CA Ranjan Mehta
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Prelude:-

Revised Model GST Law has been released by GST Council Secretariat in the month of November 2016. Whatever be the fate of GST in this Budget session, this is certain that Govt. needs to bring it by 15th Nov 2017, otherwise we will be living in an Indirect Tax-Free World. In this context, it is very pertinent to understand, the impacts, GST is going to have on the various aspects of business. Since the incidence of GST, the ways in which businesses are done in India are going to change. Major re-hauling will be required since currently taxes in a big away effect the Business Modelling in India. Every business process will be needed to be relooked critically and re-engineered as per the foregoing provisions of GST Law to achieve the maximum benefit for the business.

Present Regime: –

CST: – In Case of interstate sale of goods, presently CST is levied. CST is a Central Govt duty which is an origin based levy and is collected and retained by origin state. The rate of CST is 2-5% for B2B transactions and for B2C transactions they are equivalent to the rate of VAT in the state of origin of goods.

There is no separate levy of excise in such transfers as excise is levied on manufacture only and it has no linkage to sale or supply.

Import Duties: – In Case of Import of goods, there are various levies of Customs at present.

1) Basic Custom Duty

2) Additional duty of customs/countervailing duty u/s 3(1) in lieu of Excise

3) Special Additional Duty u/s 3(5) in lieu of VAT/Sales Tax

4) Anti-dumping duty

5) Anti-subsidy duty

6) Other various duties

Basic Custom duties are levied invariably on all products other than exempted products. Additional duty of customs or countervailing duty u/s 3(1) is generally equivalent to Duty of excise on that product in India, and Additional duty of customs u/s 3(5) is generally 4% which is a replacement for VAT/Sales tax.

Anti-dumping and anti-subsidy duties have some very different concepts in case imported products, which we are not focussing in this article.

Subsumption of duties under GST:-

Following are the duties are going to be subsumed in relation to IGST.

1) CST

2) Additional duty of customs/countervailing duty u/s 3(1) in lieu of Excise

3) Special Additional Duty u/s 3(5) in lieu of VAT/Sales Tax

Anti-dumping, anti-subsidy duties and Basic Customs duties are not going to be subsumed under GST. Thus, we can understand that largely GST is going to subsume only those levies/duties which were part of or relevant to current levies of excise and VAT.

Provisions and Law:-

The provisions related to Interstate trade are contained in the IGST Law. IGST- The Integrated Goods and Service Tax Act contains the provisions related to the assessment of Place of Supply of Goods. It is only the Place of Supply provisions which will determine that whether on a particular transaction IGST will be charged or CGST & SGST will be charged.

Sec 5 of IGST Act is the charging section, it explains that on which transactions IGST will be levied. Following are the transactions on which IGST Shall be levied:-

1. Supplies of Goods and services made in the course of Inter State Trade or Commerce.

2. Import of Goods into India

This makes it very clear that in the case of Interstate transactions of goods GST is going to be levied invariably. Further to that, on all the import of goods IGST shall be levied.

When will the duties be levied?

As per section 5(1) at following points IGST shall be levied:-

  • In Case of Inter-State supply: – In Case of interstate stock transfer the tax shall be levied when supplies are made in the course of interstate trade or commerce. Thus it is very clear that in the case of interstate transactions when the supply is made, the tax shall be levied depending upon the place of supply. Upon happening of the same transaction in different manners, Place of supply may get changed from intra state to interstate. Thus, the taxation would also need to be changed from CGST/SGST to IGST.
  • In the case of Import of Goods: – In the case of import of goods the provision is as follows:-

“PROVIDED that the Integrated Goods and Services Tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 (51 of 1975) at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962 (52 of 1962), on a value as determined under the first mentioned Act.”

Thus in case of imports, levy of IGST arise when the goods are going to cross the custom barriers of India and where the custom duties are levied. The Custom duty is levied at time when good are cleared from the port/airport after showing proper documentation (Bill of entry, Invoice etc.)

This leads to a further question whether on High Sales and Transhipment GST will be levied?

This question is unclear as of now as currently under customs duty is paid at the time when goods are cleared for Home Consumption. However the duty is levied when goods cross the custom frontiers of India i.e. it enters into Indian Territorial water/air. Thus if go by literal interpretation the High Sea Sales and Transhipment are going to be taxed under IGST being the leviability of duty arise. It is not very clear whether these transactions would involve levy of IGST or not.

Place of supply of Goods:-

To determine the type of tax (CGST and SGST or IGST) to be levied one need to identify the place of supply first.

Sec 7 of IGST act specifies the provisions for identifying the Place of supply of goods in case of Inland supply.

Sub-Section Type Provision Example
2 Normal Case scenario Place of supply shall be the location of goods where goods terminates for delivery A Ltd in Jaipur was to supply some Material to B Ltd in Mumbai. However A Ltd delivered the material to agent of B Ltd in Baroda. Place of supply shall be Baroda.
3 Third Party Scenario Where material was supplied to a party on the direction of a third person, place of supply shall be Principal Place of Business of that third person. Ex 1 A Ltd in Ahmedabad directed B Ltd in New Delhi to deliver goods to C Ltd in Bangalore; Place of supply shall be Ahmedabad and B Ltd shall charge IGST.

Ex-2 A Ltd in Kanpur directed B Ltd in Dehradun to supply material to Branch of A Ltd in Haridwar. The Place of supply for B Ltd shall be Kanpur; even where goods physically has not crossed the boundary of Uttarakhand.

4 Where there is no movement Where there is no movement involved; Place of supply shall be the location of goods at the time of delivery to recipient. A Ltd a Mining unit in Raipur made available lumps of Marble to B Ltd. However since lumps were huge, B Ltd asked A Ltd for permission to break them into pieces do some preliminary work and then transfer from there to Ranchi; Place of supply shall be Raipur.
5 When goods are assembled/ Installed Place of supply shall be place of such Installation or assembly. A Ltd in New Delhi installed a lift in the hospital of B Ltd in Mumbai; Place of supply shall be Mumbai.
6 Goods supplied in Train, Bus, Aircraft or vessel The Place of supply shall be the place where such goods are taken on Board Aircraft of Indigo airlines started from Mumbai and food items were taken on board. The flight went on to Delhi and then on to Kathmandu. The Place of supply shall be Mumbai.

Sec 8 of IGST act specifies the provisions for identifying the Place of supply of goods in case of Export/Import:-

Sub-Section Type Provision Example
1 Import Place of supply shall be location of importer A Ltd in Bhopal imported goods from the USA. The place of supply shall be Bhopal
2 Export Place of supply shall be location outside India A Ltd exported goods from Jamnagar to Abu Dhabi. Place of supply shall be Abu Dhabi.

Problems in place of supply provisions-

Provisions of sec 7(2) and 7(3) have created some deeming fiction into the law which have created a lot of confusion in the minds of practitioners and Law experts. I am trying to incorporate a few here for your knowledge.

Problem in sec 7(2)

Ex- A Ltd situated in Mumbai want to supply some material to B Ltd at Indore. A supplies material ex-factory usually, however since B Ltd could not arrange vehicle, they asked A Ltd to arrange for the vehicle for them for which they will reimburse.

In This case the Place of supply shall be Indore, being the movement terminated for delivery at Indore only. A Ltd would Charge IGST on the invoice.

Consider the same example and choose the answer if the vehicle was arranged by B Ltd.

The Place of supply in this case will be Mumbai since the movement of goods terminated for delivery in Mumbai itself i.e. material delivered to the transporter on behalf of B Ltd. A Ltd will charge CGST and SGST in his invoice since this is an Intra state supply of goods.

Problem starts here, As soon as CGST & SGST are charged, the credit flow hampers for B Ltd, as by law credit of SGST is not available interstate; and further to that, as per the modules developed by GSTN the credit pool of CGST is also going to be maintained state wise; so that will further hamper transfer of credit of CGST earned in one state to another.

Problem in sec 7(3)

Ex-1 A Ltd in Kanpur directed B Ltd in Dehradun to supply material to Branch of A Ltd in Haridwar.

The Place of supply for B Ltd shall be Kanpur; even where goods physically have not crossed the boundary of Uttarakhand.

Here, in this case B Ltd will charge IGST in his invoice, Place of supply being Kanpur, in terms of sec 7(3) of IGST law.

Now, to take the credit of this IGST, Kanpur office of A Ltd need to include this in their inward return and then in turn needs to raise Invoice on its Branch office at Haridwar. Then only it can take credit of IGST and adjust it towards their outward tax liability, hence finally transfer the credit to Haridwar.

The state tax authorities will, in this case, cause objections; since as per destination based consumption tax principle they should get tax since the place of actual supply is Uttarakhand only. However, through flow back of the invoice from Kanpur HO to Haridwar, Uttarakhand is in anyway going to get their share in IGST. But still the state tax authorities will try to get taxes at first stage only, as it may be difficult to get it at later stage. Further, it will be difficult for the assessee also, to prove such flow back.

Ex-2 A Ltd in Kanpur supplied material to B Ltd in Nagpur on the direction of C Ltd in Kolkata;

The place of supply in this case shall be Kolkata and the goods shall be deemed to be supplied to Kolkata as per sec 7(3). However the actual delivery took place at Nagpur.

Here to move the complete cycle of credit; A Ltd will raise invoice to C Ltd and who in turn will raise invoice to B Ltd. All invoices will be IGST.

Again the tax authorities of Kolkata and Nagpur will fight over the issue. Since the Kolkata would like that tax to remain in their state, while Nagpur would say that tax to be in their hands being Consumption in their state.

Ex-3 Consider the case in Ex-1 with an alteration that A Ltd do not have a branch in Haridwar but only have a temporary work site for erection of lift at someone else’s premises only for 5 days.

In this case A does not have a permanent establishment in Uttarakhand. However Material is supplied in Uttarakhand only. The HO of A Ltd in Kanpur cannot raise invoice at its Branch in Haridwar being not registered separately. How will Uttarakhand Govt get its share of revenue if B Ltd has raised IGST invoice.

This will create a lot of problems in the settlement of accounts and Law Machinery will harass the assessee for such problems and will try to tax in their state only.

Now lets take this example to another level

Ex-4 A Ltd a company situated in Dubai orders B Ltd in Jaipur to transport some material to its branch in Mumbai.

What would be the scenario?? I would leave it for readers’ guess and contemplation, since if we go by 7(3) then Place of supply is Dubai and in such cases 7(3) does not apply and 8(2) will apply. However since material is not going out of India, again the applicability of 7(3) arise. Thus, it is a circular loop.

Conclude

The current provisions for place of supply of goods are quite confusing and will give birth to a lot of litigation issues post-GST roll out. Govt should look out to simplify these provisions and provide more clarifications So that Industry could prepare better.

Govt is set to roll out GST by 01st July, with many issues still to be catered. In order to bring a simplified GST the Govt should amend the provisions cohesively sitting with the Industry, since it is the Industry who is the biggest stakeholder apart from the consumers.

(CA Ranjan Mehta, +91-9672372075, ranjanmehta21@gmail.com)

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One response to “Impact of GST on Inter State & Imports Transactions of Goods”

  1. Ronak Kothari says:

    Nice Article.
    Query1 – As per the article “as by law credit of SGST is not available interstate” –
    But as per law: The amount of input tax credit on account of SGST available in the electronic credit ledger shall first be utilized towards payment of SGST and the amount remaining, if any, may be utilized towards the payment of IGST. So whether we will be do that

    Query2 – For transportation part, whether the role of risk of transferring will not play a pivotal role to determine where the supply is being done.

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