While under the indirect tax regime various central and state levies are triggered by distinct taxes (eg, service tax on provision/deemed provision of services, value-added tax (VAT) on the sale of goods and excise duty on manufacture of excisable goods), under the new goods and services tax (GST) regime, these taxes will likely be subsumed into a single tax trigger – supply.
The 122nd Constitution Amendment Bill 2014 (introduced in the Lok Sabha on December 19 2014) defines 'GST' as a tax on the supply of goods and services. While 'supply' has not been defined, it is not restricted by the typical connotations associated with terms such as 'sale' and 'manufacture'. As a result, these concepts – which hold great significance under the existing indirect tax regime – are likely to lose their relevance once GST is introduced.
Under various supply-based VAT and GST regimes worldwide, all goods and services transactions will be taxed, unless they are specifically excluded. Therefore, businesses can expect a wide range of activities to become liable to GST, given that a supply will subsume multiple taxable events. For example, the manufacture and sale of goods, which currently attracts two separate levies (ie, excise duty and VAT), will attract a single levy as a supply under the GST regime (central GST and state GST).
One of the most significant outcomes of supply being the tax trigger is the elimination of the potential for dual taxes. GST will likely be levied on supplies of both goods and services at an identical rate. In addition, under the bill, the term 'services' has been defined as "anything other than goods". It is expected that this mutual exclusivity will be mirrored in various GST laws enacted by the states and central government. This will alleviate various longstanding disputes in relation to the duality of taxes (eg, software, IP rights and rights to use transactions). In particular, certain transactions (eg, deemed sales or those involving intangibles) which are currently treated as goods transactions may instead qualify as service transactions under the GST regime.
Another significant implication is for transactions, such as stock transfers, consignment sales or job work transactions. In light of the introduction of the concept of supply – without requirements regarding transfer of title – even supplies of personal goods or supplies of goods to agents or work-related transactions could attract GST. This would effectively ensure the continuity of the tax chain, allowing credit to flow freely.
Further, as there is no requirement of consideration inherent to supply (unlike for sale), it remains to be seen whether and how GST will apply in cases where there is no consideration paid or payable for goods or services, or where no monetary consideration is involved (eg, barter).
Place of supply
Closely linked to the taxable event of supply are the rules governing the place of supply, which will determine not only whether a given transaction is subject to GST, but also which state can lay claim to the state GST component built into central GST. Fundamentally, GST is a destination-based consumption tax and the rules for the place of supply should be aligned with this principle. Internationally, a distinction is usually made between business-to-business supplies and business-to-consumer supplies. The former are taxed per the location of the recipient, while the latter are taxed per the location of the supplier. However, given that GST will be implemented in India's unique federal system, with its ever-changing political landscape, place of supply rules will be rigorously tested.
In the interim, the Place of Provision of Service Rules 2012 were introduced in July 2012, along with the negative list approach. These rules are expected to continue under the GST regime in the context of services. The default rule for determining place of supply is the location of the recipient, per the destination principle. Special rules cover the place of provision for events, movable and immovable property and transport. These rules are broadly attached to the location where the service is effectively consumed. One notable exception is intermediary services, which are taxed at the location of the provider, rather than the recipient, thereby subverting the destination principle and effectively taxing exports of these services to foreign recipients. Such anomalies must be addressed while formulating the supply rules under the GST regime.
It is hoped that the move to GST will address the gaps in terms of identifying the situs for a supply of intangibles, possibly by treating these as service transactions or alternatively by way of a special set of norms.
Tangible goods are currently taxed based on the physical movement of goods within and between states. In the event that supplies of goods continue to be taxed on this basis, special place of supply rules must be enacted for gas and electricity, which are supplied through common distribution networks running across various states. Alternatively, place of supply may be reformulated along the lines of the general business-to-business and business-to-consumer rules described above. If this were the case, it would have important implications for various sourcing models used by businesses; for instance, the 'bill to ship to' model will be entirely redundant if GST is based solely on the location of the recipient, not the movement of goods. Businesses may thus need to re-evaluate a host of practices, including the operation of depots in various states, as there may no longer be tax arbitrage between intra-state and inter-state movement of goods. Moreover, concepts such as in-transit sales, high seas sales and sales in the course of import may also become redundant.
The place of supply rules must be clear and simple – particularly given the surge in e-commerce and electronic delivery of services – while incorporating the nuances of each business sector, as this will help to realise the government's 'made in India' initiative and the vision of India becoming a single common economic market. Any other approach may result in endless disputes not only between taxpayers and the revenue authorities, but also between states that assert jurisdiction over the supply of goods and services. To obviate such issues, industry must engage with policymakers at this critical juncture of policy and rule formulation to ensure that input from each sector is duly factored into the eventual place of supply rules.
For further information on this topic please contact Rohan Shah or Rajat Chhabra at Economic Laws Practice by telephone (+91 22 6636 7000), fax (+91 22 6636 7172) or email (firstname.lastname@example.org or email@example.com).
Rohan Shah and Rajat Chhabra.
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