Background

The model of GST adopted in India provides for a dual levy of tax, the revenue of which will be shared with the Central Government and the State Government. Since the concept of destination based tax has been adopted, it would be necessary for the revenue to flow to the state receiving the supply of goods and/ or services.

Accordingly, the model IGST law provides that in case of transaction where the supplier and the place of supply is the same state, Central and State GST will be applicable. If the supplier and the place of supply is in different state, Integrated GST will be applicable. The levy and administration of State GST will be done by the respective State Governments while that of CGST and IGST will be done by the Central Government.

The term “location of supplier” is defined u/s 2 of the model CGST/SGST law while the criteria for determination of place of supply is provided u/s 5/6 of the IGST Act. Section 5 deals with the place of supply of goods and provides criteria for determination of place of supply of goods in 5 specific scenarios which is discussed in succeeding paras.

General Rule

Sub-section 6(2) of the IGST Act provides as under:

(2) Where the supply involves movement of goods, whether by the supplier or the recipient or by any other person, the place of supply of goods shall be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient.

On a plain reading of the above provisions, it is evident that in case where the supply involves movement of goods, irrespective of the person undertaking the movement, the place of supply of goods shall be the location of the goods at the time at which the movement of goods terminate for delivery to the recipient. The use of the phrase “location of goods at the time at which the movement of goods terminate for delivery to the recipient”.

Generally, in transactions of sale of goods, there are two variants. The first variant is the scenario where the seller undertakes the responsibility of delivery of goods to the buyer/ any other person. The second variant would be the scenario of ex-works delivery, i.e., delivery at the factory/warehouse, etc. where the responsibility of the seller is to deliver the goods only up to his factory/ warehouse.

The following chart explains the probable tax implications under both the variants:

In the first variant, since the movement of goods for delivery to the recipient terminate at the location of recipient (as the responsibility of delivery of goods is on the supplier), the transaction will be treated as interstate, since both the conditions of location of supplier (Gujarat) and Place of Supply (Maharashtra- the place where the movement of goods terminate for delivery to the recipient) will be in different state and would therefore be liable to IGST. This will also enable free flow of credit to the ultimate buyer on account of IGST being eligible for credit.

In the second variant, the risks and rewards involved in the movement of goods and/ or services transfer to the buyer/ any other person at the location of supplier, i.e., delivery to the recipient takes place at the location of supplier. Therefore, in the above example, the location of supplier and Place of Supply continue to be in the same state, which would result in the transaction getting classified as an intrastate transaction and hence liable for CGST plus SGST. Therefore, there will be no free flow of credit as the recipient located in Maharashtra would not be registered in Gujarat.

Comparison with the current law:

Section 3 of the Central Sales Tax Act, 1956 prescribes scenarios to determine when a sale/purchases can be treated to be said to have taken place in the course of interstate trade/ commerce. The relevant section is reproduced below for ready reference:

Section 3: When is a sale or purchase of goods said to take place in the course of inter-State trade of commerce: - A sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase -

(a) occasions the movement of goods from one State to another; or

(b) is effected by a transfer of documents of title to the goods during their movement from one State to another.

Explanation1. - Where goods are delivered to a carrier or other bailee for transmission, the movement of the goods shall, for the purposes of clause (b), be deemed to commence at the time of such delivery and terminate at the time when delivery is taken from such carrier or bailee.

Explanation 2. Where the movement of goods commences and terminates in the same State it shall not be deemed to be a movement of the goods from one State to another by reason merely of the fact that in the course of such movement the goods pass through the territory of any other State.

Under the current regime, owing to clause (a), mere movement of goods from one state to another would amount a transaction to be in the course of interstate trade or commerce, which is not present under the model IGST law for determining whether a transaction is in the course of interstate trade or commerce.

Tripartite Sale Arrangements

Sub-section 6(2A) of the IGST Act reads as under:

(2A) Where the goods are delivered by the supplier to a recipient or any other person, on the direction of a third person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to the goods or otherwise, it shall be deemed that the said third person has received the goods and the place of supply of such goods shall be the principal place of business of such person.

The above scenario is explained pictorially below:

Under the current scenario, there will be two transactions, one wherein the taxable person located in Maharashtra (B) procures the goods from Gujarat (A), and on whose behalf, the Gujarat (A) based taxable person would deliver the goods to Punjab (C) based taxable person.

Sub-section 2 basically deals with the transaction between A and B. It provides that in cases where A delivers goods to C on B’s instruction, the place of supply will be deemed to be the location of B, i.e., Maharashtra. Therefore, in the current case, when A will bill to B for delivery of goods to C on B’s behalf, A will have to charge IGST to B which will be creditable in Maharashtra.

The issue that would arise is with respect to the transaction between B and C, and that too in the specific scenario where delivery was done by A on ex-works basis, i.e., C receives the goods from A location. This is because in T-2, when C takes ex-works delivery from A, the place of supply for goods become Gujarat. While no doubt, the condition for classification of transaction as interstate gets satisfied since the location of supplier (B) and Place of Supply (Gujarat) are in different states, the concern that would arise is whether the state entitled to receive the revenue would be Gujarat/ Punjab.

Supply where movement of goods is not involved

Section 6(3) of the IGST Act reads as under:

(3) Where the supply does not involve movement of goods, whether by the supplier or the recipient, the place of supply shall be the location of such goods at the time of the delivery to the recipient.

While the above section is very easy to understand, it would be essential to determine as to what falls under this entry. One might say that the machinery hardcoded into an immovable property would fall under this category, but under the Excise Law, the Courts have in various cases held that such machinery would not be classifiable as goods owing to the reason that there cannot be movement of goods without changing the basic structure of the machinery.

However, this particular entry would cover the transactions under taken through the commodity exchanges, where most of the supplies take place through exchange of warehouse receipts and not actual movement of goods and in such scenarios, the POS would be the location where the underlying goods are located and not at the place where there is transfer of title in goods.

Goods requiring assembly at site

Section 6(4) of the IGST Act reads as under:

(4) Where the goods are assembled or installed at site, the place of supply shall be the place of such installation or assembly.

This transaction would be a respite to equipment manufacturers who undertake the delivery of goods in CKD/ SKD condition to customers and also provide the service of erection and installation of the same at customer location under the same contract. In such cases, even if the delivery of the machinery in CKD/SKD condition would be ex-works, since the supplier would be undertaking the actual installation of the machinery at customer location, the POS would be the customer location on account of the specific provision contained in this entry.

Goods supplied on board a conveyance

Sub-section 6(5) reads as under:

(5) Where the goods are supplied on board a conveyance, such as a vessel, an aircraft, a train or a motor vehicle, the place of supply shall be the location at which such goods are taken on board

This entry specifically deals with situations wherein goods are supplied on board a conveyance. This transaction, with respect to the aviation industry can be explained pictorially as under:

The issue that would arise in this transaction are:

1. What would be the impact in case the goods are first procured and delivered to the warehouse and then are taken on board in the course of time? How would the supplier be in a position to know whether the place of supply is on board a conveyance or not.

2. If the goods are taken on board in Maharashtra, but are actually sold during the flight from Ahmedabad to Delhi, what would be the tax implication? It will be a task to keep track of goods for location from where goods are taken on board the conveyance.

Determination of place of supply in other cases

For transactions not covered by any of the above entries, sub-section (6) gives the authority to the Parliament to determine the same in accordance with the recommendation of the Council

Conclusion

Ongoing through the above, it is evident that the way the final law is drafted will be critical and will result in the existing industry practices undergoing major reforms. Existing practices, which are being followed under the current tax regime will become irrelevant and there will need for forming new practices for the industry to follow.

[Views expressed are strictly personal]