The need for the Place of Supply of Service and Goods under GST :
Goods and Services Tax (GST) is levied on the taxable supplies of goods and services. The principle that is generally adopted for levy of GST is that it should effectively tax the consumption of such supplies at the destination thereof or as the case may at the point of consumption. Goods being tangible do not pose any significant problems for determination of their consumption. The only challenge thus in case of goods is the
manner of taxation so as to avoid any double/multiple taxation or no taxation, and accrual of tax thereon to the consuming state, particularly if it is a supply at the end of the supply chain and meant for consumption of end consumer. Of-course, e-commerce based trading of goods would throw challenges for the tax administration.
Place of Supply of Goods is required to determine whether a supply is subject to SGST in a given State. These provision determine the place i.e. taxable jurisdiction where the tax should reach. Rules for supply of goods are primarily based on the physical location of the goods, though there are exceptions to the rule. For goods to be taxed in a State, it must be at some stage be located in the State concerned.
While in respect of supply of goods it may not be difficult to determine tax jurisdiction, based on consumption thereof, and therefore taxation of supply of goods under the GST regime may be relatively easier. However, taxation of interstate/ international services is extremely complex issue and internationally even the highly developed tax administration is struggling for effective taxation thereof. In India taxation of services is relatively new phenomenon and states do not have any experience in handling taxation thereof.
The major challenge as regards taxation of services, under GST regime in a federal setup, is that services being intangible in nature, it is not feasible to determine the exact place where services are acquired, enjoyed and consumed. For example interstate transport of passenger and goods, or the consultancy services, or the online database retrieval service or the intellectual property services pose such problems. The various element involved in a transaction in services, like the (i) location of service provider ( he may in fact be floating); (ii) the location of service receiver ( which may not be readily ascertainable at time, for exp voucher sale of pre-paid cards, or in the case of online information service etc); (iii) the place where the activity takes place (say a movie theater, a restaurant, an interstate transport or international transport); (iv) the place where it is consumed ( broadcasting service, roaming telecom service); and (iv) the place/person to which actual benefit flows would in respect of the same transaction flow in different directions and thus lead to distinct physical locations. Some time the same element may flow to more than one location, for example, construction or other services in respect of a railway line, a national highway or a bridge on a river which originate in one state and end in the other state. Similarly a copy right for distribution and exhibition of film could be assigned for many states in single transaction or an advertisement or a programme is broadcasted across the country at the same time. An airline may issue seasonal tickets, containing say 10 leafs which could be used for travel between any two location in the country. The card issued by Delhi metro could be used by a person located in Noida, or Delhi or Faridabad, without the Delhi metro being able to distinguish the location or journeys at the time of receipt of payment. Therefore the location where a service is consumed and accordingly to be taxed is difficult to determine.
The taxation of services becomes more complex if the following factors, to say a few, are also taken into account;
(i) In respect of goods the supply chain is usually long and as result incremental value addition in each stage is small. Therefore, capturing the transaction in at least few of the points in the supply chain is not difficult and therefore, major portion of tax is assured. Further, there always remains a trail for audit/compliance verification or enforcement. However, in case of service value addition occurs in lesser number of stages, and therefore, missing even a link would result in wiping out of complete revenue.
(ii) The manner of delivery of service could be altered easily. For example telecom service could change from mostly post-paid to mostly pre-paid; billing address could be changed, billers address could be changed, repair or maintenance of software could be changed from onsite to online; banking services were earlier required customer to go to the bank, now the customercould avail service from anywhere;
(iii) Service provider, service receiver and the service provided may not be ascertainable or may easily be suppressed as nothing tangible moves and there would hardly be a trail;
(iv) For supplying a service, a fixed location of service provider is not mandatory and even the service recipient may receive service while on the move. The location of billing could be changed overnight;
(v) Services are continuously evolving and would thus continue to pose newer challenges. For example 15-20 years back no one could have thought of DTH, online information, online banking, online booking of tickets, internet, mobile telecommunication etc. Dual tax regime in a federal setup increases the enormity of this challenge many fold.
6. The beginning point/ first challenge is as regards the determination of the place of supply of services. Since, exact determination of place of supply of service/consumption thereof is not determinable, as discussed above, the same needs to be determined by applying proxies that determine the place to supply of service proximately. However, while doing so, the tax administration needs to keep in mind the factors having bearing to tax administration and so also to the taxpayer, namely,
• certainty,
• simplicity,
• practicality,
• ease of collection of tax (compliance issue),
• competitive neutrality;
• implication to business decisions and
• overall fiscal objective.
7. Place of supply of services is required to be devised in a manner that the domestic supplier is not at a disadvantage (or advantage) as compared to foreign supplier and may be gets effective protection in internationally competed service. Exports are to be effectively zero rated.
8. The principles for determination of place of supply of goods are enumerated in section 5 of the IGST Act. These are as follows:
I. PLACE OF SUPPLY OF GOODS WHERE GOODS ARE REMOVED [SEC 5 (1)]:
i. Removal is said to take place when goods are physically moved by transport or are dispatched.
ii. This would cover Stock Transfer to branches also. Transfers to branches/ consignment agents located within the State should not amount to supply of goods whereas transfers to branches located outside the State should be deemed to be supply of goods. This is because in case of inter-State branch transfer, though the goods are being transferred within the same legal entity they are getting transferred from branch with one registration number to another with a different registration number.
II PLACE OF SUPPLY OF GOODS WHERE GOODS ARE NOT REMOVED [Section 5(3)]
i. This deals with such situation as supply of plant. This also deals with the situation where goods are supplied from a place other than supplier’s premises. For example – A manufacturer having a factory in Delhi hires a machine from a company in Gurgaon, Haryana and at a later date decides to buy the machine, the place of supply is Delhi rather than Gurgaon.
III SUPPLY OF GOODS MADE ON THE DIRECTION OF THIRD PERSON [Sec 5 (2A)]
In case supply is made on behalf of third person, then the place of supply shall be the principal place of business of the third person.
IV. PLACE OF SUPPLY OF GOODS ASSEMBLED OR INSTALLED [Sec 5 (4)]
i. The identifying element for application of this provision is installation or assembly either by the supplier or by somebody on his behalf as typically happens in case of installation of plant and machinery requiring expertise to
make it operational. This applies even when the element of installation is not substantial.
ii. This applies even if the contract for supply and installation of plant and machinery has been split into two contracts, one for supply of goods and one for supply of services of installation.
iii. Where the supplier sends components separately and such supply of machinery is not a supply in completely knocked down condition i.e. such supply is distinct from the supply of finally assembled goods, then the place of supply of each of such component will be the place from where they are removed and the place of supply of the assembled goods will be the place where the goods are assembled. Input credit of taxes paid on components would be available for payment of taxes on supply of assembled goods.
V. PLACE OF SUPPLY OF GOODS ON BOARD A VESSEL, AIRCRAFT OR TRAIN [Sec5(5)]
i. When such goods are taken on board by the supplier to the carrier (say airlines), it will be taxable i.e. the supplier of goods shall charge the tax as applicable.
ii. Further supply to the passengers is generally exempt when such supply is without any consideration.
iii. Such supplies may be taxed when sale takes place on board and in such a situation the place of supply of goods is where the goods are taken on board. For example, food and beverages supplied on board after preparation on board (e.g. in a train), place of supply would be the place where the transport originated.
VI For other supplies of goods ( not specified above), the lace of supply shall be specified by the Central Government on the recommendation of the GST Council [ Sec 5 (6) of the IGST Act]