Goods and Services Tax – Place of Supply

By Ranjeet Mahtani and Sweta Rajan

After the approval of the Lok Sabha on March 29, 2017, four supporting GST bills, viz. the Integrated GST (IGST) Bill, Central GST Bill, Union Territory GST Bill and the Compensation Bill were sent to the Rajya Sabha for their comments. The Rajya Sabha cleared the bills on April 6, 2017 without any amendments. With this, the July 1, 2017 target for the introduction of GST seems realistic. Trade and industry are therefore in the phase of deliberating the law and examining potential issues.

Under the GST regime, every transaction will have to be subjected to a 4-point analysis:

• when is the GST applicable?
• on whom is it applicable?
• how much is applicable (rate of tax), and
• what are the compliances to be followed?

The first point, i.e. ‘when is GST applicable’, in terms of the IGST Bill has in itself created a stir across industries, specifically, service providers.

In terms of the IGST law, the question of when a specific tax (CGST, SGST or IGST) is applicable is determined on the basis of two factors, i.e. the location of the supplier and the place of supply. ‘Location of the supplier’ has been defined, however ambiguously, and determination of the supplier’s location itself is raising concerns.

For instance, a supplier is required to register in the State from where supplies are made. Say, a person who is located in Karnataka owns a property in Goa, which he offers for rents. He is not required to be physically present in Goa to supply rental services. Will such a person be considered to be providing the service from Goa, even though he has no presence in Goa? As a result, will he be required to obtain a registration in Goa? The answers to these questions are most relevant since they will determine what registrations he requires, what the nature of his transactions are (inter-State or intra-State), and as a result, what tax (CGST, SGST or IGST) will he pay on his rental service.

This issue is not restricted only to cases involving immovable property. Another example is the case of license of intellectual property (IP), where the supplier owning the IP is located in one State, the licensee is located in another State and the IP is being exploited in a third State. Where will the supply (license of IP) be considered to have been made? Trade and industry will have to examine each and every transaction from this perspective, to determine when and what tax is payable. This may prove to be a herculean task in many industries.

Further, the rules relating to ‘place of supply’ of various services (including the transportation industry and the shipping industry) have also created anomalies. For instance, the place of supply of transportation of passenger services differs depending on whether the recipient of the supply is a B2B customer or a B2C customer. This has created an issue for airlines since tickets for the same route (say Bangalore to Delhi) may be charged using different taxes depending on whether the customer is a B2B or B2C customer.

By way of illustration, in a B2B supply where a person travels from Bangalore to Delhi, the place of supply will be Delhi, since the place of supply is the location of the service recipient. However, in a B2C supply, the place of supply will be Bangalore since the place of supply is the place of embarkation of the passenger. Airlines and other transporters therefore cannot treat and tax all transactions relating to one route in the same manner.

It is necessary that all service providers examine all their transactions to ensure that they are fully compliant under the GST regime. Dealing with these issues may require systemic changes including rewriting their IT systems.