The Central Board of Indirect Taxes and Customs (CBIC) on the basis of the recommendations of the 55th GST Council meeting, has recently issued a significant clarification through Circular No. 242/36/2024-GST Dated the 31st December, 2024 addressing the determination of place of supply for online services provided to unregistered recipients. This development comes in response to observed non-compliance with existing provisions and aims to ensure the correct collection of the type of tax and consequently proper revenue allocation among states.
2.The clarification primarily focuses on services delivered through digital or electronic networks, encompassing a broad spectrum of online services. These include e-newspaper and e-magazine subscriptions, entertainment services through OTT platforms, online telecom services, and various digital services accessed through mobile applications. The scope extends to cloud services, e-books, movies, music, software distribution, digital data storage, and online gaming (excluding online money gaming).
3.Under the new guidelines, service providers must mandatorily record the state name of unregistered recipients on their invoices, regardless of the supply value. This requirement applies whether the services are provided directly by the supplier or through an e-commerce operator. For instance, when a customer from Maharashtra subscribes to a streaming service, the platform must collect state information during registration and explicitly mention “Maharashtra” on the tax invoice. This state name becomes the official address on record and determines the place of supply for GST purposes.
4.The impact of this clarification extends to various common scenarios in the digital service space. Consider an e-newspaper subscription service: when a reader from Karnataka subscribes, the publisher must verify and record the subscriber’s state, mention “Karnataka” on all invoices, and declare it as the place of supply. Similarly, for mobile app services, if a user from Delhi purchases in-app services, the provider must capture the state information before the transaction and include “Delhi” on the tax invoice.
5.To ensure compliance, service providers must implement robust mechanisms for collecting and maintaining state information. This involves updating their billing systems to capture state details, modifying invoice formats, and enhancing their customer registration processes. The customer data collection process should include mandatory state fields in registration forms and proper verification of customer locations. Invoice generation systems need to be automated to include state information, and regular validation of invoice formats should be conducted.
6.The clarification also emphasizes the importance of accurate GST reporting. Businesses must ensure proper declaration of the place of supply in their GSTR-1/1A returns, maintain regular reconciliation of customer locations, and file timely returns with correct information. Failure to comply with these requirements can result in penal action under Section 122(3)(e) of the CGST Act, leading to incorrect revenue allocation between states and potential legal complications.
7.For the e-commerce sector, this clarification brings additional responsibilities. Online platforms must devise suitable mechanisms to collect state details from unregistered recipients before making any supplies. The information collected becomes crucial for determining the place of supply under section 12(2)(b)(i) of the IGST Act, 2017 which specifies that the place of supply shall be the location of the recipient which reads thus:-
Section 12. Place of supply of services where location of supplier and recipient is in India.-
- The provisions of this section shall apply to determine the place of supply of services where the location of supplier of services and the location of the recipient of services is in India.
(2) The place of supply of services, except the services specified in sub-sections (3) to (14),-
(a) made to a registered person shall be the location of such person;
(b) made to any person other than a registered person shall be,-
( i ) the location of the recipient where the address on record exists; and
(ii) the location of the supplier of services in other cases.
8. So, a conjoint reading of clause (b) of sub-section (2) of Section 12 of the IGST Act, sub-section (2) of Section 31 of the CGST Act and proviso to rule 46(f) of CGST Rules leads to a conclusion that in respect of supply of services made to unregistered persons, irrespective of the value of the said supply, the supplier is required to mandatorily record the name of the State of the unregistered recipient on the tax invoice, in cases involving supply of online money gaming or supply of taxable services by or through an electronic commerce operator or supply of online information and database access or retrieval (OIDAR) services. Recording of the name of State of the unregistered recipient on the tax invoice in respect of such supply of services shall be deemed as the address on record of the recipient for the purpose of determination of place of supply of the said services under section 12(2)(b) of IGST Act. Accordingly, in such cases, the place of supply of such services shall be considered as the location of the recipient of the services as per provisions of clause (i) of section 12(2)(b) of IGST Act 2017.
9.The practical implementation of these requirements necessitates significant operational changes for many businesses. Companies need to update their digital infrastructure to automatically capture and validate state information during customer interactions. This might involve redesigning user registration flows, modifying checkout processes, and enhancing data storage systems to maintain accurate customer location records. For instance, consider a practical example of a multi-state digital service provider. When offering subscription-based services, the provider must now ensure their platform captures the subscriber’s state during sign-up, reflects this information on every invoice generated, and correctly reports it in their GST returns. This information flow must be maintained consistently across all customer interactions and billing cycles. The clarification also addresses the specific case of services provided through electronic commerce operators. In such cases, both the operator and the actual service provider must ensure compliance with these requirements. This creates a shared responsibility for maintaining accurate place of supply information and proper tax allocation.
10Unfortunately or otherwise, the supplier fails to issue invoice in accordance with the Rule 46(f) of CGST Rules 2017
Rule 46((f) name and address of the recipient and the address of delivery, along with the name of the State and its code, if such recipient is unregistered and where the value of the taxable supply is less than fifty thousand rupees and the recipient requests that such details be recorded in the tax invoice)
by not recording correct mandatory particulars, including recording of name of State of unregistered recipient in respect of such supplies, he may be liable to penal action
Sec.122(3) (e) fails to issue an invoice in accordance with the provisions of this Act or the rules made thereunder or fails to account for an invoice in his books of account, shall be liable to a penalty which may extend to twenty-five thousand rupees.
under the provisions of section 122(3)(e) of CGST Act 2017.
11. For businesses operating in the digital space, this clarification provides much-needed clarity while also imposing additional compliance requirements. The key to successful implementation lies in creating robust systems that can automatically capture, validate, and maintain customer location information while ensuring accurate invoicing and reporting. As the digital economy continues to grow, these guidelines will play a crucial role in ensuring proper tax revenue allocation among states and maintaining transparency in online service transactions. Registered entities must act promptly to align their operations with these requirements, investing in necessary system updates and capacity building to ensure full compliance with the new guidelines.
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