Understanding Place of Supply in GST: Key Principles & Implications

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Published Date:  10-02-2024   Author:   shradha-kabr
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Introduction

GST, an acronym for Goods and Services Tax, is a destination-based system. Determining the place of supply (POS) becomes integral when deciding the taxation rates. POS is pivotal, as it is where the supply is consumed. The place of supply shall also decide the nature of trade, whether inter-state or intra-state. The Integrated Goods and Services Tax Act or IGST Act has clearly defined the provisions for the same. Let’s discuss the general principles associated with determining the place of supply.

Place Of Supply For Services (POSoS) GST

The POSoS is the backbone of GST. As mentioned earlier, two pivotal factors govern the classification of a supply as inter-state or intra-state, namely LS (Location of Service) and POSoS. According to POSoS provisions, the fundamental tenet dictates that the place of supply of service is the ‘Location of Recipient of service’ [“LR”].

However, exceptions exist for performance-based, immovable property-based, transportation services, etc. These exceptions introduce additional criteria like the location of the service supplier, location of service performance, and more. Three factors come into play when determining the intra-state or inter-state nature of a supply:

  • LS
  • LR
  • POSoS

The definitions of ‘Location of Supplier of Service’ and ‘Location of Recipient of Service’ in GST are distinct. Upon establishing the LS and LR, the supply can be categorized as either inter-state or intra-state.

Also Read: Place of Supply for Services: Definition and Regulatory Framework

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Location Of Service Recipient

Determining the place of supply regarding services is generally associated with the recipient’s location. If the recipient is enrolled in the GST system, the place of supply corresponds to the location specified in their registration information.

Instance Location of Service Recipient
When a supply is received in a business place which is registered Business place
When supply is received elsewhere than the business place. However, the former has obtained a registration in that fixed establishment Fixed establishment
When the supply is received in more than one place, like both the business place and the fixed establishment The fixed establishment is mostly associated with the supply recipient
If such places are absent The usual place of residence of the recipient

GST On Services

Within the Goods and Services Tax (GST) framework, the taxation of services depends upon the location of their supply. This principle aligns with the essence of GST as a ‘destination-based consumption tax.’ It attributes taxation to the State where the service is consumed.

Defining the place of supply for services involves distinct criteria compared to goods. For goods, the movement of physical items largely determines the place of supply.

Services, being intangible, lack a fixed mode of delivery. Sometimes, the details of the supplier and recipient may lack stability or even be indeterminable. Therefore, it becomes complex for businesses to determine the place of supply under GST.

Here are a few examples to help you better understand the implications of GST on services.

When Service Supply Is To A Registered Individual

In the Goods and Services Tax (GST) system, ascertaining the place of supply to determine the applicable GST is significant. If a taxable service is provided to a registered individual, whether they are a regular or composition dealer, the location of the recipient’s registered business becomes the place of supply. 

When Service Supply Is To A Registered Individual In The Same State

When services are supplied to a registered individual within a state, CGST and SGST are applicable.

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When Service Supply Is To A Registered Individual In Another State

IGST is applicable when the supply is made to a registered individual in a different state. 

When Service Supply Is To An Unregistered Individual

Here are two things to consider when a supply is made to an unregistered individual:

  • When Recipient’s Address Exists In Supplier’s Records

If the address of the unregistered individual exists in the supplier’s records, the supply place will be the recipient’s location, existing in the supplier’s records. 

  • When Recipient’s Address Does Not Exist In Supplier’s Records 

If the recipient’s address does not exist in the supplier’s records, the supplier’s location will be the supply place.

Also Read: How Do I Calculate GST on Services?

Inter-State Services

IGST is charged in case of an inter-state supply of goods or services. Section 7 of the Integrated Goods and Services Tax Act, 2017 (IGST Act) outlines distinct categories of Inter-state supplies.

  • Goods or services import
  • Goods or services export
  • Goods or services supplied by a SEZ developer or unit, even if the supply is made within a state

Incorrectly categorizing the supply as interstate or intrastate could pose challenges for the taxpayer. It is per provisions outlined in section 19 of the Integrated Goods and Services Tax (IGST) Act and section 70 of the Central Goods and Services Tax (CGST) Act.

Intra-state supply occurs when the LS (Location of Supplier) and POS (Place of Supply) are within the same state. Inter-state supply occurs when the LS is in one state, and the POS is in another. This type of Inter-State supply can be categorized as Domestic Inter-State supply.

IGST Rate For Services

The Integrated Goods and Service Tax (IGST) is expressed as the sum of the Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST). When goods are transported from one state to another, IGST will be applicable.

IGST is designed to accumulate in the importing state as a destination-based tax, streamlining the taxation process. One notable feature of IGST is its ability to alleviate the tax burden by imposing taxes on inter-state transactions only once. It fosters efficiency and simplicity in the taxation of goods and services across state borders.

Reverse Charge Mechanism For Services

In Goods and Services Tax (GST), the reverse charge is a mechanism that shifts the responsibility of paying the tax from the supplier to the recipient. This means that the recipient becomes liable for the payment of GST. In the conventional scenario, the supplier remits the tax amount.

The idea behind transferring the responsibility of GST payments to the recipient is to broaden the range of taxable transactions. This approach aims to grant exemptions to particular categories of suppliers while concurrently imposing taxes on the importation of services.

Sections 9(3), 9(4), and 9(5) of the Central GST and State GST Acts outline the mechanisms for reverse charge in the context of intrastate transactions. The reverse charge scenarios for inter-state transactions are regulated by sections 5(3), 5(4), and 5(5) of the Integrated GST Act.

A few services in which GST is payable on reverse charge include –

  • Taxable services rendered or to be rendered by an individual situated in a non-taxable jurisdiction and received by an entity situated in a taxable jurisdiction, excluding non-assessee online recipients (OIDAR).
  • Legal services offered or contracted to be rendered by an individual advocate or a legal firm, either directly or indirectly.
  • Services offered or agreed to be offered by GTA or goods transport agency in the context of transportation of goods by road.

Also Read: Reverse Charge Mechanism (RCM) In GST

Conclusion

Accurately determining the place of supply is paramount for businesses for several reasons. Incorrect supply classification as interstate or intra-state, etc., may result in hardships for the taxpayer, as outlined in section 19 of the IGST Act and section 70 of the CGST Act. Such errors necessitate taxpayers to claim refunds when taxes have been paid based on the inaccurate classification.

Rectifying the classification entails paying the correct tax amount and any applicable interest for the delay. If the place of supply is correctly identified as outside India, it exempts the transaction from tax obligations. Hence, correctly determining the place of supply is crucial in paying proper taxes and adhering to legal regulations. 

FAQs

  • How Do You Determine The Place Of Supply?

For domestic transactions: When the recipient is registered, the place of supply is determined based on the location of that registered person. If the recipient is not registered, the place of supply is considered to be the location where the goods are transferred for transportation.

  • What Is The Supply Place Under GST For Rental Property?

The property’s location will be the place of supply. IGST (Integrated Goods and Services Tax) will be applicable here.

  • What Is The Place Of Supply For Immovable Property?

The place of supply of services related to an immovable property is the actual site of the immovable property. The applicable Goods and Services Tax (GST) will be Central GST (CGST) and State GST (SGST).

  • What Is The Supply Of Services Under GST?

The concept of supply under GST encompasses transactions, including sale, transfer, exchange, barter, license, rental, lease, and disposal. When an individual engages in any of these transactions, it falls under supply.

  • What Is The Value Of Supply Under Services?

The value of the supply encompasses all levies, tariffs, cesses, fees, and charges. It excludes the separately charged CGST, SGST, UTGST, and GST cess by the supplier.

  • What Is The Place Of Supply In GST For Construction Services?

A Works Contract under the GST regime usually relates to immovable property. The determination of the place of supply is guided by Section 12(3) of the IGST Act, 2017, when both the supplier and recipient are situated in India. The place of supply is the location of the immovable property here.

  • What Is The Supply Of Place For Export Services?

The location of the recipient of the services is usually the supply of place.

  • What Is The Place Of Supply For Service Outside India?

The place of supply for transportation services of goods, excluding mail or courier services, shall be the destination of the goods.

  • Is GST Applicable To The Import Of Services?

The import of services by most businesses is subject to Goods and Services Tax (GST) on a reverse charge basis.

  • Who Bears The Burden Of GST?

The ultimate consumer bears the burden of GST. The best thing about GST is that the tax you pay at the end is the only tax included in the purchase price.

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Shradha Kabr

Shradha Kabra is an experienced finance writer based in India with 15 years of experience simplifying complex financial topics for readers. Her articles on taxation, Indian stock markets, and other national finance issues are well-researched and presented in an easy-to-understand style. Shradha holds a Double Master's degree and aims to make financial literacy accessible to all through her writing.

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