While levying tax on various supplies of goods or services, it becomes pertinent to decide whether supplies shall be treated as intra-State supplies or inter-State supplies. Also, this is necessary to determine because it will be a decisive factor for charging correct taxes, i.e. CGST and SGST/UTGST or IGST.
The relevant provisions for determining inter-State and intra-State supplies are governed by Section 7 and Section 8 of IGST Act. Section 8 of IGST Act pertains to intra-State supplies. Sub-section (1) of Section 8 of IGST Act deals with intra-State supply of goods. The said section provides that “subject to provisions of section 10, supply of goods where the location of the supplier and place of supply of goods are in the same State or same Union territory shall be treated as intra-State supply”, the proviso to above section excludes three supplies from being treated as intra-State supply even if the location of supplier and place of supply are in same State or Union territory, these are:
(i) supply to or by an SEZ developer or unit; (ii) goods imported into India and; (iii) supplies made to tourist referred in Section 15
Sub-section (2) to Section 8 deals with intra-State supply of services and it provides that “Subject to the provisions of Section 12, supply of services where the location of the supplier and the place of supply of services are in the same State or same Union territory shall be treated as intra-state supply”. The proviso to Section 8(2) provides that the intra-State supply of services shall not include supply of services to or by a Special Economic Zone developer or Special Economic Zone Unit.
A plain reading of the above provisions makes it clear that whereas Section 8(1) is subject to provisions of Section 10, Section 8(2) is subject to provisions of Section 12. In other words, these provisions shall not be applicable in case of export/import of goods which are covered by the provisions of Section 11 of IGST Act, as well as cases where the place of supply of services is determined as per the provisions of Section 13, i.e., in case where either the supplier or the recipient of services is located outside India.
As per Section 13(8) of IGST Act where either the location of supplier and or the location of recipient is outside India, in case of services mentioned below the place of supply of services shall be the location of supplier:
(a) Services supplied by the banking company, or a financial institution, or a non-banking financial company, to account holders; (b) Intermediary services; (c) Services consisting of hiring of means of transport, including yachts but excluding aircrafts and vessels, up to a period of one month. In all the above-mentioned supplies, in a case where the location of recipient is outside India and the supplier of services is in India, the location of supplier and place of supply will fall within same State by the reason of location of supplier being the place of supply.
Since the location of supplier and place of supply are in the same State, the same should be treated as intra-State supply of services. But, the provisions of Section 8(2) dealing with definition of intra-State supplies begins with “Subject to provisions of Section 12” i.e. the provisions of Section 8(2) shall be governed by or will be applicable only where the place of supply is determined as per provisions of Section 12 of IGST Act. As per the wordings of Section 8 of IGST Act, it can be considered that where the place of supply of services is determined as per provisions of Section 13, Section 8(2) should not be applied.
To determine the appropriate tax leviable on the supplies mentioned above, let us analyse the provisions of Section 7 of IGST Act which deals with Inter-State supplies. The said section does not specifically provide the kind of supplies satisfying the conditions as mentioned above shall be treated as inter-State supplies. However, Section 7(5)(c) provides that “Supply of goods or services or both in the taxable territory, not being an intra-state supply and not covered elsewhere in this section, shall be treated to be supply of goods or services or both in the course of inter-state trade or commerce”. Through these provisions one may conclude that the supplies of above nature made to a person outside India shall be treated as inter-State supplies. But, the same appears to be conflicting, for the reason that supplies are made to a recipient outside India and not in a taxable territory and therefore different views may be possible giving rise to litigation in the near future. Use of the words ‘Supply….in the taxable territory’ seems to point to major elements of supply being present in the taxable territory and when the location of recipient is not in India, it is possible to argue that sub-section (5) of Section 7 will not come into play at all.
Incorrect determination of nature of supply as inter-State or intra-State will lead to payment of incorrect type of tax as well i.e. instead of CGST and SGST, the tax payer may pay IGST and vice versa. Section 77(2) of CGST Act, provides that “A registered person who has paid integrated tax on a transaction considered by him to be an inter-state supply, but which is subsequently held to be an intra-state supply, shall not be required to pay any interest on the amount of central tax and state tax, or as the case may be, the central tax and the union territory tax payable.” As per this provision, if the type of tax is wrong, an assessee shall be liable to make the payment of appropriate tax but interest shall not be payable on the same. Section 55 contains provisions for refunding the tax paid wrongly, but the same will lead to blockage of working capital from the time of payment of tax till the time refund is processed by the department.
These issues need to be appropriately represented before the authorities for clarification or amendment, if necessary, so as to avoid penal consequences at later stage.