The goods and services tax (GST) is set to replace key transaction taxes in India, in the coming year. Under the GST structure, while intra-state supply of goods and services is expected to attract Central GST and state GST, inter-state supply of goods and services is expected to attract integrated GST or IGST (which is a combination of Central GST and state GST).
In the context of inter-state supplies, identifying the state eligible for levying the state GST assumes importance. In the first part of this series (goo.gl/H68ZOM), the discussion focused on the place of supply of goods. This column focuses on the place of supply of services.
It may be reasonable to assume that the ‘place of supply of services’ shall be determined by a specific set of rules somewhat aligned to the ‘place of provision of services’, currently in place under the service tax law. While these rules determine the place of provision in the context of cross-border supply of services into and from India, the GST rules would apply to cross-border supplies across two or more Indian states as well.
With the GST being a destination-based consumption tax, the place of supply would need to be determined based on the location of consumption of services. Place of supply rules are, therefore, typically designed to determine the place of consumption of the service. Internationally used place of supply rules include proxies based on the following, among other criteria:
* services related to immovable property are taxed based on the location of the property (construction, architect service, renting, building maintenance, etc);
* services that require the presence of the provider as well as recipient are taxed based on the location of their performance (training, beauty parlour, etc);
* specific rules apply to transportation of goods and passengers based on the location of commencement of journey or its destination;
* services supplied to individual consumers are taxed based on the location of the service-provider, referred to as B2C supplies (personal insurance, electronic downloads, etc).
The general rule for all other services is for the place of supply to be determined based on the location of the service-recipient, especially where the supply is to a registered business (B2B supplies).
While many of the above proxies have been incorporated in the place of provision of service rules currently in force in India, a notable exception is that India does not specifically distinguish the place of provision of B2B supplies from B2C supplies as a general principle across service categories.
While Indian businesses have, over the past 2 years, gathered experience in determining the place of supply of cross-border services into and from the country, implementing the same at a domestic level for inter-state supply can be a daunting challenge. A couple of illustrations may explain some challenges better.
Services pertaining to an immovable property are taxed based on the location of the property. In the context of inter-state supplies, where an architect based in Karnataka designs a building being constructed in Delhi, the place of supply of the service is likely to be determined at Delhi. In this example, what is currently not clear is whether the architect would need to register at Delhi and pay GST or merely pay IGST from Karnataka. The architect should ideally be required to pay IGST, identifying the place of supply as being Delhi. However, potential complications could arise if a portion of the services is sub-contracted by the architect to an engineer based in Delhi; the architect in Karnataka may not be in a position to avail credits of the local GST charged by the engineer in the absence of a registration in Delhi. How the GST levy and the corresponding credit chain pans out in such cases remains to be seen.
It is standard industry practice for the head-office of an organisation to enter into a contract with a service-provider for procuring services meant for consumption by its various branches. From a service-provider’s perspective, such supplies are presently billed on a centralised basis to the head-office contracting the services. Examples of this could be a contract for procuring software licences or insurance policies for branches across the country. Should the concept of centralised supply and billing undergo a change under GST, a service-provider engaged in providing such pan-India services to a customer with a multi-locational presence across states may well be required to split GST payment across the relevant states. Unless clear proxies are fixed for determining the ‘place’ or ‘state’ of supply in such cases, a situation of two or more states demanding tax on the same supply cannot be ruled out.
The Organization for Economic Co-operation and Development has recently issued draft guidelines in the context of taxation of cross-border supply of services to B2B and B2C segments including supply of intangibles. The latest guidelines reinforce the basic principle that GST is required to be levied at the place of consumption of the service (being the business or end-consumer to whom the service is supplied to). The guideline interestingly makes out a case for a shift in the taxation of B2C supplies (including supply of intangibles)—which is currently based on the location of the service-provider—to the location of the service-recipient. Consideration and factoring in of these guidelines could pave the way for the Indian GST regime to be in sync with the emerging global best practices on this aspect.
The determination of place of supply of services can be expected to be the most critical and challenging aspect of GST in the country. It may not be an exaggeration to state that the success of the GST regime could hinge on simple and clear rules in determining the place of supply of services. A key challenge for law-makers would be to balance the concerns of a service-provider on obtaining a registration in each and every state where she has a customer base vis-à-vis creating a jurisdiction for the tax administrator to enforce or collect GST from a non-resident service-provider.
Given the diversity in the nature of services, a single solution may not fit all and specific proxies may need to be continued for specific types of services, in line with the international best practices, including the continuation of some of the current place of provision of service rules. It is hoped that the proposed methodology of taxation of inter-state supply of services is placed before the industry soon to enable them to engage in a fruitful discussion with the law-makers to ensure that simple, effective and practical rules are formed on this front.
By Rajeev Dimri
With inputs from Jayashree Parthasarathy, Director, BMR & Associates, LLP
The author is Partner, BMR & Associates, LLP. Views are personal