With GST round the corner, companies are already reviewing and analysing the actual impact on their supply-chains. Unlike the existing regime, GST would be a destination-based consumption tax and the tax would accrue to the state where the goods/services are consumed. In this regard, the Model GST law lays down detailed provisions with respect to determination of actual ‘place of supply’ (PoS).
While the service industry is required to undertake such analysis under the existing service tax regime as well, it would be completely new for the manufacturing/trading industry. The correct determination of PoS would be critical to enable identification of whether a supply (of goods) transaction is an inter-state transaction chargeable to ISGT or intra-state transaction chargeable to CGST and SGST or a zero-rated exports transaction. The onus for such determination is on the supplier and any wrong characterisation would mean incorrect payment of taxes. The model GST laws currently do not provide for any mechanism for self-adjustment of incorrect payment of taxes. Accordingly, in such a situation the supplier would be required to first deposit correct IGST or CGST/SGST (as the case may be) and claim refund thereafter.
With this background, it is pertinent to note that in terms of the model GST laws, the PoS for transactions involving movement of goods, whether by the supplier or recipient or any other person, shall be the place where the movement of goods terminates for delivery to the recipient.
The phrases used in the aforementioned provision, i.e., ‘supply involving movement’, ‘movement by recipient’ or ‘termination of movement for delivery to the recipient’ have not been defined under the model GST laws. Being open to interpretation, the aforesaid provision raises various questions. For example, a factory in state X makes a supply on ‘ex-works’ basis to recipient located in state Y. The recipient collects the goods from the factory in X and thereafter takes the goods to Y. In such a case, whether such transaction would be an intra-state supply as the goods were delivered to the recipient in X and the movement was only a post-delivery movement, or an inter-state supply as the goods were moved by the recipient to Y. Similarly, the said provision would need some elucidation to determine the status of movement, where a carrier appointed by recipient takes delivery of such goods from supplier. It is currently unclear if delivery of goods to such carrier would qualify as constructive delivery of goods to the recipient.
While interpreting the aforesaid provision, in case it is assumed that any movement of goods after the delivery of goods to recipient is not relevant for determining PoS, it would make the phrase ‘whether by the supplier or recipient or any other person’ redundant and otiose. Accordingly, harmonious reading of the provision would suggest that movement of goods by or on behalf of the recipient is also to be considered while determining the PoS.
However, such harmonious interpretation would still leave room for interpretational issues. Such as how would the supplier determine the correct PoS in case the recipient undertakes any movement or changes the destination of movement without the knowledge of supplier? Additionally, whether any movement of goods across the state borders post an over-the-counter sale would be relevant in determining the correct PoS?
While the enthusiasm of the Centre to work towards speedy introduction of GST is commendable, it is imperative that such interpretational issues are addressed by the Government in a timely manner so companies are ready for transition in time and any unwarranted litigation is avoided.
Sandeep Chilana is partner and Aurica Bhattacharya, senior associate, Shardul Amarchand Mangaldas. Views are personal