Treatment of inter-state supplies under GST

SERVICE TAX

The treatment of inter-state supplies of goods and services under the dual GST model that is proposed is a matter of particular interest, given the significant amount of inter-state flows of goods and services in India.

This discussion is, of course, limited to the state GST component of the dual GST since the federal GST would simply treat such inter-state supplies like any other supplies, as the revenues would entirely accrue to the Centre.

The taxable events, which will trigger GST consequences under the proposed model, will most likely be the supply of goods or the provision of services. This is to be contrasted with the present CENVAT and the state VAT, which are predicated on the taxable events of manufacture and sale of goods respectively.

It is important to note this fundamental distinction in the taxable events. Thus, under the proposed GST, it is expected that detailed rules will be incorporated in the statute to identify the events/transactions which will comprise the supply of goods and services.

These rules will also identify the place of supply and the time of supply, so as to identify the GST consequences, particularly in relation to inter-state supplies.

The GST treatment of inter-state supplies of goods is relatively straightforward. Typically, the physical movement of goods across borders will be both a necessary and sufficient condition. Indeed, such a condition exists even under the present CST law relating to taxation of inter-state sales.

Of course, the CST law, as is the case with the state VAT law, is based on the taxable event of a sale of goods whereas under the GST dispensation, no such sales are required to happen and the mere inter-state movement of goods will attract the GST.

The key point to be noted here is that as per these rules, both stock transfers and sales of goods on an inter-state basis become taxable under GST. The recommendations on the dual GST model will need to be studied, once they are made public.

It is very likely that inter-state supplies of goods would be zero rated in the origin state, given the principle of a destination base consumption tax that is sought to be introduced through the GST.

The point then would be that if such inter-state supplies are zero rated, and there would no longer be a CST, how should such supplies be taxed. One option is for the destination state to charge an import GST, to be self declared and paid by the recipient of the goods in the importing State, which will be offset against the GST that would be charged upon resale/subsequent supplies in that state.

Another option is for the origin state to maintain zero rating under its own state GST but yet require the seller/supplier in that state to charge the state GST of the destination state in the GST invoice which will document the inter state supplies of goods, and for the origin state to thereafter remit such collections of the destination state's GST to that state, through banking channels.

Of course, such upfront collections of the destination state's GST would be available as full input tax offsets to the buyer/recipient in the destination State.

The larger question of how the origin State will stand to realise any GST revenues in regard to such inter State supplies, especially given the need to zero rate and hence allow input tax credits to the supplier in the origin State, needs to be addressed.

Of course, it needs to be recognised that most States will effectively act as both an origin State as well as a destination State but the point is in relation to the imbalances in tax revenues that could arise as a result of certain states turning out to be primarily producing states and not so much consuming states

As opposed to the aforesaid discussion relating to inter-state supplies of goods, the state GST treatment of inter-state supplies of services is relatively more complex. The complexity starts from the difficulty in determining the activities/transactions which would qualify as such inter-state supplies of services.

The point made earlier about the need for comprehensive place of supply rules become even more important qua services. Thus, clear rules for defining the place of supply of services are required in relation to inter State supplies of services so that it is clear as to which state will be able to tax and collect the GST in relation to such services.

In this regard, the international GST treatment of inter-state supplies of services is relevant. Typically, the place of taxation for such services is the place where the customer of the services is established at the time the services are performed.

There are, of course, exceptions to this basic principle, particularly in relation to telecommunication services, electronically supplied services and the like, wherein the place of supply shifts to the place of effective use and enjoyment and similar other unique considerations.

Clearly, the state GST treatment of inter-state supplies of services is complex purely for this reason alone but in the context of the Indian GST, the issue becomes further complicated given the absence of any state taxation of services at present and the consequently desire of the states to ensure that they have a rightful share of tax revenues from services, in the GST dispensation.

To conclude, the treatment of inter-state supplies of goods and services under the proposed GST model, relevant only with regard to the state GST component, will need to be addressed at the length so that it is clearly understood by all stakeholders and implemented in a fair and equitable manner.

The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers. Views expressed are his own.

pwclts.nd@in.pwc.com