The Goods and Services Tax is a tax system that applies to the supply of goods and services across India. However, the tax rates and rules may vary depending on the place of supply. The place of supply is usually the recipient’s location. Still, in some cases, it may be different, as the supplier may deliver the goods to a different address on the instruction of a third party. These are called bill to / ship to transactions and have special provisions for determining the place of supply under GST. In this blog, we will examine how the effects of address variation on place of supply in bill to / ship to transactions and what are the advantages and disadvantages of such transactions under GST.
What is a Bill to/Ship to transaction?
The “Bill to ship to transactions” practice is commonplace in trade and day-to-day business. Instances may arise where the supplier needs more inventory of the ordered goods, or it is not economically feasible to acquire the goods at their location before dispatching them to the recipient. In such scenarios, the supplier may enlist the services of a third party to ship the goods to the customer directly.
Legal aspects of Bill to / Ship to in place of supply
Section 10(1)(b) of the Integrated Goods and Services Tax Act specifically addresses the influence on determining the place of supply occurring before or during the movement of goods, whether through document transfer or other means. In such sales, the final recipient is presumed to be located in a different state. Consequently, the supply is classified as inter-state, even if the goods are delivered within the same state as the customer (third party) directed.
Example of Bill to / Ship to transactions
M/s. A, an electronic goods dealer based in Delhi, receives an order from M/s. B is situated in Uttar Pradesh. The order entails the supply of 100 laptops with explicit instructions to dispatch the goods to M/s. C, located in Haryana.
This scenario involves two distinct transactions:
Between M/s. A and M/s. B, where M/s. A acts as the supplier, and M/s. B assumes the role of the buyer. M/s. A issues an invoice for the transaction to M/s. B and, by the provided instructions, ships the laptops to M/s. C in Haryana.
Between M/s. B and M/s. C, where M/s. B becomes the supplier and M/s. C serves as the buyer. M/s. B generates an invoice for the transaction, subsequently endorsing the e-way bill favouring M/s. C as part of the shipping process.
Place of Supply
The place of supply for goods is defined by the location where the goods are delivered, signifying the point at which ownership of the goods changes hands. If there is no physical movement of the goods, the place of supply is determined at the time of delivery to the recipient by the location of the goods.
Considerations for Bill to / Ship to in place of supply
Determining the place of supply in bill-to/ship-to transactions follows the guidelines outlined in Section 10(1)(b) of the IGST Act, 2017. This section is about the impact of Bill to / Ship to address on place of supply:
Suppose the supplier delivers goods to the recipient or any other person as directed by a third party, acting as an agent or otherwise, before or during the movement of goods through the transfer of documents or other means. In that case, it is deemed that the said third person has received the goods. In such cases, the place of supply for these goods is considered the principal place of business of the third person.
In essence, when goods are delivered to the recipient or another person based on the instructions of a third party, the place of supply is attributed to the third person and not the ultimate recipient. This holds for instructions provided before or during the movement of goods but not after the completion of the movement.
Applying this to the provided example, the place of supply for the first transaction between M/s. A and M/s. B is Uttar Pradesh and for the second transaction between M/s. B and M/s. C, it is Haryana since both transactions involve inter-state supplies, M/s. A invoices M/s. B by levying IGST and M/s. B invoices M/s. C by charging IGST.
Bill to / ship to transactions is a common and convenient way of supplying goods under GST. Still, they also require careful attention to the place of supply rules and the documentation requirements. The supplier, the third person, and the recipient should be aware of their responsibilities in such transactions and comply with the GST law and procedures. This will ensure a smooth and hassle-free supply of goods and a fair and transparent tax system. By following the bill to / ship to address and place of supply compliance, parties can avoid any confusion, disputes, or tax evasion in such transactions.
Frequently Asked Questions(FAQs)
What sets bill-to/ship-to transactions apart from drop shipments?
Bill to/ship to transactions involves the supplier, the third person, and the recipient. The supplier delivers goods to the recipient upon the third person’s instruction, who pays the consideration. Two parties are involved in drop shipments: the supplier and the recipient. The supplier delivers goods to the recipient on behalf of another person who does not directly pay the consideration.
How can e-way bills be generated for bill-to/ship-to transactions?
E-way bills, mandatory for the movement of goods exceeding Rs. 50,000 in value, can be generated for the bill to/ship to transactions by the supplier. The ‘Bill To’ section should include details of the third person, while the ‘Ship To’ section should contain details of the recipient. The third person is responsible for endorsing the e-way bill in favour of the recipient and updating vehicle numbers and transporter details.
What is the process for claiming the input tax credit in the bill to/ship to transactions?
The input tax credit can be claimed by the third person and the recipient for their respective inward supplies, adhering to GST law conditions and restrictions. The third person can claim an input tax credit based on the tax invoice issued by the supplier. Similarly, the recipient can claim input tax credit using the tax invoice issued by the third person.