How Does the Place Of Supply Affect Tax Determination?

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Published Date:  30-11-2023   Author:   saayak-karmakar
how does the place of supply affect tax determination

Under the GST guidelines, when a transaction happens, the location of the person receiving the services or the goods is considered the place of supply. In the world of taxes, the “place of supply” is one very important term that determines the type of taxes one needs to pay for the transaction they do. 

Have you wondered what the tax implications are based on the place of supply? Or the place of supply’s influence on tax determination? In this article, you’ll learn about the impact the place of supply has on the taxes under GST and the liabilities that come with being the intermediary between the supplier and the buyer of a non-taxable territory. 

Impact Of Place Of Supply On Tax Determination

The transactions of all levels can be categorized into three types – intra-state, inter-state, and import-export. The “place of supply” helps determine the transaction’s category. Thus, the tax put into that transaction is also determined, which is why the place of supply is so important. 

The place of supply decides which tax you must pay for your transaction, such as CGST and SGST, combining or with duties or no duties. Under GST, the place of supply is extremely significant. The primary reason behind this is the provisions of GST revolve around which type of tax will be applied to the transaction.  

Role Of Supply Location In Tax Calculation

Only 3 types of taxes can be charged in the invoice when we consider GST. When the transaction is intra-state, it is SGST and CGST, but when it is an interstate transaction, the tax will be IGST. However, deciding which transaction type is not a simple task.

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IGST has set some rules that help define what type of transaction is being done to avoid confusion in complicated situations. These rules are called “the place of supply” under the GST taxation guidelines.

Supply location is crucial as it determines the right tax charged on the invoice. For example, if you are making a transaction from Kerala to Kerala, the nature of the supply is intra-state, so the tax that will be applied is SGST and CGST together. However, if your transaction is from Kerala to Maharashtra, then the nature of supply changes to Interstate, which changes the type of tax that will be charged, IGST. 

Tax Implications Based On Place Of Supply

The tax charged for the transaction depends upon the nature of the supply. There are two types of tax implementation: CGST and SGST combined or IGST. In the case of intra-state transactions of services or goods, CGST and SGST combined are to be paid, and in the case of interstate transactions, IGST tax is paid. 

Determining Tax Liability Through Place Of Supply

When the supply of goods is located in a non-taxable area, and the recipient is an online recipient (nontaxable), the person who arranges the supply of goods is considered the recipient of the said services. In cases like this, the following conditions apply: —

  • The invoice issued by the intermediary also takes part in the supply, singles out the particular supply, and identifies the supplier in nontaxable territory. 
  • The intermediary involved in the supply can not charge the buyer or take part in that charge. This means the intermediary will not process or take any payment between the supplier and buyer from the nontaxable territory. 
  • The intermediary also cannot authorize any kind of delivery in the supply process and can not set any terms and conditions of his own in the supply process. 

Place Of Supply’s Influence On Tax Determination

When the supply location and the place of supply are in the same state, the transaction is an intra-state transaction that incorporates the combination of CGST and SGST. 

For a better understanding, if the supply location is Uttar Pradesh, meaning the supplier is from Madhya Pradesh and supplies goods within Uttar Pradesh, then the transaction is labeled an intra-state transaction. For this reason, the buyer needs to pay SGST + CGST. 

However, if the buyer is not in the same state as the supplier, IGST is incurred since the transaction is interstate. For example, if the supplier supplies the goods from Kolkata to a Chennai buyer, the transaction is interstate; thus, IGST is charged. 

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Table 1: Tax determination on the basis of the place of supply and location of supplier

Sl. No. Supplier Location Place of Supply If the location of the supplier and the place of supply are in the same State Inter-state/ Intra-state
1. Kerala Bihar NO Inter-State (IGST)
2. Puducherry Puducherry YES Intra-State (CGST& Puducherry GST)
3. Chandigarh Chandigarh YES Intra-State (CGST + UTGST)
4. Chandigarh Punjab NO Inter-State (IGST)
5. Chandigarh Daman & Diu NO Inter-State (IGST)
6. Goa Goa YES Intra-State (CGST + Goa GST)
7. Karnataka (SEZ) Karnataka (non-SEZ) Special case Inter-State


In the case of either the buyer or the supplier being in the foreign party, the transaction of goods between them is treated as import or export, which depends on the particular case. However, these transactions also fall under inter-state transactions, which is why IGST is charged. 

However, there is one instance when IGST is not incorporable: when the supplier is related to the buyer, and the supplied goods are not for resale but for consumption. 

Effects Of Supply Location On Taxation

When the place of supply of goods is concerned, the source location of supply is considered the place of supply. Where the ownership of the goods changes is the place of supply of goods. If the goods aren’t moved anywhere, then the goods’ location at the time of delivery is considered the place of supply. For example, in a market, the good’s supply location is the market itself. 

When we are talking about goods installed or assembled, the place of supply becomes the location where the goods are installed or assembled. For example, if Delhi has supplied machinery to Mumbai, but the machinery gets assembled in Chennai, then the place of supply becomes Chennai. 

When the location of the supply changes, the tax will also change depending on what type of transaction is being done, such as interstate or intra-state. 

Conclusion 

Currently, the current system of levy of provision of taxable services, manufacture taxes, and the “supply” concept replaces the selling of goods. This is why it is very important that you understand the meaning of the “place of supply” so that you can determine if you are getting charged the right tax amount for supply. Regarding businesses and financial trades, the place of supply becomes extremely important regarding taxes. 

This article discussed the importance of the place of supply in taxation and how it is determined which type of tax will be put on to the supply based on nature. Let us know if you have follow-up questions, and we will reach out with the answers. 

FAQs

  • What is the place of supply in taxation?

In taxation, when a particular service or some goods are delivered to a place, the location is called the place of supply. So, the place where the ownership of the goods or the service is changed is called the place of supply. If there is no movement in supplying the goods, then the location where the recipient is receiving the goods is considered the place of supply. 

  • Is it mandatory to provide the place of supply in GST?

Specifying the place of supply in the commerce trade or the inter-state trade is mandatory for all registered suppliers and buyers with the state name in the tax invoice. 

  • What is applicable for Taxable sales to SEZ in terms of tax?

There is a zero tax rate GST law on SEZ, which means that the supplying of goods under GST will be zero tax rate. This means that when you supply to SEZ, the tax rate is zero because it is exempt from GST as they are considered exports. The suppliers going for the SEZ need to supply the goods or services under bond or LUT, and they don’t need to pay IGST. They also don’t need to claim credit from ITC. 

  • What is the applicability of GST on supply?

The supply of any kind of goods or service is considered a taxable event, and the buyer must pay the GST tax. At the time of the goods’ or services’ supply, the tax liability is significant. This is why it is important to determine whether a transaction falls under the definition of supply under GST. 

  • What is the place of supply under section 12 of GST?

In the case of banking and financial services, which also include stock broking to the recipient, the place of supply is the recipient’s location provided in the supplier’s records of selling the services. 

  • What is the place of supply in terms of bills?

When the supply of goods has been received by a third person other than the supplier or the buyer, the place of supply will be the primary location of the transaction of this third party. In this case, two supplies are happening. The first is between the supplier and the third person, and the next is from the third person to the buyer. 

  • What are GST sec 12 and Sec 13?

When the matter of time of the supply of the services or the goods is concerned, then Section 12 and Section 14 of the GST are brought up. These two sections determine the time of supply of the goods. 

  • What is code 96 in the place of supply?

There is a list of codes available in the FORM GSTR-1’s portal. This is for the supplies that go out of India. In this case, the supplier needs to put the place of supply by selecting one of the codes from the portal. Amongst them, the ’96 – foreign country’ is a state code for suppliers supplying goods or services out of India. 

  • Are there different types of supply under GST?

There are two types of supply of goods/services under GST, which are non-taxable supplies and taxable supplies. However, based on the nature of their supply, these two types get further divided into different types. 

  • What is Dual GST?

Dual GST is when two taxation components vary from each other. SGST and CGST are the two tax components applicable in intra-state transactions because of their federal nature.

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Saayak Karmakar
Hi, I am Saayak Karmakar. I am a freelance content writer with 7 + years of experience. I did my masters in Mass Communication from Guru Jambeswar University.

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