The Indian version of Goods and Services Tax (GST) is unique and one of its kind in the entire world. This piece of legislation has tried to maintain a simplistic structure even though it has various challenges on its way, which included federal structure, growing population, low internet penetration, redundant information technology tools, low level of literacy, geographic inequality and ever-shifting political balance. Against this background, introducing GST in July 2017 was a challenge for all the stakeholders. Even today, facets of GST are reinvented on a daily basis by tax officers and advance ruling authorities. One area which is boiling inside the furnace with an iron lid is ‘place of supply’.India has moved from an origin-based taxation to
destination-based taxation, which means taxes would now flow to a state which is consuming the said supply of goods or services. This tectonic change of taxation mechanism has upped the importance of place of supply. By a mere mention of two digits of state code on an invoice, the taxpayer on self-assessment basis determines the fate of state exchequer — too much is power given to every taxpayer in the country.
Place of supply provisions have been framed for goods and services. However, as goods are tangible, determination of their place of supply based on the consumption principle is not difficult. Generally speaking, the place of delivery of goods becomes the place of supply. Services being intangible in nature, it is not easy to determine the exact place where services are acquired, enjoyed and consumed, thereby in respect of certain categories of services, the place of supply is determined with reference to a proxy. This determination of the place of supply for services is often loaded with technical interpretations and understanding of facts of the case, as the tax rate is same across all states and taxpayers frequently pay less attention to the place of supply. This leads to payment of tax in a wrong state.
Now, this issue is not limited only to services, but several retail chains are already facing the heat of local tax enforcement oversupply for goods, whereby taxes are paid in a wrong state.
Let's understand this with a help of a classic example.
Mr. A, a resident of Delhi, buys an LCD from a store in Gurgaon, Haryana and brings it back to Delhi. Then the store needs to pay IGST-Delhi. However, the store has made on over-the-counter supply and they have no mechanism to track the state in which such goods are to be actually consumed thereby they pay CGST and SGST – Haryana. Two issues immerge from this situation; firstly, the tax which was to be paid in Delhi is paid in the state of Haryana and secondly, a registered recipient would be denied his due tax credit as the tax has been paid in the state of Haryana and not in Delhi. We believe this issue is already noticed by tax officers in bordering states of Uttar Pradesh, Punjab and Delhi.
There is also a peculiar situation. The Authority for Advance Ruling. Law states that in case of any confusion in relation to GST, you may approach it for clarification. However if the confusion is pertaining to place of supply, the AAR does not have any jurisdiction to resolve the matter.
Moreover, tax laws are quite imbalanced when it comes to a taxpayer in this regard. Law provides that in case the IGST is paid instead of CGST/SGST, then in all such cases, the taxpayer is required to resubmit the entire tax again and claim a refund of earlier taxes so paid. No adjustment would be permitted of tax so deposited in incorrect codes. This would lead to cash flow issues for a taxpayer and would also tighten his liquidity position.
Every Indian state runs a high risk of short receipt of tax due to incorrect tax payment by a taxpayer sitting in some other state over which recipient state has no jurisdiction. Besides this, every taxpayer is to be assessed by a tax officer from his home state only, who virtually has neither an interest nor obligation in ensuring the tax revenue for other states. This is a clear case of conflict of interest, whereby recipient state will always have a trust deficit across every other state.
Tax authorities of a state would be faced with numerous issues relating to the identification of a defaulting taxpayer, jurisdictional power to summon such a taxpayer, power to visit and check its records or even to place reliance on the procedures followed by other state officers. This issue is expected to create trust deficit among states and would also fuel an environment of animosity among state governments fuelling the political rivalry leading to catastrophe every now and then. The Constitution of India has empowered the GST council to establish a mechanism to adjudicate any dispute between two or more states. However, even after 18 months, no such mechanism has been established.
We believe place of supply would be a double-sided sword hurting both the taxpayer and the state exchequer alike. GST annual filings including annual return and reconciliation statement do not address the issue relating to tax payments in an incorrect state account. Chartered accountants appointed as GST auditors don’t not have any clear guidelines from CBIC or its regulator ICAI on methodologies to check place of supply. GST council need to step up measures and introduce a PAN India independent task force of senior IRS officers on the lines of CAG who can cut across jurisdictional boundaries to ensure compliance of key GST attributes like place of supply. The government is sitting on a ticking time bomb which will blow up anytime, and the explosion would affect majority of state governments leading to an environment of mistrust. We would advise the government to step in and contain the situation before it gets too late.
Rajat Mohan is partner at AMRG and Associates.