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.
2. 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 taxshould 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.
3. 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.
4. 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.
5. 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 customer could 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,
• 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 [Sec 5(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]
PLACE OF SUPPLY OF SERVICES [sec (6)]
I Place of supply of B 2B services- Default rule [Section 6(2)]
The place of supply of B2B services except the exception given below is the location the service recipient.
II Place of supply of B2C (Business to Customer) and B2G (Business to Government) services [Sec 5(3)]
It has prescribed that in default (other than the exceptions given below) the place of supply of service shall be the location of recipient where the address is available on
record. If the address is not on record, the place of supply of service shall be the location of service provider.
Exceptions to the general principle:
(i) Services having nexus to immovable property-Place of supply shall be location of immovable property [Section 6(4)].
Services relating to immovable property are not interdependent on the location of service provider or the service receiver. The place of supply of service provided by an engineer, architect, estate agent, interior decorator and surveyor is specified as location of such property.
For example: A Delhi based businessman wish to construct a school in Bhopal. He may hire the services of Architect having usual place of residence in Mumbai. Here, the entire economic activity is culminating in the form of construction of school and such activity is taking place in Bhopal. Services in relation to immovable property are treated as supplied at the location of immovable property. Therefore, in this case the place of supply is Bhopal.
The supplies that are covered under this exception are,‑
a) The grant, assignment or surrender of any interest in or right over land;
b) The grant, assignment or surrender of a personal right to call for or be granted any interest in or right over land;
c) The grant, assignment or surrender of a license to occupy land or any other contractual right exercisable over or in relation to land (including the provision of holiday accommodation, tents and camping facilities);
d) Any works of construction, demolition, conversion, reconstruction, alteration, enlargement, repair or maintenance of a building or civil engineering work; and
e) It also covers the services of professionals such as estate agents, auctioneers, architects, surveyors and engineers, in so far as they are directly related to a specific site (or sites) of land. It does not apply where such services are only indirectly related to land, or where the land related service is only an incidental component of a more comprehensive service. Examples of land related services include,-
• Services of estate agents, auctioneers, architects, surveyors, engineers and similar professional people relating to land, buildings or civil engineering works and management, conveyance, survey or valuation of property by a solicitor or surveyor;
• seismic surveying and associated data processing services on land;
• services of a loss adjuster in assessing validity of an insurance claim relating to damage to land or buildings;
• legal services such as conveyancing and dealing with applications for planning permission;
• accountancy services relating to the letting of property;
• lease or hire of exhibition stand space, where the specific stand space is reserved by an individual exhibitor;
• property management, including rent collection and arranging for routine maintenance;
• interior designing in buildings;
• leases of buildings for less than 21 years (which is a supply of a service);
• provision of hotel or holiday accommodation;
• options to purchase land;
• provision of car parking, provision of space in a warehouse (whether in a designated area or not).
f) Services in the course of construction, alteration, demolition, repair or maintenance of any building or civil engineering work on land, including painting, decorating, and the supply of plant or machinery together with an operator for work on a construction site.
g)The provision in an hotel, or similar accommodation of sleeping accommodation or of accommodation in rooms which are provided in conjunction with sleeping accommodation or for the purpose of a supply of catering.
(ii) Restaurant services, catering services and other performance based services-Place of supply shall be the place of performance [section 6 (5)]
The services provided by a restaurant, beauty parlour, therapeutic massage centre, dance or drama classes or other training or coaching etc are such services which require simultaneous presence of service provider and service receiver. The place of supply of such service has been prescribed as the location where such services is performed. The restaurant and catering services are also performance based services. The place of performance of these services, and thus place of consumption thereof is readily ascertainable. The place of supply of these services will be where the services are actually performed and it is the closest proxy for determining the place of supply of these services.
(iii) The place of supply of training and performance appraisal when provided to a non-registered person- Place of supply shall be the place of performance service [Section 6(6)].
The place of supply of such services to a registered person is governed by the default rule, i.e., location of service recipient. However, in respect of B2C supply the location of such supply is the place where such services ae performed.
(iv) Admission to an event or amusement park- Place of supply shall be the place of performance service where event is held [section 6(7)].
A Mumbai based event manager organizes an event in Hyderabad. It allows admission to the employee of Bangalore based company in the said event. The place of supply of this service is Hyderabad as even is held there.
(v) Services relating to organizing an events when provided to a nonregistered person – Place of supply shall be the location where event is held [section 6(8)].
The place of supply of services that have direct nexus to the admission, organization and conduct of an event is determinable as the place of such event. Services covered under this sub-rule are,
• any supply of cultural, artistic, sporting, technical support, educational, or entertainment services
• miscellaneous services relating to organizing exhibitions, conferences, or meetings
• Sporting services include
(i) individual sports persons appearing at an event for a fee (appearance money’)
(ii) organisation of sporting events such as races and tournaments, and provision of race prepared cars to racing teams or drivers, comprising a package including the hire of the car and support services to ensure the optimum maintenance and operation of the car throughout a series of races.
• Entertainment services include of the services of an artist or performer before a live audience, or services relating to a performance. It would also include the services of a DJ or musician at a concert or event.
(vi) Goods transportation services including courier or mail when provided to a non-registered person [section 6(9)]‑
Place of supply of B2C supply shall be the location where such goods are handed over for transportation. For B2B services default rule shall be followed.
(vii) Passenger transportation service when provided to a non-registered person – [section 6(10)]
Place of supply shall be the location where the passenger embarks for a continuous journey. For B2B services default rule shall be followed. Therefore in respect of a flight from Delhi to Chennai, when provided to a non-business entity, the place of supply shall be Delhi.
(viii) Services provided on board a conveyance- [Section 6(11)]
Place of supply of service provided on board a conveyance shall be the location first schedule point of departure of the conveyance.
(ix) Telecom services -Cable services/DTH services [Section 6(12)]
The place of supply of telecom company to a customer shall be determined in the following manner;
(i) in case of service by way of fixed telecom line, leased circuits, internet leased circuit shall be the state where the fixed line is made available to the user ;
(ii) In case of mobile connection for telecom and internet service provided on post-paid basis, the place of supply shall be the billing address for such service;
(iii) In case where such service is provided on pre-paid basis through a pre-paid voucher the place of supply of service shall be the state where such vouchers are sold. However, if voucher are sold on internet banking or other mode of e-payment then in such cases the location/address of recipient would be available. Hence in such cases the place of supply of service be the recipient location on the record.
(iv) The place of supply of such services is determinable almost like telecom service, in the following manner.The place of supply of service by way of cable connection and direct to home connection service shall be the state where such connection is made available to the service recipient. For example Tatasky has a registered business premises in Chandigarh from where it supplies services to whole of India. Tatasky can identify, at the time of payment itself, the location of the subscriber in case of payment made, other than by way of pre-paid vouchers.
(x) The Place of supply of banking and financial services including the stock broking service shall be the location of service recipient on record. If location is not available then the location of service provider shall be the place of supply of service. [Section 6(13)]
This provision shall cover a transaction of lease/hire-purchase finance, money changing, mutual fund service, bill discounting, credit card service, banking services, brokerage service, demat services etc.
(xi) The Place of supply of insurance services in case of B2C transaction shall be the location of service recipient on record. For B2B services it shall be the location of recipient, i.e., default rule [Section 6(14)]
(xii) Place of supply advertisement service to the Central Government, State Government, a statutory body etc [Section 6(15)]‑
The place of supply of such services shall be the state to which such service identifiable. If it is attributable to more than one state, it shall be determined in terms of contract and in absence thereof it shall be determined on reasonable basis as may be prescribed.
(i) A Government Department , say, Women and Child Welfare, from Delhi office hires the services of say Doordarshan, also located in Delhi for advertisement campaign across the country. The campaigns are broadcasted across the country;
(ii) Income tax department hires the service of Times of India from a centralized location for publication of advertisement in all editions across the country; (iv) A national political party hires a service broadcasting channel or paper for
(iii) dissemination of advertisement across the country.
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