A place of supply is the final location where goods and services are being delivered after a sale or purchase. For a beginner in the world of business, the place of supply may seem insignificant. But you mustn’t worry, myth we’re here to break that fiction today. The Goods and Services Tax (GST) in India was implemented with the aim to streamline and integrate all the different taxes applicable to suppliers and vendors. Specifically, on the sale and purchase of goods and services. In the concept of Goods and Services Tax, you’ll see a lot of different components or types of GST applicable based on the jurisdictions of transactions. Here’s when the place of supply comes into the picture, it allows you to determine the tax payable. In this blog, we will look into all the various factors that make the place of supply important for taxation.
Why is the accurate determination of the Place of Supply important?
Global, inter-state and intra-state transactions are a part and parcel of business transactions. How do you propel business owners to determine how and whom to pay their taxes in these situations? With the increase in globalisation, this is also becoming difficult. This is why accurate determination of the place of supply is important. Still confused? Let’s decipher it with an example:
Intrastate transaction
XYZ company is based out of Maharashtra, India and is a manufacturer of threads. They entered into a deal with ABC pvt ltd., which is also based out of Maharashtra, India. In this situation, accurate determination of the place of supply is quite easy, it is the final place where the goods were delivered. Hence, It is Mumbai. The determination of the place of supply helps in figuring out the type of GST applicable. In this example, both CGST and SGST are supposed to be collected. If the palace of supply was inaccurately determined, then, the business owners would have made errors in the payment of GST.
Inter-State Transaction
ABC Private Limited situated in Jamnagar, Gujarat enters into a deal with Pixie Agency situated in Amritsar, Punjab to obtain a delivery of raw materials. Here, to accurately determine the Place of Supply is still easier. The place of supply is the final destination of raw materials, ie., the registered office address of ABC pvt ltd., situated in Gujarat. Hence, IGST is applicable in this transaction. If there were an error in determining the place of supply, the application of IGST would not be possible. This might lead to legal problems for both companies.
International Supply
DFG is an e-commerce store that supplies its products to international clients all over the world. In which country do you think they must pay their taxes? Inaccurate determination of place of supply in such matters will lead to problems, so much so, that the business might have to shut down.
Hence, no matter the jurisdiction of a business transaction, if either of the parties is based in India, it is very crucial for them to accurately determine the place of supply. The table below briefly shows the effects of the determination of place of supply.
| Determination of Place of Supply | Consequences of Determination |
| Accurate Determination |
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| Inaccurate Determination |
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Also Read: Place of Supply for Goods in Domestic Transactions: Inter-State and Intra-State Sales
Place of Supply’s Role in Taxation Compliance
From the examples above, we’ve seen how accuracy in determining the place of supply is important to ensure smooth legal compliance in business. The primary effect of the place of supply is in taxation compliance for the GST-registered businesses in India. The points below showcase the place of supply’s role in taxation compliance:
Determining jurisdiction
The application of appropriate jurisdiction for tax compliance happens based on the place of supply. Hence, place of supply helps in the process of determining the tax to be levied in various jurisdictions. Besides, there are different tax laws in different states and jurisdictions. So, if the jurisdiction is not determined appropriately from the place of supply, it causes legal repercussions.
Delivering functions of tax authorities
The tax authorities of India have a keen responsibility to ensure that tax is appropriately levied and distributed. These authorities, hence, use the information regarding the place of supply to levy an appropriate amount of tax on the businesses.
Prevention of tax evasions
When the parties have accurately determined the place of supply, it helps them in assessing accurate taxation requirements. Consequently, this gives the tax authorities access to more accurate information about various business transactions in India. Hence, the authorities can easily determine if anyone is trying to evade their tax liabilities and take legal action accordingly.
Thus, we can state that the place of supply plays a very important role in the management of taxation compliance of the organised and unorganised sectors of India.
Also Read: How Does the Place Of Supply Affect Tax Determination?
Regulatory significance of the place of supply
The importance of place of supply in India goes beyond the scope of just managing the tax compliances. The regulations governing businesses in India, also mandate the accurate jurisdiction of the place of supply. Wondering what significance the place of supply plays in regulatory compliances in India? We’ve broken it down for you here:
GST Registration
In India, GST is governed by the State and Centre as and when applicable. All state governments also have different rules and regulations. Hence, depending on the Place of Supply, a business may have to get GST registration in a particular state or jurisdiction.
For example, if a freelancer based in Mumbai, is providing writing services to a firm based in Delhi. The GST rules of Delhi will apply to the freelancer. So, he may need to get GST registration in Delhi.
Generating Invoices
An important admin task in businesses is to generate appropriate invoices. Generally, it is the seller’s responsibility to issue an invoice to its buyer. Since the complex matter of GST is involved, it is mandatory to include certain specific information in a sale purchase or tax invoice. This includes information such as the place of supply, GSTRN, date of issue, details of the recipient, etc. Moreover, when all the invoices are generated appropriately, it makes it easy to pay the taxes and then track all expenses and income of a business.
Filing Returns
Filing GST returns appropriately is a contemporary duty of business owners. Knowing the correct place of supply is important to file the GST returns accurately without any errors.
Moreover, it also plays a significant role in determining if a business can claim the incentives of input tax credit. Besides, when you file all your returns timely and with accurate information, it eliminates all risks of future tax disputes between parties.
Impact of Place of Supply on Business Operations
The regulations for business and tax compliance both are significantly impacted from the place of supply. However, the place of supply also has a certain level of impact on the business operations as a whole. Let’s see the various areas that place supply impacts on business operations.
| Area of Function | Impact on Business Operation |
|---|---|
| Pricing of Goods/Services | Different jurisdictions have different tax rates. So, the place of supply helps in determining the final pricing of the supplier. |
| Managing Supply Chain | A track of place of supply helps in understanding the target audience areas. Business owners use this data to improve their supply chain management. |
| Cash Flow Management | When taxes are paid accurately , within the time limit prescribed, there is no risk of additional penalties or charges. Making it easier to manage the cash flow of business. |
| Vendor Agreements | Depending on the place of supply, businesses also can amend the terms of their agreements with vendors and suppliers. |
| Tax Planning and payment | From the data available of different places of supplies, the financial aspects can be studied in detail. This makes tax planning for the future much easier and accurate. |
| Tax Audits | Error in tax payment evokes unnecessary tax audits and penalties. These are easily avoided by accurate determination of place of supply. |
Place of Supply and its Importance in Business Documentation
Documents rule and govern a business. Lack of appropriate documents in a business may cause financial and reputational damages. Besides, the place of supply (POS) is subject to change with each type of transaction. So, it becomes all the more important to keep the POS documented. The accurate determination of the place of supply also helps the business in maintaining the business documents. The POS is an integral part of the invoices, the contracts, the tax filing details, etc. Hence, businesses can keep ensuring proper documentation through accurate place of supply. Here’s how:
Transparency
Documenting the Place of Supply ensures transparency between both the parties and tax authorities of India. A written clarification on the location of services rendered, or the place of delivery of goods enhances trust and eliminates the risk of long-term dispute.
Streamlining Process
Having a streamlined process where everything, including the place of supply, is documented, facilitates accounting and managing the finances easily. Especially because a change in place of supply in transactions will lead to changes in the invoices, contracts and more. Hence, experts always suggest keeping documented evidence of each transaction with its place of supply.
Compliance with International Trade Laws
The laws applicable in international transactions are a bit more complex than the domestic ones. Keeping appropriate documentation of the place of supply will help in availing the benefits of zero tax rate on the export of goods, etc. It will also allow you to obtain the necessary licences and registration for export.
Also Read: Documentation And Invoicing Requirements For Service Transactions: Place Of Supply Considerations
Transparency and compliance benefits of understanding the place of supply
The most important benefit of understanding the concept of place of supply is that it makes compliance much easier and creates transparency between the parties. Let’s see the various transparency and compliance benefits of understanding the place of supply in business transactions:
Accuracy in Due Diligence
Due diligence is a mathematical process which involves a detailed study of all the aspects of a business. If there are any legal or compliance mishaps in the business, thorough due diligence brings it forward. Hence, the importance of the place of supply lies in the fact that appropriate mapping of the POS will allow the business owner to identify all risks related to the taxes levied on a particular transaction.
Well Informed Tax Planning
When you keep documentation of all your places of supplies, you can see where your products or services are being used the most. Hence, it allows you to comply with the tax laws easily by planning. Moreover, the data also provides security for making a well-informed and strategic decision regarding tax and business planning.
Preparing for a Smooth Audit
Preparing for tax audits can prove to be stressful for business owners. Especially if you are newly established. Having a clear understanding of the concept of place of supply and its importance allows you to be well-prepared for the audit requirements of your company. Besides, it will allow you to easily handle the audit with confidence.
Increased Trust
Trust amongst all the stakeholders of a business, including the potential clients is a very integral to its success. When the business owners have a clear knowledge of the detailed aspects of the business, such as the importance of place of supply it will build trust in the investors, authorities and clients. Consequently, this leads to reduced risks of tax disputes or additional penalties.
Conclusion
To conclude, the importance of the place of supply in a business transaction cannot be understated. Accurate determination helps in fulfilling the legal and taxation compliances. It makes managing and planning the taxations easy for business owners. Moreover, inaccuracy in determination often leads to tax evasion, penalties for non-compliance and even disputes among vendors and suppliers. Hence, it is very important to understand the concept of place of supply in detail for all entrepreneurs.
FAQs
Why is a place of supply important in GST?
Place of supply is important in GST as it allows the accurate determination of the applicable jurisdiction and applicable jurisdiction.
Is determining place of supply important for business?
Yes, determining the place of supply with accuracy is important for businesses. Mostly because it allows them to pay and plan their taxes as per the local rules and regulations applicable.
What is the main objective of place of supply?
Place of supply helps in deciding the final location of delivery of goods and services to facilitate application of tax rates. This is the primary objective of place of supply.
What are the consequences of error in choosing place of supply?
Problems like tax evasion, inaccurate payment, tax disputes and loss of incentives can occur due to error in determining the place of supply.
What is the importance of place of supply of goods?
Applicable component of GST from IGST, CGST, SGST, or UTGST are determined on the basis of the final location of goods after delivery, ie., place of supply. Hence, it is important to apply proper taxation rules on a transaction.
