional officers of the supplier of
goods/service. The classification cannot be decided by the jurisdictional
officer of recipient of goods/service. They have no authority to change the
classification adopted by supplier of goods/service. The Hon. Supreme Court in
the case of Sarvesh Refractories, 2007 (218) ELT 488 (SC) has held that
classification cannot be changed by jurisdictional officer of recipient. The
relevant extract of the above mentioned judgment is as follows:

     6. The finding recorded by the
Tribunal is unexceptionable. We agree with the view taken by the Tribunal that
the appellant could not get the classification of ‘Loadall’ changed to Heading
84.27 from 84.29, as declared by the manufacturer. Insofar as the penalty
imposed by the authority-in-original is concerned, we are of the view that a
case for imposition of penalty is not made out and accordingly the same is set
aside and deleted. Rest of the order of the Tribunal restoring the order of the
authority-in-original is confirmed.

     The taxable person shall apply the above
principles for the purpose of classifying the goods or services.

    Classification of composite supply

     In trade parlance when both the goods or
services are supplied, it is considered as a ‘works contract’.  However, under GST the ‘works contract’ has
been defined in Section 2(119) as follows:

     “119.            “works contract” means a contract for building,
construction, fabrication, completion, erection, installation, fitting out,
improvement, modification, repair, maintenance, renovation, alteration or
commissioning of any immovable property wherein transfer of property in goods
(whether as goods or in some other form) is involved in the execution of such
contract.”

     The definition of ‘works contract’ can be
divided into following two parts:

a)  It should be contract for building,
construction, fabrication, completion, erection, installation, fitting out,
improvement, modification, repair, maintenance, renovation, alteration or
commission;

b)  It should result in an immovable property
wherein transfer of goods is also involved.

     Thus, as a result of provision of supply,
the contract shall result in immovable property. If it does not result in
immovable property, the supply cannot be considered as a supply of ‘works
contract’.

     If the contract of supply involves both
supply of goods or services and does not result in immovable property, the
supply can be considered either as a mixed supply or composite supply. The
‘mixed supply’ and ‘composite supply’ has been defined in section 2(30) and
2(74) of the GST Act which reads as follows:

     30.   “composite
supply” means a supply made by a taxable person to a recipient  consisting of two or more taxable supplies of
goods or services or both, or any combination thereof, which are naturally
bundled and supplied in conjunction with each other in the ordinary course of
business, one of which is a principal supply.”

     Illustration: Where goods are packed, and
transported with insurance, the supply of goods, packing materials, transport
and insurance is a composite supply and supply of goods is a principal supply.”

     74.   “mixed supply” means two or more individual supplies of goods
or services, or any combination thereof, made in conjunction with each other by
a taxable person for a single price where such supply does not constitute a
composite supply.

     Thus, the composite supply will be
classified as a supply of goods or service based on principal supply. Hence in
any composite supply, the principal supply is required to be determined. For
example, a person books a ticket from Mumbai to Delhi in Rajdhani Express. The
railways provide the service of transportation of passengers which is a
principal supply. However, in a train the food is also served and bed rolls are
also provided. These two supplies of food and bed rolls are to make the supply
of transportation of passengers more convenient and comfortable. Therefore, as
per section 2(30) of the GST Act, all the three supplies will be classified as
‘transportation of passengers’ and the tax rate applicable to transportation of
passengers will be payable by the railways.

     However, in many cases, it becomes very
difficult to determine the principal supply in composite supply. The Honourable
Supreme Court has laid down certain principles for determining the essential
character of the product. These principles can be helpful in determining the
principal supply of a product. These principles are:

     a. Cost of components of
the product—

     The Hon’ble Supreme Court in the case of Xerox
India Ltd. vs. CC 2010 (260) ELT 161 has determined the classification of
multi-functional printing machines. The assessee claimed classification under
Chapter heading 8479.89, whereas the revenue claimed classification under
Chapter heading 847160. The machine performs various functions of printer, fax,
copier and scanner. The court observed that printing function emerges as
principal function and gives the machine its essential character.In arriving at
the principal function, the court held that, in case of product XeroxRegal
5799, 85% of its total parts and components and manufacturing cost is allocated
to printing. Similarly, in case of product Xerox XD 155df model, 74% of the
parts and components along with cost are allocated to printing. Similar
principle of determining the essential characteristic based on cost has been
laid down in various other judgements. Therefore, this is one of the criteria
which can be applied for the purpose of determining the essential
characteristic.

     b. Functionality of the product
–

     In the case of CCE, Hyderabad vs.
Bakelite Hylam Ltd. 1997 (91) ELT 13 (SC) the issue was regarding
classification of decorative laminate sheet where paper constituted 60% to 70%
of the total weight and other input was plastic which constituted 30% to 40% of
the total weight. The Hon’ble Supreme Court in para 25, reproduced below, held
that the essential characteristic is given by plastic. The quality of plastic
like rigidity, strength, resistance to heat provide essential characteristic to
product. Therefore, the product merits classification as plastic.

     “25. Rule 1 does not help
to classify the goods in the present case because Note 1(f) in Chapter 48 is
not applicable to these goods. The other relevant rule of interpretation is
Rule 3(b) which provides that mixtures or composite goods consisting of
different materials which cannot be classified with reference to Rule 3(a) as
in the present case, are to be classified as if they consisted of the material
or component which gives them their essential character. In the present case,
the essential character of a decorative laminated sheet is itsrigidity or
strength and its resistance to heat and moisture. These are essentially
characteristics which are imparted by resins. Paper does not possess any of
these characteristics.Therefore, applying Rule 3(b) and going by the essential
characteristics of such laminated sheets, these goods are more appropriately
classifiable under Chapter 39.”

    Thus, in determining the essential
characteristic, the above two factors can be considered as guidelines.

    Thus, the functionality test or the test of
cost of product can be applied for the purpose of determining the principle of
supply.

     This principle can be applied to
comprehensive AMC. In case of comprehensive AMC, the intention of the recipient
is to ensure that the equipments run in a smooth condition, so that the maximum
benefit of the equipment can be derived by the recipient. Therefore, the
supplier of service regularly visits and inspects the equipments. He carries
out the function of cleaning, washing and greasing wherever required for the
equipments. However, wherever requbired, the service provider will also carry
out the replacement of the part which is covered in the contract. There may or
may not be any replacement of any part. Therefore, in this case, applying the
principle of functionality test, the service appears to be predominant and
accordingly the entire contract shall be classified as a service contract
levied to tax rate of 18%. It is quite possible that the part if any which is
replaced in the performance of the contract may attract 28% tax. However, since
it is a composite supply, where service is a principal supply, therefore, the
rate of tax would be 18%.

Conclusion

shailesh.kwebmaker

Introduction

The Goods and Services Tax [“GST”] is a landmark piece of
legislation to be introduced in India. It is a destination based tax on
consumption of goods and services i.e., the tax should accrue to the taxing
authority which has jurisdiction over the place of consumption. For this
purpose, one needs to determine what is popularly known as Place of Supply
[“POS”] i.e. the place where goods or services have been supplied so as to
decide the taxing jurisdiction. ‘Place of Supply of Services’ [“POSoS”]¹
alongwith the ‘Location of Supplier of Service’ [“LS”] would
determine whether the supply is intra-state or inter-state, that are the two
types of supplies in GST but having different GST implications.

_________________________________________________________________________________________________

1   The author while
dealing with the concept of Place of Supply of Service has assumed that the
basic concepts such as supply, dual levy and input tax credit mechanism has
already been explained in other articles. All those concepts are relevant for
study of POS

Types of Supply

Intra-state supply will be the case where the LS and POS
are in the same State. Inter-state Supply would be a case where LS is in
one state and POS is in another state. Since there are other kinds of
Inter-state supply as well, for ease of reference we refer to this Inter-state
supply as Domestic Inter-state supply.

There are four types of Inter-state supplies as envisaged by
section 7 of the Integrated Goods and Services Tax Act, 2017 [“IGST Act”]:

(i)  Domestic Inter-state supply i.e. supply
between two states.

(ii) Cross border supply.

(iii) Supply to or by a

a. SEZ Developer; or

b. SEZ Unit.

(iv) Non Intra-state supply not covered above.

Domestic Inter-state supply is a case where the LS and
POS are:

(i)   in two different States; or

(ii)  in two different Union Territories; or

(iii)  one in a State and another in a Union
Territory.

N.B.: For ease of
reference, while referring to Domestic POSoS in this article, the elucidation
of the provisions will be in respect of (i) above though it would be the same
for (ii) and (iii).

Cross Border supply of service will cover the following
supply of services:

(i)  Import of Services.

(ii) Export of Services.

N.B.: (i) Import of
services and export of services is separately
explained in Annexure 1 attached.

(ii) On a perusal of the said
Annexure 1, it will be noted that in respect of export of services under GST
scenario, the condition of receipt of foreign currency is a must as against the
current Place of Provision of Services Rules, 2012, where the said condition of
receipt of foreign currency is relevant only to the extent of allowance of
input credit in respect of services used for exports but service tax would not
be payable.

Place of Supply of Services [“POSOS”]

The POSoS is the Heart of GST which is very likely
to be subjected to “Attacks” post GST implementation. A proper study of
POSoS may ensure “Bypass” ensuring no need of a “Stent” or a “Stunt”.

As explained in the earlier paragraphs, two factors are
relevant to determine whether the supply is inter-state or intra-state viz. LS
and POSoS. Further, as per the POSoS provisions, the basic
principle is that the place of supply of service shall be the ‘Location of
Recipient of service’ [“LR”]. However, exceptions have been provided in
case of performance based services, immovable property based services, certain
specified services and transportation service etc. where other criteria
such as location of supplier of service, location of performance of service,
location of immovable property etc. are relevant. Thus in effect, there
would be three factors which are relevant in determining whether the
supply is intra-state or inter-state viz. i) LS; ii) LR; and iii)
POSoS. The ‘Location of Supplier of Service’ and ‘Location of
Recipient of Service’ are defined separately in GST based on certain tests.
Of course, these tests will really test the legal acumen of assessee,
department and the judiciary in the years to come. In fact, to locate the LS
or LR would be in many cases a Big Challenge. It is separately being
dealt in Annexure 2 attached so as not to disturb the flow of the article on
the subject under consideration viz. POSoS. However the readers are
advised to carefully read the said Annexure 2 before proceeding further. In
fact. it is MOST IMPORTANT!

Once the LS and LR both are determined, it
would be necessary to determine the POSoS in order to determine whether
the supply is inter-state or intra-state.

Determining the POSoS has always been a challenging
task world over. However, internationally, the POSoS is generally
determined in a cross border transaction i.e. where either the Service provider
or the Service recipient is abroad and the other is in home country. However,
Indian Curry and Indian Laws are always spicy!!! The GST in India has
complicated the entire issue of POSoS by its dual structure [i.e.
Central Tax (“CT”) & State Tax (“ST”)]. Thus, the study of POSoS would
involve:

(i)   Study of Domestic POSoS i.e. where LS
and LR both are in India. [Section 12 of IGST Act]

(ii)  Study of Cross Border POSoS i.e. where
either LS or LR is outside India. [Section 13 of IGST Act]

Keeping in mind the constraints of space in this article [Of
course also the reader’s tolerance level – otherwise there would be a taxable
supply of tolerating an act – Consideration???], I would deal with the Domestic
POSoS which is unique and has raised various challenges and issues. As
regards the Cross border POSoS; they are similar to the existing Place
of Provision of Service Rules, 2012 under the Service tax law, and hence I
shall deal with it very briefly.

Domestic Place of supply of Service [Section 12 of the IGST
Act]

While the catchword is “One nation, One Tax”, The Central
Goods and Services Tax Act, 2017 [“CGST Act”] and The State Goods and Services
Tax Act, 2017 [“SGST Act”] have been so designed that each state is an
independent taxing jurisdiction. Each state has been ring fenced i.e. a
tax paid in one state cannot be adjusted against tax liability of another
state. Further, Inter – unit supply between an unit in one State to an unit in
another State though belonging to the same entity is considered as
supply. The LS and POS will also have far reaching impact on
ultimate cost of goods and services based on the credit availability. Thus, the
study of Domestic POSoS is most crucial to the business.

Section 12(1) of the IGST Act provides for determination of
the Domestic POSoS i.e. where the LS and LR both are in
India. The provisions dealing with Domestic POSoS for different
situations are explained below.

General principle – POSoS is Location of
service recipient [Section 12(2)]

The general or default principle is that the POSoS is
the –

(i)  ‘LR’ if the supply is made to a
recipient registered for GST (i.e. B2B transactions); 

However in case of supply to an unregistered person (i.e. B2C
transactions), the POSoS will be –

(a) ‘LR’ where the recipient’s address is
available in the records of the supplier; and

(b) ‘LS’ in other cases. 

The above general principle would apply unless the
transaction falls within any of the other sub-sections of  Section 12.

POSoS relating to immovable property would be the
location of immoveable property [Section 12(3)].

The POSoS of the following services shall be the place
where the immovable property is located or intended to be located [i.e.
property to come into existence]:

(i)   Services provided directly in relation to
an immovable property e.g. construction, repair, renovation of a building, etc.
Services remotely connected to immovable property would not be covered u/s.
12(3) e.g. real estate feasibility studies or advice on capital gains, etc;

(ii)  services provided by experts e.g. architects,
interior decorators, surveyors, engineers, and other related experts or estate
agents;

(iii)  grant of rights to use immovable property.

(iv) carrying out or co-ordination of construction
work;

(v)  Provision of accommodation in immovable
property for organising marriage or reception or matters related thereto,
official, social, cultural, religious or business function including services
in relation to such function at such property;

(vi) Ancillary services to above 5 services.

POSoS relating to lodging accommodation in immovable
property or boat or vessel would be the location of immovable property or boat
or vessel [Section 12(3)].

The POSoS by way of lodging accommodation in a hotel,
inn, guest house, home stay, club or campsite, by whatever name called, and
including a house boat or any other vessel and ancillary services thereto shall
be the place where the immovable property or boat or vessel is located
or intended to be located [i.e. property to come into existence].

Comments: When a company’s employee based in
Mumbai goes to Delhi for office work, the supply for hotel accommodation would
be an intra-state supply [LS and POSoS fall in Delhi] but the Delhi CT+ST
charged by hotel may not be available as credit to the Mumbai-based company due
to the ring fencing.

N.B. (i) Where
the location of immovable property or boat or vessel is located or intended to
be located outside India the POSoS shall be the ‘LR’ in India. [Proviso to Section
12(3)]

Comments: This is
akin to the existing rule 8 read with rule 5 of the Place of Provision of
Services Rules, 2012 where the place of provision of service is where the ‘LR’
is situated and not where the immovable property is situated.

(ii) Where the
immovable property or house boat or vessel is in more than one State/Union
Territory [“UT”], the supply would be considered to be made in each of
respective State or UT in proportion to value for service separately collected
or determined as per contract / agreement and if there is no contract /
agreement then on such other basis in the manner prescribed.

Comments: It would
involve a laborious exercise to determine the POSoS when the boat wherein the
accommodation services are provided, moves from one state to another state.
Perhaps it would have been better to provide that the POSoS be the place of
commencement of journey by the house boat or vessel.

Performance based services [Sections 12(4) and 12(5)]

Event Based services
[Sections 12(6) and 12(7)]

*Specified Events are
cultural, artistic, sporting, scientific, educational and entertainment event.

Goods Transportation
services [Sections 12(8)]

Comments: This rule would apply to transport by road, rail, air and sea
whether locally or outside India provided the supplier and recipient both are
in India. An important change is that ocean freight for cargo exported for a
shipper in India would be subject to GST though presently ocean freight for
export cargo undertaken for a shipper in India is not liable to service tax in
view of Rule 10 of the Place of Provision of Service Rules, 2012.

Passenger transportation service [Sections
12(9)]

*Return journey to be treated as separate journey

Services provided on board a conveyance [Section 12(10)]

The POSoS on board a conveyance including a vessel, an
aircraft, a train or a motor vehicle, shall be the first scheduled point of departure
of the conveyance on that journey.

Comments: Issues – Can it be said that
supply of packaged Drinking water/packed Biscuit is ‘Supply of goods’ and
Supply of Sandwich/Samosa is ‘Supply of Service’. While POS of Service is first
scheduled point of departure irrespective of where the food/eatables is taken
on the board, the POS of goods is the location at which the goods are taken on
board. Thus it is imperative to decide whether the said supply is supply of
goods or supply of services.

Telecommunication / data
transfer / broadcasting / cable / DTH services [Sections 12(11)]

Banking & Other Financial services (including stock
broking services) [Section 12(12)]

N.B.: The CGST law does not define what is Banking
and Other Financial Services. Does it cover only services provided by banks or
NBFC? What about merchant banking services, asset management services etc.,
which under the existing definition are covered under Banking and Other
Financial Services. The only saving grace is whether it is rule 12(2) [Para
4.3] or 12(12) [Para 4.12] it may not make a significant difference.

Insurance services [Section 12(13)]

N.B.: The policy holder’s address will be
there in Insurance company’s records

Advertisement services to Central / State
Government/Statutory Body/Local Authority/UT for identifiable States [Section
12(14)]

The POSoS for the above services shall be each state
and the value of supply would be proportionate to the amount attributable for
dissemination in each State determined as per contract/agreement or in absence
of contract/agreement on any other basis as maybe prescribed

Cross –border place of supply of services [Section 13 of IGST
Act]

Section 13 of IGST Act provides for determination of the
Cross border POSoS i.e. where the ‘LS’ or ‘LR’ are outside
India [section 13 of IGST Act]. The Cross border POSoS for different
situations envisaged by section 13 are given below:

Notes:

(i)  Performance based services are of two types:

A.  Work upon goods: services supplied
in respect of goods made physically available by service recipient to
the supplier or to any person acting on behalf of the supplier in order to
provide the service e.g. Repairs, Storage and cargo handling. There are two
exceptions.

(a) Remote access – POSoS is Location of
goods at the time of supply of service;

(b) Goods temporarily imported into India for
repair and re-exported subject to the condition that goods not put to use in
India (except for such repair). POSoS under sl. no. 2 would not apply.
Basic principle (sl. No. 1) would apply.

B.  Work upon individuals: Services
supplied to individuals physically present in their personal capacity or on
service recipient’s behalf e.g. beauty treatment, plastic surgery, etc.

(ii) In this case, it would cover supply of
admission to an event as well as organisation of event and services ancillary
thereto. Thus, in case of cross-border supply of event based services, POSoS
is location of event but in case of Domestic POSoS the location of event
is relevant for the services of admission but for organisation of the event,
the POSoS is different as explained in para 4.7.

(iii) Thus, on a reading of sl. No. 5 & 6 above
it appears that if an architect in India provides services for his client’s
immovable property abroad, the POSoS would be outside India. But
however, if he supplies services to the same person for 3 properties – one in
UK, one in Karnataka, and one in Kerala, the POSoS for the entire
consideration would be Kerala and Karnataka.

(iv)
Specified services are:

(a) Services supplied to Account holders by banks,
Financial Institutions, NBFCs ;

(b) Intermediaries

(c) Hiring means of transport [including yachts but
excluding aircrafts & vessels] upto a month.

(v) Person receiving OIDAR services is deemed to be
located in Taxable Territory (TT) –

if any 2 of the following non-contradictory conditions are
satisfied viz.:-

–  location of address presented by service
recipient (SR) via internet is in TT;

–  credit card /debit card/ store value card/
charge card/ smart card/ any other card by which SR settles payment has been
issued in TT;

–  SR’s billing address is in TT;

–  Internet Protocol [IP] address of device used
by SR is in TT;

–  SR’s bank account used for payment maintained
in TT;

–  country code of SIM card used by SR is of TT;

–  location of SR’s fixed land line through
which service is received by person, is in TT.

Challenges

I have dealt with some of the challenges in the
implementation of GST qua POS provisions while elucidating the provisions
to determine Location of supplier of service and Location of recipient of
service in Annexure 2. I have also given my comments on some of the significant
Domestic POSoS provisions.

However as explained in Annexure 2, the Biggest Challenge is
WHO is providing service to WHOM and from WHERE? This will be the most crucial
question to be answered. This will also involve examining whether LS and
LR be – the contracting office or actual performing / receiving office.
There are several situations that may arise when the determination of three
factors viz. LS, LR and POSoS may pose a challenge. Due to
restrictions of space, I take up only 2 case studies.

CASE STUDY 1

In a typical case of contract for renting of offices, say, a
landlord based in Mumbai owns several properties at different places in India
which he has given on rent to various corporates across India. The landlord’s
Principal Place of Business [“PPoB”] is in Mumbai and accordingly, all the
license/rental agreements are entered into by the landlord from his PPoB in Mumbai.
This may be given by way of table.

In the above case, the issue arises whether the landlord has
Place of Business [“PoB”] at all places [i.e. where the properties are
located], since that would decide LS which is one of the important
factors to determine whether the supply is intra-state or inter-state. A view
that could be taken is that the landlord is located only in Mumbai since the
registered PoB is Mumbai and the other locations cannot be considered as Fixed
Establishment [“FE”] since he has no people working in those locations so as to
constitute a FE. The result would be as under;

N.B.: In the last case, the licensee in Hyderabad
may not get the credit of Maharashtra CT + ST due to ring fencing as explained
in Para 4.1 above

CASE STUDY 2

A Partnership firm of 8 CAs specialising in internal audit
based in Mumbai [Head Office (“H.O”)] having branches in the cities of Delhi,
Bangalore and Chennai gets an internal audit assignment from a leading
Mumbai-based IT company who also have branches in the cities of Delhi,
Bangalore and Chennai. The letter of engagement for the assignment comes from
the registered office of the client based in Mumbai addressed to the CA Firm’s
Head Office in Mumbai. But the CA firm does the internal audit of Delhi,
Bangalore and Chennai using its resources at the relevant locations viz.,
Delhi, Bangalore and Chennai. Thus, an issue may arise as to which unit of
CA firm should bill to which unit of client and how much.

The issue in such cases that arises is to determine the LS
or LR, the contracting unit is relevant or performing unit is
relevant.

(i)  Firstly the letter of engagement is given to
the Mumbai CA H.O. from the Mumbai based office of client

(ii) The planning of audit, maintaining client
interface, signing, responsibility and accounta-bility are all from H.O. at
Mumbai.

It is not possible to slice the value attributable to each
location of the supplier or the recipient so as to say that supply comes from
one LS to a specific LR. The best course of action would be to
consider location of contracting party [i.e. Head office of the CA firm] as ‘location
of supplier’ and accordingly the Head Office should bill to the client and
the concerned branches should bill to the Head Office at the appropriate rate
as may be prescribed. Of course this would have to be backed by a Policy
Document / Framework so as to provide –

i)   Only H.O would interact with client.

ii)  The branches provide service to H.O and not to
client – Accountability, service level expectation etc.

iii)  Branches bill H.O at cost plus.

Conclusion

The analysis and the views given above have to be taken by
the reader with a pinch of salt considering that GST is a very new law. GST law
has evolved over the last 6 months with at least 3 versions. It is also still
evolving and almost every day a rule or a clarification is coming out and many
issues are still unfolding. By the time this article reaches you, there could
be some more changes in the rules / notifications. Please note the author is
also evolving and revolving with the GST law. In time both the law and the
author will mature. Till then HAPPY GST (Great Super Time) with GST!!!

Annexure 1

Relevant extract of section 2 of IGST Act:

“2(11)
“import of service” means the supply of any service, where

          (a) the supplier of service is
located outside India,

          (b) the recipient of service is
located in India, and

          (c) the place of supply of service is
in India,

“2(6)
“export of service” means the supply of any service when

          (a) the supplier of service is
located in India,

          (b) the recipient of service is
located outside India,

          (c) the place of supply of service is
outside India,

          (d) the payment for such service has
been received by the supplier of service in convertible foreign exchange, and

          (e) the supplier of service and
recipient of service are not merely establishments of a distinct person in
accordance with explanation 1 of section 8;

N.B.:
In respect of export of services under GST scenario, the condition of
receipt of foreign currency is a must as against the current Place of Provision
of Services Rules, 2012, where the said condition of receipt of foreign
currency is relevant only to the extent of allowance of input credit in respect
of services used for exports, but service tax would not be payable.

Annexure 2

Location of supplier of service and Location of recipient of
services [sections 2(15) and s. 2(14) of the IGST Act]

A2.     Provisions to determine Location of
supplier of service and Location of recipient of service

A2.1   The ‘location of supplier of services’ and
‘location of recipient of services’ are most relevant to determine the
nature of supply – whether intra-state or inter-state. The provisions to
determine the LS and LR are explained below.

A2.2   The ‘location of the supplier of services’
[Section 2(15) of IGST Act] is to be determined by applying the following 4
rules in seriatum

Notes:

1.  Place of business includes –

–   Place from where business ordinarily carried
on and includes warehouse, godown, any other place where goods are stored or
goods/services are provided / received

–   Place where Account books are maintained

–   Place where taxable person engaged in
business through agent

           [Section 2(85) of CGST Act]

2.  “Fixed establishment” means a place (other
than the registered place of a business) which is characterised by a sufficient
degree of permanence and suitable structure in terms of human and technical
resources to supply services or to receive and use services for own needs.
[Section 2(50) of CGST Act]. In a nutshell, three factors are determinative
of a ‘fixed establishment’: (i) a place; (ii) people, (iii) with
a degree of ‘permanence’ [the three PPPs like a three piece suit!].
The definition has almost all the attributes of a PoB. In fact, all FEs would
be a PoB.

3.  ‘usual place of residence’, means –

(a) in case of an individual, the place where he
ordinarily resides;

(b) in other cases, the place where the person is
incorporated or otherwise legally constituted. [Section 2(113) of CGST Act].

A2.3   The ‘location of the recipient of
services’ [Section 2(14) of IGST Act] is to be determined by applying the
following 4 rules in seriatum

A2.4   The following rules apply as to
establishments:

(i)  Establishment outside India and Establishment
in India are treated as separate persons [Clause (i) of Explanation 1 to
Section 8 of IGST Act].

(ii) Establishment in a State/UT² and
Establishment outside that State/UT are treated as separate persons [Clause
(ii) of Explanation 1 to Section 8 of IGST Act]

_______________________________

2  UT
= Union Territory

(iii) A person carrying on business though a
branch, agency or representational office in a territory shall be treated as
having establishment in the territory [Explanation 2 to section 8 of IGST Act].

(iv) Where LS/PoS is in the territorial
waters (12 nautical miles from Indian shores), the LS / PoS would be in
the coastal State/UT where the nearest point of appropriate baseline is located
[Section 9 of IGST Act].

Establishment most directly
concerned in providing/ receiving a supply

A2.5   The rules provide that where services are
supplied / received from more than one establishment, whether Place of Business
or fixed establishment, the PoB/establishment most directly concerned with
the supply / receipt of the service would be relevant. This provision is going
to pose a Big Challenge. There will be several instances where the contract
with the client will be with the Head Office but the Services maybe provided
from the several branches in different states. The client also may have several
offices in different states, which are being serviced by the Service provider. The
issue is what would the LS and LR qua the transaction – the
contracting office or actual performing / receiving office. WHO is providing
service to WHOM and from WHERE? This will be the most crucial question to
be answered. What will be the factors to be taken into account to arrive at a
conclusion. This is an issue which is being pondered world over by all the
nations having GST. But generally, it concerns cross border transactions.
However, in India, it would be relevant for Domestic Inter-State supply also.
Each State may say that the supply is from their state. If it goes into
litigation, the assessee cannot ask the two States to settle between
themselves, but may have to pay the GST in one State and claim refund in
another State if matter goes against him in an adjudicating forum – thus
perhaps leaving the poor assessee in a SORRY STATE.

A2.6   In order to ascertain the ‘establishment
more directly concerned in provision of supply’, the test adopted is to
consider the significance of the activities performed by the establishments in
question and the part they play in their contribution to the service supplied.
[Chinese Channel (Hongkong) Ltd. vs. Commissioners of Customs and Excise
(1998) Simon’s Tax Cases 347 (High Court of Justice – Queens Bench Division,
UK)]. In this context when the present Place of Provision of Services Rules,
2012 was introduced, the CBEC’s Education Guide has given guidance as follows:

        “This will depend on the facts and
supporting documentation, specific to each case. The documentation will include
the following:-

–   the contract(s) between the service
provider and receiver;

–   where there are no written contracts, any
written account (documents, e-mail etc.) between parties which sets out
in detail their understanding of the oral contract;

–   details of how the business fits into any
larger corporate structure;

–   the establishment whose staff is actually
involved in the execution of the job;

–   performance agreements (which may sbe
indicative both of the substance and actual nature of work performed at a
particular establishment).”

shailesh.kwebmaker

Introduction

‘One Nation One Tax’ – The
new system for indirect tax – GST, is now set to commence in India. For quite a
long time it has generated public debate and its shape was eagerly awaited by
all stakeholders. Now the parliament has passed the laws required by the
Centre, and, the States are in the process of doing so. At present, the Central
Goods and Services Tax (CGST), Union Territory Goods & Services Tax Act
(UGST), State Goods and Services Tax (SGST) for many States and Integrated
Goods and Services Tax (IGST) Acts are available.

On going through the
provisions contained in these Acts, it appears that the laws are drafted by
incorporating provisions from different existing Acts, which are being subsumed
in GST like Excise, Service Tax and State VAT etc. Therefore, for the
trading class, some of the provisions are very new and they feel that the
system will be a bit complicated along with too much time-consuming compliance
requirements. However, it is said that any new law has such teething problems,
which may get resolved in the days to come as well as due to steps taken by the
Government to resolve such issues by necessary modifications and clarifications
from time to time. We expect the same, in relation to GST.

Situs of sale

So far as indirect tax on
goods is concerned the basic requirement is to identify the place where tax is
to be discharged.

For sale transactions of
goods, there are various ingredients connected with same like, place of buyer,
place of preparing invoice, place of payment, place of actual despatch, place
of transfer of ownership in goods etc.

In the old days, (prior to
incorporation of Central Sales Tax Act) the States used to levy tax on sale
transaction on the basis of ‘nexus theory’. In other words, taking nexus of any
one ingredient happening in their State, tax was sought to be levied in that
state. A simple example can be that a seller in Maharashtra sells goods to
buyer in Delhi. Maharashtra Government used to levy tax on said sale
transaction in Maharashtra as the seller and the goods were located in their
State. The Delhi Government would try to levy tax on said transaction on the
ground that actual sale i.e. transfer of ownership took place in their State.
Thus on one transaction, more than one State could lay their claim of tax.

This created chaos and
trading community was required to face multi-state tax on one sale
transaction.        

Central Sales Tax Act (CST
Act)

To avoid the above
confusion and unwarranted multi-state levy, the Central Sales Tax Act, 1956 was
enacted. One of the main objects of the Act was to determine place of sale i.e.
situs of sale. Section 4(2) of CST Act reads as under:

“S.4. When is a sale or
purchase of goods said to take place outside a State.—

(1) Subject to the
provisions contained in section 3, when a sale or purchase of goods is
determined in accordance with sub-section (2) to take place inside a State,
such sale or purchase shall be deemed to have taken place outside all other
States.

(2) A sale or purchase of
goods shall be deemed to take place inside a State, if the goods are within the
State –

(a) in the case of specific or ascertained goods, at
the time of the contract of sale is made; and

(b) in the case of unascertained or future goods, at
the time of their appropriation to contract of sale by the seller or by the
buyer, whether assent of the other party is prior or subsequent to such
appropriation.

Explanation.- Where there is a single contract of sale or
purchase of goods situated at more places than one, the provisions of this
sub-section shall apply as if there were separate contracts in respect of the
goods at each places.”

Thus, the ‘place of ‘sale’
was linked with physical ascertainment of goods towards sale. By the above
provision, it was laid down as to which state the sale will be deemed to have
taken place and once it was held to be taking place in one particular state, it
was to be outside all other States. This brought finality to place of sale and
this gave much required relief to the trading community. The nature of
transaction whether interstate or intra state can be decided based on movement
of goods. However, it cannot be taxable in more than one State. Till today, the
system has worked satisfactorily.

GST/IGST Act/SGST Act

The above Acts are collectively
referred to as “GST laws/GST” in this article.

Under GST, the concept of
‘sale’ is replaced by ‘supply’ which is a broad term and includes supply of
goods as well as services.

There are several
incidences by which “supply” can take place and “sale” is one of them.

So far as supply of goods
is concerned, unlike the CST Act, there is no direct provision about situs of
supply of goods. However, the supply of goods may be intra-state or
inter-state. The tax will be attracted accordingly. If it is held to be
intra-state, it will be liable to CGST/SGST and if it is held to be
inter-state, it will be liable to IGST. Situs of supply is required to
be determined to find out the State from which the supply is made and then to
decide its nature i.e. whether intra state or interstate.

Under GST, the provisions
to determine the nature of interstate/intra state supplies are contained in
IGST Act.

Relevant Provisions of
IGST Act        

Section 7 defines the nature of interstate supply.

Section 8 defines the nature of intra state supply.

The nature of supply, as
to whether intra state or interstate, depends upon location of supplier and
place of supply. If both fall in same state, it will be intra state and if in
different states, it will be interstate.

The aspects related to the
above are discussed subsequently in this article.

Section 9 specifically deals with supplies in territorial
waters. It is provided that when the location of supplier or place of supply is
in territorial waters, the supply should be deemed to be in the Coastal State
or Union Territory where the nearest point of the appropriate baseline is
located. The further categorisation as to intra state or interstate should be
determined taking into consideration above position of place of location of
supplier and place of supply.         

As per above provisions,
the Taxable person is required to First determine place of supply of goods. If
such place of supply creates a situation that the location of supplier is in
one state and the place of supply is in different State, there will be
interstate supply. If both are in same state, there will be intra state supply.

There is no definition of
“location of supplier”. However, place of supply is to be determined as per
section 10 reproduced below.

“10. (1) The place of
supply of goods, other than supply of goods imported into, or exported from
India, shall be as under,––

(a) where the
supply involves movement of goods, whether by the supplier or the recipient or
by any other person, the place of supply of such goods shall be the location of
the goods at the time at which the movement of goods terminates for delivery to
the recipient;

(b) 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;

(c) 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;

(d) where the goods
are assembled or installed at site, the place of supply shall be the place of
such installation or assembly;

(e) where the goods
are supplied on board a conveyance, including 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.

(2) Where the place of
supply of goods cannot be determined, the place of supply shall be determined
in such manner as may be prescribed.”

Analysis of Section 10

One of the critical issues
to decide nature of supply transaction will be to decide place of supply.
Section 10 provides clue to find the place of supply. There will be in all five
situations envisaged by section 10(1). All are required to be interpreted
harmoniously.

(a)   Situation
contemplated by section 10(1)(a)- Goods involving movement

This section is applicable
where the supply involves movement of goods. Since it refers to ‘supply
involves movement’, it is understood that the situation is required to be seen
per supply transaction. The nature of goods, whether capable of movement or not
etc., is not relevant. The position can be seen with simple examples:-

A machinery as installed
in factory is for sale by auction. The term of ‘auction’ is that it will be
supplied on “as is where is basis”. Under this situation, it can be said that
movement is not involved in supply.

In the same example, if
condition appears that the recipient should move the goods to its factory, then
it can be said that movement is involved in supply transaction. Section
10(1)(a) appears to cover the second example.

The movement may be
available from written contract/purchase order or any such other relevant
documents.

If not in written form
then it can be inferred from intention of parties. In normal cases the supply
of goods will be deemed to involve movement as the recipient is expected to
take goods to its place.

However, for clarity of
nature of transaction, it will be advisable that parties mention about movement
of goods in the contract document.

Once the goods involve
movement, the next step will be to decide place of supply. As per the said
section, the place of supply will be the location of goods at the time at which
the movement of goods terminates for delivery to recipient.

It is a settled law that
the provisions should be interpreted in its plain language. Reference can be
made to the judgment of Hon. Supreme Court in case of M/s. Polestar
Electronic P. Ltd. (41 STC 409)(SC), where in the Hon. Supreme Court has
observed as under about interpretation of provision:-

“A statutory enactment
must ordinarily be construed according to the plain natural meaning of its
language and no words should be added, altered or modified unless it is plainly
necessary to do so in order to prevent a provision from being unintelligible,
absurd, unreasonable, unworkable or totally irreconcilable with the rest
of  the statute. This rule of literal
construction is firmly established and it has received judicial recognition in
numerous cases.”

Applying the above
principle, the place of supply will be where the movement terminates for
delivery to recipient.

The essential fact will be
to decide when the movement terminates. If any express term in documents, the
issue can be decided accordingly. If no express term in contract, the delivery
point can be decided on inference and intention of parties and relevant facts.
There can be different situations about termination of delivery. For example,
the supply is ex-work. When such is the position, the delivery can be said to
have terminated at place of work/godown, shop of the supplier. This will be
place of supply in above transaction. Obviously, location of supplier and place
of supply being same, it will be considered to be intra-state transaction
attracting CGST/SGST.

The other situation will
be that the delivery is home delivery to recipient. In such a case, the
supplier will carry goods to godown/shop of recipient and delivery will
terminate at such place. If the location of supplier and place of  supply are in different states, it will be interstate sale, attracting IGST.

There can be many other
situations arising on facts of the case. Suppose a supplier in Maharashtra has
agreed to deliver goods to recipient at its godown in Karnataka. In between,
there is a breakdown of transport vehicle, before crossing Maharashtra border.
The parties renegotiate and it is agreed that recipient will take delivery at
breakdown point (which is within Maharashtra) and will carry goods on its own
to Karnataka. Here, though initially the transaction appeared to be inter-state
(delivery point to be in Karnataka), due to change in terms, the delivery will
be deemed to terminate within Maharashtra and the transaction will be intra
state transaction.

It is felt that the
parties should make delivery termination point/place clear in the documents, to
avoid any confusion in future.

The above analysis shows
that the principle of seamless credit is not fulfilled. If a trader of
Karnataka acquires any goods within Maharashtra, where delivery terminates
within Maharashtra, the supplier will charge CGST/SGST. Even if the goods are
taken to Karnataka and consumed there, still no ITC will be eligible to trader
of Karnataka and the ITC will lapse. There will also be cascading effect,
though GST is meant for avoiding the same.

(b)   Section
10(1)(b)- “Bill to ship to” model

This section is not worded
very happily. It appears that the above section is meant to cover cases where
more than two parties are involved before termination of delivery (bill to ship
to model). In existing law such transactions are identified as sale by transfer
of documents and hence have special status as per provisions of section 6(2) of
the CST Act, 1956.

If section 10(1)(b) is
dissected for proper interpretation it shows following position:

“Where the goods are
delivered by the supplier to a recipient

or any other person

on the direction of third
person

whether acting as agent or
otherwise

before or during movement
of goods

either by way of transfer
of documents of title to 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.”    

The section contemplates
delivery to recipient or any other person as per direction of third person.

The reference to third
person is not comprehensible.

Normally, the owner or
would be owner of goods who has power to give direction. In my opinion, the
recipient is the correct person to give direction to supplier. What is locus
standi of third person to give direction is not clear from section and hence,
there is ambiguity in the provision.  

The term ‘recipient’ is
defined in section 2(93) of CGST Act as under:

“(93) “recipient” of supply of goods or services or both, means—

(a) where a
consideration is payable for the supply of goods or services or both, the
person who is liable to pay that consideration;

(b) where no
consideration is payable for the supply of goods, the person to whom the goods
are delivered or made available, or to whom possession or use of the goods is
given or made available; and

(c) where no
consideration is payable for the supply of a service, the person to whom the
service is rendered, and any reference to a person to whom a supply is made
shall be construed as a reference to the recipient of the supply and shall
include an agent acting as such on behalf of the recipient in relation to the
goods or services or both supplied.”

Thus the person who is
going to pay consideration is the recipient. Only buyer of goods can be liable
to pay consideration and therefore, buyer can be recipient. While placing order
on supplier or afterwards, such buyer can give direction to deliver goods to
third person and the place of supply could be decided accordingly. Instead of
above logical situation, the section refers to “third person” for even delivery
to recipient and provides to consider principal place of business of third
person as place of supply.

It is felt that in the
present form, the above section does not serve any purpose.

Following pictorial
example can be seen to ascertain the position as per literal meaning of section
10(1)(b).

In this case, C will be
third person. As per plain reading of section, C should give direction to
Supplier. It appears to be unrealistic but for the sake of discussion, it is
assumed that C gives direction. In this case, the place of supply will be
principal place of C and it being in Tamil Nadu, for A the sale to B will be
interstate supply.

However, there is no clue
to decide place of supply when B bills to C. There is no third person to give
direction to B and therefore section 10(1)(b) cannot apply for transaction
between B and C. Similar will be the position in all further supply
transactions in chain like from C to D etc.  

Thus, section 10(1)(b)
gives illogical and unexpected results in present form.

There is another view that
one should interpret the section in a workable manner. Under such view it is
suggested that the third person should be considered to be recipient and the
position should be analysed accordingly.

For example, in above diagram,
‘B’ will give direction to ‘A’ to delivery to ‘C’. The place of supply will be
the principal place of business of ‘C’ i.e. Tamil Nadu and the transaction
between ‘A’ and ‘B’ will be liable under IGST. The further transaction between
‘B’ to ‘C’ will also be IGST as in this supply transaction, ‘B’ is supplier and
‘C’ recipient have principal places of business in different States. Thus every
transaction will be required to be seen separately. This appears to be workable
interpretation of section 10(1)(b). However, though the above view is practical
and certainly gives desired meaning one cannot ignore the plain language and
even adjudicating authority may not agree to above workable interpretation. It
is reported that the authorities are going to issue certain guidelines about
place of supply. We hope the above confusion in section is clarified to remove
the ambiguity, which will guide traders for deciding correct nature of
transaction.

In both the above sections
10(1)(a)/(b), one more aspect is about location of supplier. Suppose the place
of business of supplier is in Delhi but goods are located in Maharashtra and
supplied to recipient of Maharashtra, the issue will arise as to in which state
the liability will arise for supplier?

Above difficulties are
being faced as neither situs of sale is provided nor “location of
supplier” is defined. 

It is expected that all
such issues will be clarified at the earliest for ease of business. 

With the above pending
issues of interpretation, the section 10(1)(b) lays down that place of supply
is principal place of business of third person. There is no connection with
actual place of delivery of goods or termination of delivery.

Unlike under CST Act,
under this section there is no continuation of nature of transaction during one
movement by transfer of documents of title to goods. Under the CST Act, all
transactions effected during one interstate movement of goods will remain
inter-state sales till movement terminates, irrespective of addresses of
parties etc. Under GST, every transaction will be different and one
transaction may be inter-state, the next one can be intra state, depending upon
location of supplier and place of supply. The issue of seamless credit may also
get affected due to nature of transaction being different at each stage.

(c)   Section
10(1)(c) – Not involving movement

Section 10(1)(c) – appears to be supplementary to section
10(1)(a)/(b). This section seems to take care where no movement is involved in
the given supply transaction. The example is already given above.

In such a case, the
transaction will always be intra-state attracting CGST/SGST.

(d)  Section 10(1)(d) – Installation/assembly

Section 10(1)(d) deals with situation where installation or
assembly at site is required. The place of installation or assembly will be
place of supply. An example can be of installation of air conditioner. A
Maharashtra supplier supplies air conditioner to Gujarat recipient and installs
it as part of supply transaction. In such a case, the place of supply will be
State of Gujarat. Since the location of supplier and place of supply is in two
different States, transaction will be liable under IGST. However, there is
possibility that, Gujarat authority, considering the goods are brought in
Gujarat as branch transfer and installed in Gujarat may consider it a
intra-state state transaction in Gujarat based on above provision of section
10(1)(d).

This difficulty arises as
no connection is provided between movement of goods from Maharashtra and place
of supply, as under CST Act. Section 3(a) of CST Act provides to consider
transaction as inter-state sale if the movement  of goods from moving state is linked with ultimate sale in other State.

However, under GST, there
is no such inter linking provision. Therefore, even if goods are moved from
Maharashtra for assembly in other State, there is possibility that it may be
considered as intra state sale in assembly state.

The meaning of “assembly”
and “installation” may also be a bone of contention. Mere putting the goods in
place like putting fan in hook in ceiling, will amount to installation? There
may be such debatable issues.

To avoid litigation and
further adverse contingency it is better the transactions are clearly
identified as far as possible in relevant documents.

(e)   Section
10(1)(e) – On board a conveyance

Section 10(1)(e) – deals
with situation where goods are supplied on board a conveyance. “Conveyance” is
defined in section 2(34) of CGST Act as under:

(34) “conveyance”
includes a vessel, an aircraft and a vehicle;

This clause is a good
attempt to resolve the issue being faced presently. In normal course, taxation
of supplier on trains / aircrafts to passengers is a very debatable issue. It
requires per state wise detail about sales taking place in respective states.
To resolve such issue, it is provided that the place of supply will be deemed
to be place where such goods are taken on board. For example, the articles are
taken on board the train at Mumbai, which is actually sold to passengers on
running train travelling through several states.

The place of supply for
all such supplies will be one i.e. Mumbai and tax will be required to be
discharged accordingly. Whether such supply will be interstate or intra state
will further depend upon location of supplier and the place of supply, decided
as above.

Certain issues can still
arise under the above clause. For example, the goods are taken on board at
Mumbai on board an aircraft, which is travelling to Delhi. Certain goods are
sold out on board the aircraft which will mean the place of supply for such goods
will be Mumbai. After Delhi, suppose the aircraft moves to Lucknow as different
flight say from Delhi to Lucknow and remaining goods are sold on board the said
flight. Whether the place of supply will still remain Mumbai ?

The issue arises as one
journey is over and fresh journey starts with original stock. Looking to the
intention of the provision even such goods supplied on board the Lucknow
flight, the place of supply should be Mumbai. However, if a view is taken that
the goods were taken on board for particular flight and the goods taken on
board are for such particular flight, then the place of supply Mumbai will end
on termination of said flight. The next fresh journey will be separate. The
issue will again arise about place of supply. Some clarification on the above
issue will be appreciated.

Residuary – Section 10(2)   

The Act provided by
section 10(2) that where the place of supply cannot be determined with
reference to earlier provisions, then the place of supply should be determined
as may prescribed. The prescription may come by Rules or notification. It can
be presumed that the prescription will solve the issues for remaining
situations as well as debatable issues with reference to situations in section
10(1), discussed above.

Place of supply of goods
imported into or exported from India

Section 11 of IGST Act
reads as under:

“11. The place of supply of goods,––

(a) imported into
India shall be the location of the importer;

(b) exported from
India shall be the location outside India.”

This section is specific
for import/export supplies.

Place of supply is
normally meant to apply to supplies of goods so as to determine nature of
supply. When goods are imported, there is supply by foreign supplier and place
of supply will be relevant to said supplier, if nature of supply is to be
determined in its hands. However, normally such situation will not arise as no
tax is contemplated on foreign exporter, who is supplier.

It appears that the above
clause about place of supply for imported goods will also equally apply to
importer and the place of supply for importer of goods will be the location of
importer. Importer is required to discharge the IGST on imported goods. For
example, importer is in Delhi and the goods are physically unloaded and cleared
at Mumbai Port. The place of supply in such case will be location of importer
and it will be Delhi. The importer in Delhi will be required to pay IGST in
Delhi under GSTN of Delhi.

Section 11 also provides
place of supply for export. In case of export the place of supply will be
located outside India. It means in such a case, the place of supply will be
place in foreign country where the goods are exported.

Since Export is zero rated
supply, it appears that above provision has no practical effect.   

Conclusion

shailesh.kwebmaker

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

shailesh.kwebmaker

The objective of this article is to examine and analyse some
of the important interpretational issues noticed while unravelling the
definition of “Supply” in the Central Goods and Service Tax Act, 2017 (CGST
Act).

Under any taxation legislation, the levy of tax depends on
undertaking of an event. Levy of Excise Duty is on ‘manufacture or production
of goods’, while for levy of Service Tax, there has to be a ‘provision of
service’ and levy of Sales Tax/VAT triggers on ‘sale of goods’. According to
Article 366(12A) of the Constitution of India, ‘Goods and Service Tax’ means “a
tax on supply of goods or services, or both, except ………” The
definition of “supply” contained in the new GST legal framework, is central to
the ambit of its applicability. Therefore, for GST to be levied on a
transaction, it must satisfy the ingredients of definition of ‘supply’.

Section 7 of the CGST Act defines ‘Supply’ as under

“….the expression “supply” includes–

(a) all forms of supply of goods or services or
both such as sale, transfer, barter, exchange, licence, rental, lease or
disposal made or agreed to be made for a consideration by a person in the course
or furtherance of business;

(b) import of services for a consideration whether
or not in the course or furtherance of business;

(c) the activities specified in Schedule I, made or
agreed to be made without a consideration; and

(d) the activities to be treated as supply of goods
or supply or services as referred to in Schedule II.”

Whether use of the word ‘includes’ has enlarged the scope
of “supply” to include all transactions even if these are not covered in
Clauses (a) to (d) or the word “includes” is to be construed as equivalent to
“means and includes”.

Where the definition of a term employs the word “includes”,
the natural connotation is of an extensive, rather than restrictive, definition
and construction. This interpretation has been held by judiciary in many cases.
But, this interpretation may be contentious in the context of GST, as it would
render filters of applicability ineffective, granting an arbitrary taxing
power. Further, this could result in transactions that were not intended to be a
“supply”, being held to constitute “supply” for the purposes of this law.

Hence, the implications of the word “includes” in the
definition of “supply” requires consideration. While the use of the word
“includes” in a definition usually denotes that the definition is prima
facie extensive, it is capable of another construction.

Lord Watson in the Privy
Council in the case of Dilworth vs. Commissioner of Stamps¹
stated that this alternate construction may become imperative if the context of
the Act is sufficient to show that it was not merely employed for the purpose
of adding to the natural significance of the words or expressions used. It may be equivalent to ‘mean and include’ and in
that case, it may afford an exhaustive explanation of the meaning which for
the purposes of the Act must invariably be attached to those words or
expressions.

________________________________________________

1   (1899) AC 99, pp. 105,
106

The following Supreme Court judgments take cognisance of this
dicta and illustrate possible situations which allow for the word
“includes” to be construed as equivalent to “mean and include”, providing for a
restrictive and exhaustive definition of the term.

1) South Gujarat Roofing Tile Manufacturers
Association vs. State of Gujarat, AIR 1977 SC 90

Entry 22 added by the Gujarat Government to Part I of the
Schedule to the Minimum Wages Act, 1948 is followed by an explanation which
reads: ‘For the purpose of this entry potteries industry includes the
manufacture of the following articles of pottery namely – (a) Crockery, (b)
Sanitary appliances, (c) Refractories, (d) Jars, (e) Electrical Accessories…’

The Supreme Court held that constructing the explanation, the
items included in it were plainly comprised in the expression which showed that
the word ‘includes’ was not used to extend the normal meaning of the
expression. The word ‘includes’ was used in the explanation in the sense of
‘means’ and so the definition provided by the explanation was exhaustive.
Hence, Mangalore pattern roofing tiles manufactories lay outside the ambit of
Entry 22 as they were not included in the Explanation.

2) RBI vs. Peerless General Finance and Investment
Co. Ltd., (1987) 1 SCC 424

The Supreme Court held that interpretation must depend on the
text and the context. They are the bases of interpretation. One may well say if
the text is the texture, context is what gives the colour. Neither can be
ignored. Both are important. That interpretation is best which makes the
textual interpretation match the contextual. A statute is best interpreted
when we know why it was enacted. With this knowledge, the statute must be read,
first as a whole and then section by section, clause by clause, phrase by
phrase and word by word. If a statute is looked at, in the context of its
enactment, with the glasses of the statutemaker, provided by such context, its
scheme, the sections, clauses, phrases and words may take colour and appear different
than when the statute is looked at without the glasses provided by the context.

3) NDP Namboodripad vs. Union of India, (2007) 4
SCC 502

Rule 62 of Part III of the Kerala Services Rules uses the
word “includes” in the definition of “emolument”.

The Supreme Court held that the word “includes” in Rule 62
should be read as “comprises” or “consists of”. Accordingly, clearness
allowance and special allowance cannot be added to the pay for the purposes of
pension as they were not contained in the definition.

Based on above discussion, it is amply clear that use of word
‘includes’, cannot be read to enlarge the scope of ‘supply’ to any absurd
situation. Therefore, in my opinion, a supply without consideration (not
specifically covered by Schedule I will not be considered as a supply liable to
GST, despite use of the word ‘includes’ in the definition.

In the course or furtherance of business

The words ‘in the course or furtherance of business’ would be
important to determine whether particular activity can be taxed or not. The
word ‘business’ has been defined in an inclusive manner in section 2(17) giving
a wide meaning. Activities without profit motive or even infrequent or
irregular transactions are also considered as business. However, despite such a
wide connotation, in my opinion, a personal activity or activities for pleasure
or sport would still not fall under ‘business’. In the case of State of
Mysore vs. K. N. Chandrasekhar AIR 1965 SC 533 and State of Andhra
Pradesh vs. H. Abdul Bakhi AIR 1965 SC 531, it was held that the expression
‘business’ though extensively used as a word of indefinite import, in taxing
statute, it is used in the sense of an occupation, or profession which occupies
the time, attention and labour of a person and is normally with an object of
making profit and not for pleasure or sport. FAQ on GST issued by CBEC (2^nd
Edition) has clarified that selling of personal car by an individual is not a
business activity. Therefore, an intention of a person carrying out a
particular transaction can be one of the determining factors in deciding
whether it is a business transaction or not.

Consideration in kind and Barter/Exchange Transactions –

–   Barter/ exchange transactions were not liable
to VAT, as these were considered as transaction without a valuable
consideration. However, GST law specifically includes these transactions in the
definition of supply. Provision of architect/construction services for which
consideration is paid by way of transfer of 
flat by a builder or exchange of old phones/cars for new ones, etc.
are illustration of non-monetary consideration and liable to GST as covered by
definition of “supply”.

–   In case of redevelopment projects where a
developer may agree to construct a new building for existing flat owners, the
service of construction provided by builder would be considered as provided in lieu
of additional FSI received by him. This activity would come in the category
of barter transaction and liable to GST. It is interesting to note that in
barter transactions, both person are making supply to each other and GST is
leviable on both persons, if the transactions satisfy other requirements of the
definition. In such transactions, valuation of each of the supplies will be
governed by the Valuation Rule. Rule 1, provides for considering the open
market value of the goods supplied by the supplier in such cases. Therefore,
despite the consideration for both the supplies being same in commercial sense,
the valuation for taxability under GST may differ.

Whether issuing bills payable to a creditor results in
Exchange liable to GST? The exchange is of one form of payment to another,
therefore, the transaction is in money and neither party receives goods or
services. Therefore, despite being an exchange in common parlance, it will not
be liable to GST.

Unilateral Disposal

In order to cover the disposal as a supply, it has to be made
to another person with a consideration, therefore, unilateral disposal of
waste, even though made in the course of business, e.g. flaring of gas,
disposing refuse, etc. without consideration is not a ‘supply’, consequently,
not liable to GST.

 Supplies without a consideration (Schedule I)
Clause (c)

As per main definition u/s. 7(1)(a), an activity without
consideration is not “supply”. However, Clause (c) provides that in certain
cases, even though there is no consideration, the same would be treated as
‘supply’. Such cases are listed in Schedule I. Hence, normal cases of free
service by a professional or free supply of goods, like free samples or gifts
to customers would not be liable to GST, unless these are covered by the
specified transactions listed in Schedule I.

Permanent transfer of business assets

Permanent transfer or disposal of business assets where input
tax credit has been availed has been deemed to be supply even if it is made
without consideration as per entry 1 of the Schedule I. The word ‘permanent
transfer’ implies that goods should be transferred without any intention or
requirement of having to receive the goods back by a person. Typically,
donation of business assets or disposal in any other manner would qualify as
‘supply’ under this clause, where input tax credit has been claimed on the
same.

Whether destruction by natural causes or intentional
destruction would also be covered within the meaning of disposal? Destruction
by natural causes, in my view, may not be covered under the scope of disposal,
as disposal is an intentional and deliberate act as against the destruction by
natural causes. On the other hand, intentional destruction, say scrapping of a
machine, may be covered in the scope of disposal.

A linked issue to disposal of business asset is that of
double taxation. When any capital goods or plant or machinery is supplied,
proportionate input tax or GST on transaction value, whichever is higher, is
required to be paid in terms of section 18 (6) of CGST Act. On the same
transaction, GST would also be required to be paid, as it is deemed to be
supply under this entry of Schedule I. Further, no input tax credit can be
availed in case where goods are lost, stolen, destroyed, written off or
disposed of by way of gift or free samples as per section 17(5)(h) of CGST Act.
Therefore, unless an exemption is provided for one of these transactions, it
would lead to double taxation.

Gifts to employee of more than Rs. 50,000 in a financial year

Employee and employer have been deemed to be related persons
as per section 15 of CGST Act. Entry 2 of Schedule I provides that supply of
goods between related persons without consideration is also deemed to be
supply. However, the proviso to the said entry provides for an exemption
to gift up to Rs. 50,000 in a year. The term ‘gift’ has not been defined in the
Act. Therefore, whether payments like bonus, free accommodation, free
food/beverages, free transportation, diwali gifts, Sodexo coupons, ex-gratia
payments would be considered as gift? In my view, all payments which are part
of the employment contract cannot be treated as a gift. Pre-decided bonus, free
accommodation are illustrations of this category. Further, there are some
perquisites which are given to employees as part of normal business practice
like free food and beverages during office hours or use of gym in office, as
these may also not be considered as Gift. On the other hand, payment in cash or
kind like Diwali gifts or gift vouchers on achievement by a child of employee
or any ex-gratia payment may come in the category of Gift.

Clause (d) – Schedule
II

Schedule II to the CGST Act lists down activities to be
treated as supply of goods or services and all these activities have been
deemed to be supply as per clause (d) of Section 7(1).

While other clauses of section 7(1) specifically provide for
the existence or otherwise of the conditions of consideration and furtherance
of business, this clause does not mention requirement of any such condition.
Therefore, does it mean that these activities will be considered as supply,
even if they are made without consideration or are not in the course or
furtherance of business? For example, transfer of car to a daughter without any
consideration may fall in entry 1 (a) of said Schedule II. Further, some of the
entries, like 4(a) and (b) provides for coverage under the scope of ‘supply‘
whether or not with a consideration. Entry 5 (f) also prescribe a condition of
consideration. Does it mean that for other entries in the Schedule, there is no
requirement of consideration?

Transfer of Development Right (TDR) – whether covered in GST?

Entry 2(a) of said Schedule provides that any lease, tenancy,
easement, license to occupy land is a supply of service. Further, entry 5 of
Schedule III treats the activity of sale of land as not a supply. Development
Right are one of many rights attached to earth.

As per definition of Immovable Property, u/s. 3(26) of the
General Clauses Act, 1897, any benefit arising out of land is also considered
as an immovable property. As per Entry 18, List III, of Seventh Schedule to the
Constitution, land also includes rights in or over land. It has also been held
by Bombay High Court in Chedda Housing Development Corporation (2007 (3)MHLJ
402 that TDR is an immovable property. In the case of goods, the activity of
any transfer of right in goods without transfer of title has been treated as a
supply of service. However, in case of land and building, only specific modes
like lease, tenancy, easement, and license to occupy land and only lease and
letting out building has been deemed to be a supply of service.

This shows the intention of the legislature to not include
all types of transfer of rights relating to land under the purview of GST. In
the present Service Tax law, a view could have been taken that transaction of
sale of TDR was in the nature of transfer of title in the immovable property,
hence, was excluded from the definition of Service u/s. 65 B (44). However, in
GST law, exclusion is only towards sale of land. Hence, taking a view that sale
of TDR is equivalent to sale of land is fraught with risk.

Construction of Complex

Like in present Service Tax Law, construction service has
been made liable to GST. Entry 5 in Schedule II provides for this activity. In
the said entry, in addition to the issue of completion certificate, one more
condition of first occupation has been added. First Occupation requirement
would be applicable only when requirement of issue of completion certificate is
not there, say in case of villages. Explanation (2) to the said entry provides
that the expression “construction” includes additions, alterations,
replacements or remodeling of any existing civil structure. It means that any
activity, say of alteration of existing flat, would also be covered under the
scope of construction activity.

However, it is unclear as to how the test of receipt of
consideration before issuance of completion certificate or after its first
occupation can be fulfilled in such situations. In fact, there can be cases
where alteration or additions can be made in one part of building, even with
residents staying inside the building. Further, in such cases, generally there
is no requirement to issue completion certificate. Therefore, it appears that
the Explanation has been added without realising the implication thereof.

Conclusion

shailesh.kwebmaker

India is a Union of States, modelled along a federal system
of governance where legislative, administrative and executive powers are
distributed between two levels of government, Parliament and States. The Indian
Constitution bifurcates the power to enact laws between the Parliament and State
Legislatures on diverse subjects, as categorised by the three Lists to the
Seventh Schedule. In respect of matters enumerated in List I, Parliament is
delegated exclusive powers to enact laws, while in respect of matters
enumerated in List II, only State Legislatures have power to enact laws. The
prerogative to enact laws pertaining to matters enumerated in List III is
shared concurrently between Parliament and State Legislatures.

Need for the Constitutional Amendment

Prior to the enactment of the Constitutional (One Hundred and
First Amendment) Act, 2016, the States did not possess the authority to levy
tax on the provision of Services or Manufacture of goods, with the exception of
alcoholic liquor for human consumption, opium, Indian hemp, narcotics and other
narcotic drugs. List II does not assign a bare power to tax supply per se to
the States.

Although a separate entry could have been included in the
Concurrent List enabling the levy of taxes on the supply of goods and services,
Article 254(1) provides that any inconsistency between laws enacted by the
Parliament and the State Legislatures, is to be resolved in favour of the
Parliament, rendering the opposing State law void to that extent. In view of
Article 254(1), the addition of such an entry could not have assigned equal and
concurrent powers to both the Parliament and the State Legislatures.

Consequently, this impasse has been addressed by the
introduction of Article 246A in the Constitution, which reads as under:

“246A. (1) Notwithstanding anything contained in articles
246 and 254, Parliament, and, subject to clause (2), the Legislature of every
State, have power to make laws with respect to goods and services tax imposed
by the Union or by such State.

(2) Parliament has exclusive power to make laws with
respect to goods and services tax where the supply of goods, or of services, or
both takes place in the course of inter-State trade or commerce.

Explanation.—The provisions of this article, shall, in
respect of goods and services tax referred to in clause (5) of article 279A,
take effect from the date recommended by the Goods and Services Tax Council.’’

Article 246A empowers both the Parliament and the State
Legislatures to legislate with respect to GST. The Constitution provides for
the creation of the GST Council (GSTC), which shall inter alia make
recommendations to the Union and the States on:

a.  model Goods and Services Tax Laws, principles
of levy, apportionment of Integrated Goods and Services Tax and the principles
that govern the place of supply;

b.  the rates including floor rates with bands of
goods and services tax;

c.  any special rate or rates for a specified
period, to raise additional resources during any natural calamity or disaster;

d.  special provision with respect to the States
of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram,
Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand.

The role of GSTC is limited to that of a recommendatory body.

Are the recommendations of GST Council binding?

To me, it appears that the recommendations of the GSTC are
mere suggestions or guidelines, which the Parliament or the State Legislature,
as the case may be, may or may not accept and implement.The concept of granting
recommendatory powers to constitutional bodies is not unfamiliar. However, the
existing jurisprudence,  discussed herein
below, does not conclusively postulate that the recommendations have to
necessarily be adopted. Therefore, the consequences following non-implementation
of the recommendations by the GSTC will have to be judicially determined.

A)  The United States Constitution provides in
Clause 2 of Section 3, known as the “Recommendation Clause”, that the President
shall recommend to the Congress (Parliament) such measures as he shall judge
necessary and expedient.  This clause has
been interpreted by the US Supreme Court in the case of Youngstown Sheet
& Tube Co. vs. Sawyer¹ 
to mean that the Recommendation Clause serves as a reminder that the
President cannot legislate unilaterally, and further, that the President merely
has the power to recommend. The prerogative to legislate is possessed
exclusively by the Congress.

B)  Similarly, in the Indian context, Article
233(2) of the Constitution provides for the recommendation of the High Court
for appointment of an advocate or a pleader as the district judge. In the case
of Chandra Mohan vs. State of Uttar Pradesh², the Apex
Court observed that under Article 233(2), the Governor can only appoint a
person recommended by the High Court. On the other hand, in the case of Supreme
Court  Advocates vs. Union of India³,
it was observed that, “In cases governed by Article 233(2), normally as a
matter of rule, the High Court’s recommendation must be accepted unless there
exist ‘good and weighty reason’ in which case the executive should communicate
its views to the High Court and give the latter an opportunity to react to the
same.” Therefore, the contours and strength of the recommendation power
prescribed by Article 233(2) to the High Court is amenable to ascertainment by
judicial examination. 

Mechanism for Dispute resolution

In cases where the States deviate from the recommendations of
the GSTC and enact an absolutely contrary GST Law, it could lead to utter chaos
and defeat the stated objective of GST, namely, for the provision of a common
national market for goods and services. Whether such a deviation is permissible
or not, and whether the same would withstand judicial scrutiny is something
that only time will tell.

I must however, point out that Article 279A(11) stipulates
that the GSTC shall establish a mechanism to adjudicate any dispute arising
between the Government and the States or between the States out of its
recommendations or implementation thereof. However, the scope of this mechanism
is coloured with opacity. It remains unclear whether it would address a
situation where one State does not follow the recommendations. Further, the
said article does not specifically provide that the resolution of the dispute
under the mechanism would be binding.

It may be relevant to point out that under the Hundred and
Fifteenth Amendment Bill, 2011, Article 279B had proposed that “Parliament
may, by law, provide for the establishment of a Goods and Services Tax Dispute
Settlement Authority to adjudicate any dispute or complaint referred to
it by a State Government or the Government of India arising out of a
deviation from any of the recommendations of the Goods and Services Tax
Council constituted under article 279A that results in a loss of revenue to a
State Government or the Government of India or affects the harmonised
structure of the goods and services tax.”

However, the said Article was not enacted in the
Constitutional Amendment Act and no other mechanism was provided for in such
specific terms.

Is GST a challenge to the ‘Basic Structure Theory’?

Primarily, the GSTC would take decisions on the basis of
majority votes, however, there is a possibility that certain decisions of the
GSTC, which were not accepted by some States or the Centre, are challenged.
Such challenge may have recourse to the theory of “Basic Structure” pronounced
by the Apex Court in the landmark case of Kesavananda Bharati vs. State of
Kerala⁴ and subsequent judgments building on the principle.

It can be argued that the forefathers of the Constitution had
provided for the division of taxation powers to enable the Parliament and the
State Legislatures to exercise their own freedom. The concept of GST itself may
be challenged on the grounds of impinging upon the freedom of the States and
Base Structure theory.

Non-divestment of powers by the Centre

Further, a subject of intrigue is the possibility of
overlapping concentrations of power. On the one hand, the 101^st
Constitutional Amendment Act, 2016 has divested the States of their powers to
tax sale or purchase of goods, except for specified goods, by substituting
Entry 54 of List II of the Seventh Schedule to the Constitution. While on the
other hand, the Union has not divested itself of the power to tax sale/purchase
of any goods in the course of inter-State trade or commerce as also of the
residual power to levy tax of sale/purchase/supply of goods or services, the
supply of which would already have suffered GST. The said entries are
reproduced hereunder for ease of reference:

i)   Entry 54 of State List (List II):

     Existing Entry:

     “Taxes
on sale or purchase of goods other than newspapers, subject to the
provisions of entry 92A of List I.”

     Substituted Entry:

     “Taxes
on the sale of petroleum crude, high speed diesel, motor spirit (commonly
known as petrol), natural gas, aviation turbine fuel and alcoholic liquor for
human consumption, but not including
sale in the course of inter-State trade or commerce or sale in the course of
international trade or commerce of such goods.”

ii) Entry 92A of the Union List (List I) – to be
retained as it is

     “Taxes
on the sale or purchase of goods other than newspapers, where such sale or
purchase takes place in the course of inter-State trade or commerce.”

iii) Entry
97 of the Union List (List I) – to be retained as it is

     “Any other matter not enumerated in
List II or List III including any tax not mentioned in either of those
Lists.”

Conclusion

shailesh.kwebmaker

The Goods & Services Tax (‘GST’), is the biggest
reform in the Indian indirect tax structure since the economy opened up, twenty
six years ago. At last, it will become a reality. The 122^nd
Constitution Amendment Bill which was cleared in the Rajya Sabha last August
laid the foundation for the change. It was further cemented by the formation of
the GST Council & passage of the GST Act and Rules. Now with the GST Rates
and Transition provisions finalised, the 1^st July deadline for the
radical change is inevitable.

As per the current law, businesses are required to pay
multiple taxes and adhere to multiple compliances and timelines. Once GST comes
into play, all taxes will come under one umbrella, making it much simpler for
the industry. The GST Law will also prove to be a boon for the industry that
currently has to deal with different tax processes in all different States. The
hassle of dealing with different State Governments with varied rules will be
done away with.

This tax aims to make India a single market, avoid the effect
of cascading taxes and reduce tax burden on the consumer. The key features of
this tax regime are elimination of tax on tax, lower rates, faster growth and
system driven compliances for the industry as well as the consumers.

While GST will impact various stakeholders differently, the
consumer shall be the most benefitted party. Consumer items continue to be
exempt from a levy of GST or are to be subjected to GST at lower rate as more
than 50% of the items within the consumer price index bracket are placed at a
lower rate than they presently are.

Having said the above, I am mindful that this is a complete
change for the Industry and its functioning. The way of dealing with
transactions would completely undergo a change with the new concept of supply
resulting in a paradigm shift from the age old scanner of manufacture, sale and
service concepts. This would not only entail changes in business processes, but
would completely change the accounting processes and the ERP system of every
business would require to adapt to this change quickly.

For Corporates, now the decision to set up manufacturing
operations and supply chain would be influenced not by tax benefits, but based
on business efficiencies. With destination based principle of taxation and
export to be zero rated, the competitiveness of Indian firms would surely
increase.

The law in the current form has been successful in attempting
the above. Credit should be given to the Tax Authorities and the political
willingness to achieve this by both the Houses of Parliament, State Governments
and the Finance Ministry.

With the support of the industry and the receptive consumers,
GST will be successfully implemented and accepted by India.

shailesh.kwebmaker

The Tax

India Goods and Services Tax (GST), a new consolidated
indirect tax, slated to be implemented from 1^st July 2017 as per
current indications, is a common tax on supply of both, goods and services, to
be commonly levied and collected by Centre, 28 States and 7 Union Territories,
on a common base, at common rates, having common procedures to be administered
fully electronically through a common digital platform.

Reaching this far, with an enactment, at the Central level,
of all the three laws, Integrated GST, Central GST, Union Territory GST as also
law for imposing Compensation Cess, an innovative instrument to collect tax for
distribution among State Governments for likely loss of revenue on GST
implementation, is no mean achievement.

Most rules are also finalised and agreed, rate schedules are
broadly agreed and announced and the State Governments are in the process of
enacting State GST Acts. This is an unparalleled accomplishment for a country
having a federal structure of governance, with population of over a billion
people and wide diversity in many ways.

We are all now waiting with bated breath for the
implementation of this historic indirect tax reform; a new tax structure which
has many unique and unprecedented features in the history of indirect taxation,
not only in India but around the world.

The Model – Australia, EU and Canada and India

Our new indirect tax system retains the basic principles of
value added tax system, adopts features of indirect taxation system of some
developed, more advanced/experienced nations, encompasses latest
recommendations of Organisation of Economic Co-operation and Development (OECD)
for consumption taxes and tops it with India’s unique challenges, traditions,
culture, level of development, and experience of our own taxation systems.

When we look around the world for comparables, we find that
Australia, Canada and EU have some comparable features in their tax reforms and
consumption tax models.

Australia consolidated wholesale sales tax and state level
duties and taxes into a federal level system of GST in 2000 and they adopted a
standard rate of 10 % (comparatively lower rate). So, they now have only one
Federal GST and states do not levy sales tax as also few other levies, duties
which they were levying prior to introduction of federal level GST described as
“New Tax System”. It used pricing control and anti-profiteering provisions to
monitor prices¹.

European Union Council issued a direction² in 1977
to all member nations to harmonise their national VAT systems through which tax
was levied on supply of goods and services; turnover taxes. The objective was
to achieve a common base for taxation, apply common meanings to the terms
“taxable person”, “taxable transaction” and others, common provisions relating
to place of supply of goods and services, common list of exemptions,
deductions, assessment basis and the like, so as to achieve non-discrimination
as to origin of goods and services and permit fair competition among member
nations. The system, in a way, is similar to our State Level VAT system (except
that it is at independent country level and includes taxation of services and
importation of goods); not comparable with our New GST system.

Canada has a federal structure of governance and they have
national as well provincial level (similar to States in our system) GST³.
The rate of the national level GST is uniformly applied across the country but,
States determine their own system of taxation including rate of tax on supply
of goods and services and they have varied systems. One province (Ontario) has
value added tax system described as Provincial Tax System, some provinces
impose tax only at retail level (British Columbia, Manitoba and Sasketchewan),
some provinces (Nova Scotia, Newfoundland and Labrador) have merged their
provincial taxes with national tax and adopted harmonised system of taxation
(HST) administered by national administrator, the Canada Revenue Agency, and
one province (Alberta) does not impose provincial tax at all⁴. So, this is also not comparable with Indian system of GST⁵.

___________________________________________________________________________

1   GST final report –
ACCC oversight of pricing responses to the introduction of the new tax
system-January 2003 –
https://www.accc.gov.au/system/files/GST%20Final%20Report.rtf

2   Sixth Directive,
77/388/EEC -17 May 1977 – ref http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=URISERV%3Al310063 Article 226b of the Sixth Directive

3   Introduced from
1.1.1991

4   https://en.wikipedia.org/wiki/Goods_and_services_tax_(Canada)

5   https://en.wikipedia.org/wiki/Goods_and_services_tax_(Canada)                                 

We, in India, have adopted dual model for taxation of goods
and services whereby Central Government and State Governments (including Union
Territories) will levy and administer the new tax, GST on supply of goods and
services. Uniformity, non-discrimination, no non-double taxation or no
non-taxation are sought to be achieved through overarching GST Council, a body
established through the Constitution having powers to make recommendations on
all key aspects of GST like rate, tax base, goods, services and taxes to be
subsumed in GST and so on. This body is somewhat on the lines of the European
Commission. The voting powers within GST Council are so fixed that neither
Centre alone nor States ( even if they all join hands) can change the decisions
of the Council, a path-breaking move to achieve uniformity and stability as is
described, ‘one tax across the nation’.

GST Features

We have adopted, as charging event, the concept of “supply”,
the term used internationally, replacing manufacture, sale and provision of
services as major taxes, Central Excise Duty (on manufacture levied by Central
Government), State Value Added Tax (on sale of goods levied by State
Governments), Service tax  (on provision
of service levied by Central Government), Octroi and Entry tax (on entry of
goods in local area for consumption levied by Local Authorities and State Governments),
Luxury tax (on specified services levied by State Governments) and specified
cesses levied by Central and State Governments merge into one tax, GST, levied
at the same rate by Central and State Governments on common base.

All taxable goods and services, across the country, when they
move from one state to another, will have paid tax, the Integrated GST (I-GST)
which is sum of Central GST (C-GST) and State GST (S-GST) or Union Territory
GST (UT-GST). This will be so, even in cases where goods/services move to own
branches, depots, distributors, stockists, otherwise than on sale/transfer of
property in goods. The tax so paid, to the extent of B2B (and, in most cases,
when the goods move to own branches, depots and like will be B2B transactions)
will be fully creditable unlike the earlier system where, Central Sales Tax was
not levied on transfer of stocks to own depot, branch ( against F form), levied
at concessional rate for B2B transactions ( against C form) and was not
creditable; it was retained by the originating State.

The objective of this design feature of our GST system is to
ensure that goods and services moving across States do not have to be supported
by C/F/I and like forms, prevalent under the current system for no or
concessional rate of tax ( forms to be obtained from tax department) as also
verified at check-posts set up by State Governments at their borders to capture
movement of goods without taxes, can be done away with (to achieve one tax
across the nation without, sort of, border restrictions) and, at the same time,
provide reasonable assurance to the State Governments of non-leakage of
revenue. Of course, the unscrupulous will attempt to find ways around it;
vigilance and way bill mechanism in the new system seek to track such leakages.

So far as movement of goods and services pursuant to supply
within a State is concerned, goods and services would have paid due tax, C-GST
plus either S-GST or UT-GST .

I would not be surprised, if, after a few years, some of the
Union Territories merge their U-GST and some smaller States merge their S-GST
with C-GST and hand over tax administration to Central Government – like
Harmonized GST of Canada. This could result in a fair degree of saving of tax
compliance cost for businesses and administration cost for governments at State/UT
level.

Gains and Pains

The charge on supplies within one legal entity [identified
based on Permanent Account No. (PAN) allotted by Income tax Department], when
goods move to another State to self has a logic in that it enables transfer of
input tax credit from one State to another where sale will take place and the
input tax credit can be utilised. This feature is enabled through I-GST
mechanism which is a sort of settlement mechanism. I- GST can be used for
payment of I-GST itself, C-GST, S-GST and UT-GST and, in same manner, all those
taxes, C-GST, S-GST and UT-GST, can be used for paying I-GST. Same is not true
so far as C-GST and S-GST/UT–GST are concerned. They will move parallel and not
meet, meaning C-GST input tax credit cannot be utilised for payment of S-GST/UT
GST and vice versa.

This requirement of payment of tax on inter-state transfer of
stocks will add cost in terms of cash flow management. But, a bigger worry of
businesses is valuation – whether administrations will be flexible on this aspect
since the transaction is tax neutral. Current provision, to the effect that
value declared by tax payer for such supplies will be accepted if the taxable
person is eligible for “full” input tax credit or that, the value could be 90%
of the sale price at the time of supply to third parties, is met with
skepticism.

The inclusion of such provision for services though is
puzzling. Valuation of services for transfers within an organisation will be a
challenge and, it appears that the department’s perspective is that even
employee cost must be included to arrive at open market value of services. This
means, taxing employee services which are specifically excluded from charge of
GST. There is provision for input service distribution and that could have been
used for transfer of input tax credits in case of services. Some rethink is
required on this aspect. Hopefully, sooner than later!

Our GST adopts same basic principles of value addition –
which we had adopted for Central Excise Duty, State VAT and Service tax.  The chain for taxation starts from origin and
ends when it reaches the ultimate consumer. 
Taxes paid at each of the earlier stages are rebated through mechanism
of input tax credit. Ideally, therefore, no tax cost should stick to
businesses, they being mere pass -through entities. Practically, that does not
happen due to non-allowance of input tax credit on several grounds like exempt
supplies with taxable supplies, supplies used for personal purposes or those,
where input tax credit is specifically restricted like motor vehicles.

A provision not to allow input tax credit when no tax is
payable on output is a reasonable one as the chain of input tax credit stops
there. The difficulty arises when the list of disallowable input tax credit
becomes large. The items on which input tax credit is not allowable under our
GST include expenses  like outdoor
catering, rent-a-cab, free samples, health insurance of employees and others.
These have been subject matter of significant litigation in the past and
attempt appears to be to clarify intent and avoid litigation; provide
certainty. However, it is desirable that tax paid on all inputs, goods and
services, used for purpose of business ought to be eligible for input tax
credit to minimise tax cost and cascading.

Exports will be zero rated and imports will be charged to
IGST, collected, at the time of clearance of import consignments, with the
Customs duties. There is a feature in export of services that appears to be
different from current regime of service taxation. A supply of service where
supplier is in India and place of supply is outside India is an interstate
transaction. Where the recipient is also outside India, consideration is
received in convertible foreign exchange and the supplier and recipient are not
establishments of distinct persons (different establishment of the same legal
entity), the transaction is “export of service”⁶ and will be
zero-rated. The difference is, if these three conditions are not fulfilled,
supply will be subjected to IGST though the place of supply is outside India.

The rates and exemptions under GST are more or less
maintained at the current level to ensure that the current overall tax burden
does not increase in GST. There are four rate bands, 5% and 12% (merit rate),
18% (standard rate) and 28% (demerit rate). There is also Compensation Cess
which varies significantly and is fairly steep for luxury/sin goods like
tobacco and tobacco products. It ranges from 1% to 15% for motor vehicles
depending on specifications. Special rate of 0.25% is prescribed for rough
diamonds and 3% for gold, gold jewellery, silver and processed diamonds⁷.
The exercise of rate fitment is currently ongoing.

The varied rate structure is different from other countries
and a question often asked, in the backdrop of one of the objectives of GST of
simplification of current complex indirect tax structure, is: is this
simplification ? While there could be no two arguments that ideally, one ought
to have only two rates, merit and standard, given the diversity and need for
consideration of all strata of society, variable rate was a must for our
country. Over a period of time, this too will be modified and we too will move
to two or three rate structure.

____________________________________________

6   S2(6)
of IGST Act,20175

7.Statement of Revenue Secretary post
GST Council Meeting of 3 June 2017- Business Standard Article of 5 June,2017-
business-standard.com

Several areas where there was litigation and department has
accepted the position or there are decisions of higher courts, have been
incorporated in the law and will hopefully, reduce litigation. For example, a
specific provision is made as regards amalgamation or merger of companies⁸.
Not all issues are addressed though and, hopefully, will be addressed as we go
along.

There are a few pain points too like paying tax on reverse
charge basis on purchases from unregistered persons, generating self invoice
and the like. This specific provision will, no doubt, increase cost of
compliance and will lead to the threshold losing its relevance. Reverse charge
is also continued for few services like that of legal services provided by
individual advocate or firm of advocates to business entity. This too is not
compatible with GST concept and ought to have been avoided.

______________________________________

8   S
87 0f CGST Act,20177.

Need for pan India service providers to register in each
state and work out tax liability state wise as also requirement for providing
information about each branch together with name and address of the person in
charge, besides proof of address, is a time consuming exercise. Maybe, going
forward, the IT system will soften this burden.

There is significant unease among pan India suppliers of
goods and services about possibility of differing views/approaches that could
be adopted by different authorities and likely multiple demands on identical
transactions. A centralised audit system for such suppliers by a group
comprising officers representing Central Government and State Governments
(these could be rotated from State to State depending on the volume of activities
in a State and can be done electronically without human intervention) is a
solution, referred to in the passing, and may be adopted as the tax authorities
across different States gain experience.

Requirement of quoting detailed HSN Code or Service
Accounting Code at the time of registration on GSTN portal itself is causing
huge anxiety especially for non-manufacturing sector. Asking this information,
at this early stage of GST implementation, could be done away with. Broad
industry classification could meet the objective; facilitating government in
collating industry-wise data and simplifying process for tax payers from
compliance perspective.

There are very detailed and exhaustive transition provisions
which have envisaged various situations and dealt with them. Yet, there are
areas that need to be addressed. Leasing industry is an example where
transition provision is missing.

A provision that is causing significant apprehension during
transition is that of “anti-profiteering”; up to what level should one go and
how to determine it? There are mixed reports from Australia and more recently,
Malaysia, as to effectiveness of such provisions in controlling prices post GST
implementation. Some sectors like consumer goods or fast moving capital goods,
where there is intense competition, will self-adjust prices and the likelihood
of price increase is less. Monopolies and monopolistic sectors are the ones
where Government will have to focus. This will certainly be an area of intense
interest for all, especially, the consumer groups.

Entirely digital administration is a super feature of our GST
system facilitating several processes like enabling businesses to comply with
laws of all the States from one location; complete one to one matching of
invoices to avoid disputes and demands at a later date. But, this feature has
its own challenges, connectivity issues, comparability and so on. Here again,
as we gain experience, systems and processes will be streamlined. Technology
platform will significantly ease verification of input tax credits and overall
compliances as is the experience with TDS under Income tax.

Mindset change

shailesh.kwebmaker