Place of supply under GST regime

FEBRUARY 17, !1!

By S"i#ani S"a" $A
%&T' the advent of Goods and Service Tax (GST) in India just around the
corner, there are lot many apprehensions about its successful implementation.
Hoever, if and hen GST is implemented, the concepts of manufacture, service,
sales etc. ill become redundant. !hat ill becomes a taxable event ill be
"supply of #oods and services$. Hoever, the first discussion paper released on
the %&'%%'(&&) does not thro much li#ht on the subject "place of supply$.
GST is sou#ht to be a consumption based tax. Hence it ould become extremely
important to understand hat is implied by "place of supply$. The problem
becomes even #rave in relation of services. Services because of its intan#ible
nature ould pose immense issues in determination of the place of supply. The
discussion belo is in relation to international practices hich could perhaps help
form a notion about hat could be the "place of supply$ under the GST re#ime in
India.
*nder the value added tax (+,T) system tax is levied on value added at each
sta#e. Thus, input credit is available at each sta#e of value addition. *nder this
re#ime, each assessee in the supply chain ta-es part in the process of controllin#
and collectin# the tax, remittin# the proportion of tax correspondin# to the
mar#in reali.ed on transactions, or the difference beteen the +,T paid out to
suppliers and the +,T char#ed to customers.
Generally, +,T is desi#ned on the destination principle hich allos the tax to
maintain the concept of neutrality in cross border transaction. Hence, exports
are exempt ith refund of input taxes (/.ero0rated/) and imports are taxed on
the same basis and ith the same rates as local production. This +,T on imports
is #enerally collected at the same time as customs duties, althou#h in some
countries collection is postponed until declared on the importer$s next +,T
return. 1eduction of the +,T incurred at importation, in the same ay as input
tax deduction on domestic supply, ensures neutrality and helps maintain a
seamless flo of credit. This implies that the total tax paid in relation to a
commodity is determined by the rules applicable in the jurisdiction of its
consumption ' destination and hence all revenue accrues to the jurisdiction
here the sale to the final customer occurs.
In #eneral parlance, it is not a difficult proposition to determine the place of
supply for tan#ible #oods. The same is #enerally understood to be the place of
delivery, or shipment, of the #oods to the recipient (buyer). In other ords, a
sale of #oods is taxable in a jurisdiction if the #oods are made available in, or
delivered'shipped, that jurisdiction.
,s mentioned earlier, it becomes a lot more complex to determine the place of
supply for services. 2rincipally, the service provider should account for the tax in
the jurisdiction here the service or the intan#ible property is consumed or
used, irrespective of the contract, payment, beneficial interest or the location of
the supplier and customer at the time of the supply. 3o the moot 4uestion that
arises is hether intan#ible property is used or a service is actually performed in
a particular jurisdiction. The increasin# diversity in nature of businesses ma-es it
more difficult to apply a pure consumption test.
This leads to different sets of rules across different countries. !hile the rules and
approaches vary across countries, the basic criteria for determinin# the place of
taxation (or place of supply) in the case of services could be summari.ed as
follos, vi..5
In case of sale of real property, the place of supply is understood to be the
jurisdiction in hich the said property is located. 6i-eise, services directly
connected ith real property (i.e services provided by real estate a#ents or
architects etc.) are also taxed in the place in hich the property is located.
Hoever, in the case of mobile services (li-e passen#er travel services, frei#ht
transportation services, telecommunication services, motor vehicles lease'rentals
and 70commerce supplies), it becomes difficult to establish a fixed place of
performance or use'enjoyment of the service. Hence, special rules need to be
framed -eepin# in mind the basic destination principle.
In the case of other services and intan#ible property, the place of supply may be
determined on the basis of one or more of the folloin# #uidelines5
88 2lace of performance of service9
88 2lace of use or enjoyment of the service or intan#ible property9
88 2lace of location'residence of the recipient9 and
88 2lace of location'residence of the supplier
,t this juncture, it becomes important to distin#uish beteen :usiness to
:usiness (:(:) and :usiness to ;onsumer (:(;) transaction. In case of the
former, the place here the recipient is located or established re#ardless of
here the services are performed or used may be termed as the place of supply.
This is particularly in the case of intan#ible services li-e advisory or consultin#
services for hich the place of performance is not important. Therefore, all such
services rendered to a non0resident are .ero0rated. <n the other hand, in case of
:(; transaction, tan#ible services li-e haircuts, hotel accommodation, local
transportation and entertainment services hich are consumed in the place of
their performance. Therefore, the place of supply in the case of :(; transaction
is the place here the supplier is located.
=urther, there are a variety of other complex cross0border transactions for hich
supplementary rules are re4uired to ensure uniformity and consistency across
jurisdictions. They relate to #lobal transactions (or master service a#reements)
for individual supplies to le#al entities of a corporate #roup around the orld,
trian#ular transactions, supplies amon# branches and beteen branches and
head office, and cost reimbursement' allocation arran#ements.
The discussion relatin# to the place of supply above relate to international
transactions of #oods and services. <rdinarily, these rules should also apply to
inter0state supplies. Hoever, in practice there are substantial deviations in
these rules.
The recipient of the services may be located in more than one state and there is
no practice to determine the residency of the recipient unli-e in the case of
international transactions. Therefore, it is extremely difficult to identify the place
in hich the recipient is established' located. This problem becomes #rave for
countries li-e India hich have a federal structure ith the ;enters and States
havin# autonomous poers. Ta-in# an illustration ould help brin# clarity on the
subject. Say a business entity in state > appoints a commission a#ent located in
state : to help establish a mar-et for the formers products in states ,, :, ; ? 1
respectively. In such cases, the rules relatin# to the place of supply under the
GST re#ime in India need to be framed comprehensively. In such cases, if the
transaction is said to effect only state > ? @, obviously it ould not be a#reeable
to states ,, :, ; ? 1.
=or multi0establishment business entities, the place of destination should be
defined as the place of predominant use of the service. Hoever, in cases here
there is no uni4ue place of predominant use, the place of destination could be
the mailin# address of the recipient as stated on the invoice, hich ould
normally be the business address of the contractin# party. Hoever, ho far
ould it be a#reeable to the states here the service is actually used is a bi#
4uestion.
=or :(; services, the place of supply could be the State in hich the supplier is
located, hich, in turn, could be defined as the place here the services are
performed. If there is no uni4ue place of performance of the service, the place of
supply could be defined as the State here the supplier$s establishment most
directly in ne#otiation ith the recipient is located.