The Place of Supply: What It Means and Why Is It Important?
A keystone in the structure is the Goods and Services Tax (GST). The concept of place of supply ensures fair and efficient taxation in commerce. Businesses must understand the rules that govern this concept to prevent incorrect taxation, non-compliance, penalties, or legal ramifications. In this blog, we will understand the meaning of place of supply, explore its significance, and learn about the rules that govern place of supply in transactions related to goods.
What is GST?
The government introduced the Goods and Services Tax, or GST, in 2017 to streamline the indirect tax structure. This new tax regime replaced several indirect taxes, such as central excise duty, value-added tax (VAT), and customs duties.
GST can be defined as a tax that applies to the value added to goods at every step of the supply chain. GST is a destination-based tax. Businesses pay the tax in the state where goods or services are finally consumed. The GST tax can be further classified into four types: state GST (SGST), central GST (CGST), union territory GST (UTGST), and integrated GST (IGST), with distinct taxation rates.
What Is The Place Of Supply—GST Goods Transaction Location?
As mentioned above, GST is a destination-based tax. Two factors play a crucial role in determining the type of tax applicable: the nature of the transaction and the destination where goods are consumed or delivered.
The first factor, type of transaction (interstate or intrastate), depends on the following two factors:
- Location of the supplier, or the address where the business of the supplier is located.
- Location of the recipient, or the location where goods are delivered or consumed.
The second factor, which is the destination where goods are consumed or delivered, is known as the place of supply. Therefore, the place of supply is defined as the location of the recipient or the location where goods are delivered. The place of supply determines the jurisdiction or state eligible for revenue.
Rules For Place Of Supply For Goods
The place of supply is extremely vital in a business transaction, as any GST provisions, including the type and amount of tax, revolve around it. It helps businesses determine the correct type of tax and an accurate amount to be paid. Given below are the reasons behind the importance of the place of supply:
- It ensures that the correct state receives revenue. Recipient states are eligible to collect revenue under GST; however, determining the correct state may be a bit difficult under different scenarios. Therefore, it is essential to know the place of supply to correctly govern the state pertaining to tax liability.
- It also aids businesses by ensuring they follow the relevant state-wise protocol.
- It prevents issues such as incorrect payments, late payments, penalties, non-compliance, and legal repercussions.
Also read: What Are The Different Rules That Apply To The Place Of Supply Of Goods?
Legal Framework For Place Of Supply Of Goods
Before we dive into the rules that determine the place of supply, let us understand the types of supply. To determine the place of supply and tax liability, supply can be divided into two major segments:
- Domestic supply: all transactions where the supplier and recipient are in India.
- Cross-border supply: It involves transactions in which goods are either imported into India or exported out of the country.
Supply can also be classified into business-to-business (B2B), wherein the supplier and recipient are businesses, and business-to-consumer (B2C), wherein the recipient is the final consumer. This classification also plays an important role in determining the place of supply for a transaction.
Let us now understand the rules that govern the determination of the place of supply. Section 10 of the IGST Act 2017, under the GST law, includes the following rules to determine the place of supply of goods for domestic transactions:
10(1)(a) Supply that involves movement of goods
If goods are transported from one place to another, the place of supply is the location where the movement of goods terminates for delivery. Here, the recipient, supplier, or a third party like a transporter can undertake the movement of goods.
10(1)(b) Supply that involves the “bill-to-ship-to” model
If goods are delivered to a recipient based on the instructions of a third party, then the movement of goods falls under the ‘bill-to,’ship-to’ category. Though the situation involves two supplies: supplier to third party, followed by third party to recipient, only the first transaction is considered. In this scenario, the place of supply is not the location of the recipient but the principal place of business of the third party.
10(1)(c) Supply without movement of goods
If the transaction does not involve any movement of goods, then the place of supply will be the location of the recipient business or consumer at the time of delivery. This rule is applicable only after it is established that there is no movement of goods in the transaction.
10(1)(d) Supply where goods are assembled or installed at the site
If a transaction includes assembly or installation of any type, then the location of assembly or installation is considered the place of supply.
10(1)(e) Supply of goods on board some form of conveyance
In the event of the supply of goods on board any type of conveyance, such as a motor vehicle, aircraft, or train, the place of supply will be the location from which the goods were taken on board.
If the place of supply cannot be determined using the rules mentioned above, the Central Government, on the recommendations of the GST Council, will prescribe the required rules.
In cases of cross-border transactions, goods are either exported from or imported into India. Section 11 of the IGST Act of 2017 has provisions to determine the place of supply in such cases.
- Clause (a) of Section 11 states that if goods are imported into India, then the place of supply is the location of the importer in India.
- Clause (b) covers the place of supply of goods exported outside India. Here, the place of supply will be the location where goods have been exported (supplied), outside India.
Place of supply for domestic transactions
| Section | Type of Supply of Goods | Place of Supply |
| 10(1)(a) | Movement of goods | Termination of goods for delivery |
| 10(1)(b) | Delivery on the instructions of third party (Bill-to-ship-to) | third party’s principal place of business |
| 10(1)(c) | No movement of goods | Location of goods during delivery |
| 10(1)(d) | Installation or assembly at the site | Location of installation or assembly |
| 10(1)(e) | Supply on board any form of conveyance | Location where goods went on board |
Place of supply for cross-border transactions
| Section | Type of Supply of Goods | Place of Supply |
| 11(a) | Import | Location of importer |
| 11(b) | Export | Location where goods are exported |
Also Read: Legal Provisions And Case Studies On Determining The Place Of Supply For Goods
Determining Place of Supply for Goods
We have already established the importance of the place of supply in taxation. This concept enables a business to determine the correct type of tax applicable, the state or jurisdiction eligible to receive it, and ensures that the business avoids non-compliance.
The correct taxation also depends on the type of transaction. Therefore, it is essential to know the location of the supplier and recipient. For example, if the locations of the supplier and recipient are not in the same state or union territory, the transaction is interstate. Alternatively, an intrastate transaction involves suppliers and recipients from the same state or union territory. The type of transaction and place of supply help a business establish the correct type of tax (CGST, SGST, IGST, UTGST) to be paid.
Once the location of the supplier and recipient is known, businesses or authorities can easily determine the place of supply based on the rules mentioned above.
Also read: How Is The Place Of Supply Determined For Goods?
Goods Taxation Jurisdiction
A jurisdiction, in the GST regime, is defined as a geographical region that has been assigned to a specific tax officer or authority for tax administration. The GST jurisdiction for any business depends on its location in a state or union territory. It is essential to know the jurisdiction of businesses for correct taxation in the case of transaction of goods.
A business, through knowledge of the correct jurisdiction, can establish the place of supply of goods. This enables accurate tax collection and ensures that the eligible state receives revenue. It also ensures businesses are compliant with state-specific regulations to prevent fines or penalties.
Conclusion
The place of supply is an important part of the GST tax regime. Not only does it ensure correct taxation, but it also prevents potential risks of penalties or legal challenges. Therefore, understanding the rules of place of supply is a powerful tool to possess. Businesses, with this knowledge, can ensure compliance, reduce errors, and enhance their performance. Whether the transaction is domestic or international, establishing the correct place of supply will only lead to lesser risks, prompt tax payments, and the avoidance of potential issues.
Frequently Asked Questions
What is GST? What are the types of GST?
Goods and Services Tax (GST) is a destination-based tax and applies to the value added to goods at every step of the supply chain. The types of GST are:
- Central GST (CGST)
- State GST (SGST)
- Integrated GST (IGST)
- Union Territory GST (UTGST)
What is the place of supply?
The place of supply is the location where the supply is delivered or consumed. In other words, it is the location of the person or business receiving goods. The place of supply is an essential concept as it establishes the type of transaction and the state where tax is payable.
Describe the factors essential to determining the type of transaction.
The type of transaction, interstate or intrastate, is essential as it determines the type of GST that is to be charged. The factors that determine the type of transaction are:
- Location of the supplier
- Location of the recipient.
If the supplier and recipient are from the same state or union territory, the transaction is intrastate. If the businesses are from different locations, then the transaction is interstate.
What are the types of supply in a transaction?
There are two types of supply depending on the nature of a transaction: domestic transactions, and cross-border transactions.
Domestic transactions involve suppliers and recipients from within India, whereas cross-border transactions involve either the supplier or the recipient from outside India. The transaction could be an import or an export.
Name the sections pertaining to the place of supply of goods in the IGST Act of 2017.
Section 10 has rules related to the place of supply of goods for domestic transactions. In the case of cross-border transactions, the rules can be found in Section 11 of the IGST Act of 2017.
Explain the rule for place of supply in case of movement of goods with an example.
In the case of movement of goods, whether by the supplier, recipient, or a third party, the place of supply is the location where the movement of goods terminates. For example,
Supplier X (based in Delhi) delivers goods to recipient Y (based in Mumbai). In this scenario, the place of supply is Mumbai, as the movement of goods terminates in Mumbai.
The supplier X is based in Delhi and receives an order from recipient Y in Mumbai. Here, the recipient Y has arranged for transport and gets the goods delivered to Mumbai. In this situation too, the place of supply remains Mumbai.
What are the rules that govern the place of supply of goods for international transactions?
In the case of international transactions, there are two scenarios:
- If goods are exported from India, the place of supply will be a location outside the country (where the goods have been exported.)
- If goods are imported into India, the place of supply will be the location of the importer, inside India.
Where is the place of supply of goods if the goods are supplied on board a conveyance?
The place of supply will be the location where the goods were taken on board.
What happens if the place of supply is incorrect?
Incorrect place of supply can lead to incorrect taxation, non-compliance, penalties, or legal issues.
Is the place of supply important for services too?
Yes, it is important to determine the place of supply of services too, though the rules governing determination vary.
