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The challenge of place of supply rules

The challenge of place of supply rules

The task force on goods and services tax (GST) appointed by the 13th Finance Commission had issued a report on 15 December detailing the recommendations on various issues relating to the proposed GST in India. This was in addition to the discussion paper on GST released by the empowered committee of state finance ministers on 10 November. This potentially pathbreaking report articulates the conceptual basis on which GST would operate.

The proposed GST model aims at rationalizing the present indirect tax regime by doing away with the multiplicity and cascading effect of indirect taxes across industries and replacing them (including service tax, central excise tax, value added tax and various cesses) with a single tax, GST.

With the dust settling in on the probable framework of GST, it is time for all parties that have an interest or are likely to be affected to partner in developing concepts that would make it a workable reality. In our federal milieu, which guarantees fiscal independence to states, a major challenge for the implementation of GST would be to preserve the revenue interest of the states. At a practical level, since the states have concurrent powers under the Indian constitution to tax goods and services, the real challenge would be to build up mechanisms to determine tax jurisdictions for the smooth implementation of GST.

This article attempts to highlight aspects relating to the place of supply rules for services under the proposed GST regime. Under the existing regime, the place of supply for services is primarily relevant only in the context of cross-border service transactions, which are currently governed by rules on export or import of services.

Currently, the place of supply is not of much relevance in the context of taxable services rendered within India, since service tax is a federal levy. While the export and import rules could still hold good for cross-border transactions under GST, issues may arise in the case of inter-state supply of services within India leading to different states claiming to tax the same transaction.

The recent report of the 13th Finance Commission has broadly indicated best international practice on place of supply rules, which may be adopted by India. The guidelines indicated appear to be akin to principles followed in the European Union (EU). It is pertinent to note that in the EU, the current applicable rules (as amended on 1 January ) provide that, for supply of services to businesses (B2B) within the EU, the place of supply will be where the recipient is established. For similar supplies made to consumers (B2C), it would be where the supplier is established. These principles are, however, subject to certain exceptions where the place of supply is more closely linked to the performance of services or location of immovable property.

In the above backdrop, it would be worthwhile to draw from EU’s experience in evolving and implementing these rules across member states. Applying the said rules in the Indian context would mean that, in the case of an inter-state B2B supply, GST would be accounted for in the state where the recipient is established. Further, in the case of service supplies made to a non-business customer outside the state, GST would be accounted for in the state where supplier is established.

As indicated in the 13th Finance Commission report, there should be exceptions to the general rules; for example, with respect to services connected with land, the place of supply would be linked to the location of the immovable property, as also for services such as transportation and telecommunication. In the absence of any fixed place of performance, use or enjoyment of the service, special rules should be framed.

The important position emerging from the discussion is the considerable role that the location of the customer or supplier would play in determining the tax jurisdiction under the proposed GST regime. Lawmakers, therefore, need to evolve sound principles to determine the location of the supplier or customer as the case may be, since uncertainty may prevail in situations where services are being supplied to more than one establishment of a single customer in different states. For example, in case a supplier provides marketing and promotion services to a business with branches across the country, the definitive question would be: What is the location of the recipient for establishing tax jurisdiction?

While one mechanism to tackle this situation could be the splitting and allocating of services to each of the branches, this too has its fallacy since the splitting may not be possible in the case of the supply of composite services. As suggested by the 13th Finance Commission, another mechanism could be the ‘predominant use test’, wherein the place of supply is the place of predominant use of the service. Further, in situations where it is difficult to establish predominant use, the mailing address of the recipient as stated on the invoice could be the place of supply.

The place of supply rules will also need to develop ways of determining tax jurisdiction in case of composite supplies, or supply of both goods and services. Resolving the issue of ‘place of supply’ will not only be crucial for the state governments, it would be of immense importance to businesses to identify their tax obligations. While Indian lawmakers can refer to the international practice, the unique federal structure and domestic environment of India would require careful consideration, and more articulation and participation from all stakeholders.

This column is contributed by Suresh Varanasi and Aditya Singh Chandel of AZB and Partners, advocates and solicitors.

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