© Economic Laws Practice 2015 INTER-STATE SUPPLIES UNDER GOODS AND SERVICES TAX IN INDIA August 20, 2015 GST STUDY CIRCLE MEETING /MR. ROHIT JAIN

© Economic Laws Practice 2015 SCHEME & STRUCTURE OF INTER-STATE SUPPLIES 2

© Economic Laws Practice Constitutional amendments proposed by 122 nd Bill Prohibits States from taxing sale or purchase of goods - Outside the State In the course of the import of goods into or export of the goods outside, the territory of India Article 286 Provides for Parliament and State Legislature to exclusively and mutually legislate on subjects in Lists I and II of the 7 th Schedule, respectively Article 246 Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter- State trade or commerce. Entry 92A - Union List Taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter-State trade or commerce. Entry 92B – Union List No power to States to levy tax on any inter-State transactio ns (goods and services)

© Economic Laws Practice 2015 Key issues under current regime 4 Determining nature of supply Intra-State versus Inter-State supply Inter-State supply of goods under Central Sales Tax Act, 1956 to mean: “Occasioning movement of goods from one State to another” – Both originating State and destination State demanding taxes Need absolute clarity on place of supply under GST to avoid multiplicity of payment and tax demands: State A versus State B Center versus State

© Economic Laws Practice 2015 Consequential phase out of CST 5 Initial proposal for introduction of GST (2006) CST phase out necessary CST phased out for introducing GST CST compensation for FY promised Compensation to States in 122 nd Bill proposed as under Compensation over 5 years for any revenue loss Full compensation for initial 3 years Partial compensation for balance 2 years 1% additional tax levy on inter-state supply of goods for 2 years to origin State CST rate reduced from 4% to 3% w.e.f. 1 st April, % to 2% w.e.f. 1 st June, 2008

© Economic Laws Practice Constitutional amendments proposed by 122 nd Bill Parliament and State legislatures empowered to legislate on GST (CGST & SGST), respectively Centre exclusively empowered to legislate on GST levied on inter-State movement of goods and/ or services (IGST) Power to States to levy tax on services for the first time Article 246A Centre to levy GST on Inter-State supplies Import of goods or provision of services from outside India will be treated as Inter-State supplies ‘Place of supply’ of goods & services to be determined as per Rules formulated by Centre Article 269A Article 286 prohibits States from taxing both inter-State supplies and imports, of goods and services Article 286 prohibits States from taxing both inter-State supplies and imports, of goods and services Article 246A – “(1)… (2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.” Article 246A – “(1)… (2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.”

© Economic Laws Practice Recent Progress Views of the Select Committee of MPs Dissenting views Key recommendations Restricting the levy of 1% additional GST to supplies with consideration Full compensation to States for five years on account of loss, if any pursuant to GST Moderate rates of GST with wide base GST rates to be domain of GST Council and not to be incorporated in the Amendment Bill Key recommendations Total Elimination of 1% additional GST on inter State supply of goods Cap on GST rates to 18% Introduction of provisions to ensure local bodies’ tax collection does not suffer GST Council to have 1/4th representation from Centre and 3/4 th from States as against 1/3 rd and 2/3 rd respectively presently proposed

© Economic Laws Practice Recent Progress “I’m game, are you?” - FM FM’s clarifies the Government’s stand on the Constitution Amendment Bill via Social Media – GST rate to be decided by the GST Council GST on Inter unit transfer – GST charged on supplies will be VATable and will not have any cascading effect Share of local bodies in the revenue buoyancy should be a part of the proposed constitution amendment – not acceptable Two years transient provision which provided for an additional tax of 1% added to allay the fears of manufacturing States Electricity, tobacco products and alcohol for human consumption should be given the same treatment as petroleum in the Amendment bill – no such consensus with the States

© Economic Laws Practice Concept of IGST CGSTSGSTIGST Rate of SGST to be above a floor rate and within a bandwidth Rate of SGST on certain products may vary from State to State Consequently, change in the IGST rate ?

IGST Mechanism 10 Inter-State SGST Procurement of goods Import Intra-State Intra-State sales of goods Inter-State sales Exports Intra-State Procurement of Services Manufacturer/ Service Provider Stock Transfers C Excise CGST VAT SGST C Excise BCD CVD IGST SAD S Tax CGST Inter-StateImport S Tax IGST C Excise CGST SGST C Excise No taxes IGST CST BCD No taxes IGST? VAT CST 1% Addl tax ? 1% Addl tax 1% Addl tax?

© Economic Laws Practice Central Government Clearing House State A State B Inter-state sale Rs. 1,000 Intra-state sale Rs. 3,000 Rs. 240 Rs. 160 Rs. 200 Rs. 20 Rs. 15 Rs. 155 STATE A Balance15 Less: paid to clearing house (15) Net Cash flow0 CLEARING HOUSE ITC Balance10 Add: received from ABC Paid by State A Received from C.G Less: Paid to State B (200) Net Cash flow0 CENTRAL GOVERNMENT ITC Balance20 Less: paid to clearing house (20) Add: Received from XYZ 240 Net Cash Flow240 STATE B Received from XYZ160 Add: Received from Clearing House 200 Net Cash flow360 The IGST Mechanism *Rates – CGST – 8% SGST – 12% IGST – 20% XYZ ABC

© Economic Laws Practice 2015 Additional GST 12 Article 279A (18) provides for Additional 1% for 2 years To be levied by Centre on Inter-State supply of goods Will be remitted to States from where the supply originates – contra destination principle Will be a cost as it is not a part of the credit chain – contra principle of complete fungibility of credit Levy only on supply of goods meaning that – - Differentiation between goods and services will continue to exist - Duality issues (e.g. IPR, software) and issues with determining goods and service components (e.g. works contract, catering contract) will continue to exist Will stock transfer also suffer this levy ? Compromise measure to compensate States for abolishing CST and move GST forward Ideally, should not be in proposed scheme of GST

© Economic Laws Practice 2015 ISSUES & IMPLICATIONS 13

© Economic Laws Practice 2015 Origin / destination based taxation 14 ORIGIN BASED TAXATION GOODS - Inter-State movement of goods: CST remitted to origin State SERVICES – For certain services (e.g. Intermediary, online information and database access retrieval services etc.), situs of service is location of Service Provider (Rule 9 of PPSR) DESTINATION BASED TAXATION Destination based consumption tax recommended in First Discussion Paper and Task Force Report As per Apex Court decision in All India Federation of Tax Practitioners vs. Union of India - Appeal (civil) 7128 of 2001 In line with International practices and precedents

© Economic Laws Practice 2015 Inter-State transactions in Goods 15 Transaction in Goods Sale in course of Import (SICOI) - Not liable to Sales tax (SICOI subjected to Import duty i.e. BCD + CVD + SAD) -Exemption to SICOI may not continue - CVD & SAD to be subsumed in GST; BCD will be levied separately on import in India Sale in-transit - In-transit Sales exempted by issuance of E-I Form in 1 st sale & E-II Form in subsequent sales - Exemption to In-transit Sale may not exist under GST Sale to Bombay High - Judicial rulings holding that supply of goods to/ from Bombay High are not ‘Inter-State sale’ -No clarity whether such supplies will be treated as inter-State transactions under the GST regime State-specific incentives: Schemes may continue under GST (may have refund / subsidy mechanism instead) – Transitional provisions may ensure benefits not revoked in untimely manner CURRENT GST REGIME

© Economic Laws Practice 2015 Need to re-look at logistics 16 In case Goods are billed in State A but delivered to recipient in State B Place of supply based on physical movement of goods or location of recipient? Different rules for B2B and B2C transactions? Taxation will be origin-based or destination-based? Bill-to-ship-to model Procedural formalities may change Checkposts may remain for inter- State movement of goods May be some changes in forms and procedures Goods passing through multiple States in inter-State supply remain untaxed Pass through Sales IMPORTANCE / RELEVANCE OF DEPOTS

© Economic Laws Practice 2015 Inter-State supply of Intangibles 17 Current Provisions No legislative provision specifically for determining situs of sale of intangibles Judicial precedents are divergent and vary from case to case (contra views in 20 th Century Finance (SC) and Duphar Interfran (MSTT)) International Practice – Different rules for tangibles and intangibles GST Regime Relevant to determine place of supply in case of Inter-State movement of intangibles Determination of transaction as a sale of goods or supply of services will continue if different place of supply rules adopted

© Economic Laws Practice 2015 Inter-State supply of Services 18 Specific concept of inter-State supply for the first time for services providers No levy of Additional GST of 1% on Inter-State supply of Services Revenue accrued on Inter-State supply of Services will be remitted to originating State Place of supply likely to be one of the most litigated areas - Taxpayer vs. Centre / State - State vs. State [e.g. Current Rule 7 of PPSR – ambiguous rule of place where “greatest portion of service” is provided]

© Economic Laws Practice 2015 Treatment of supply to Self 19 Goods Current Position Stock transfer not liable to tax but leads to burn out of credit Position under GST regime Stock transfer will attract GST Inter-State stock transfer will attract 1% additional tax Issue of how to value such transfers Services Current Position Central Registration (no State-wise levy or collection) No Service tax on supply to self Position under GST regime Service to self between States may be taxed Issue of determining consideration

© Economic Laws Practice 2015 International Precedents 20 EU countries, like UK, offer the option of VAT grouping Single registration for various companies in a group Intra-group supplies not taxed One representative company pays VAT and files returns on behalf of the group May be ideally suited to a unitary GST/ VAT, like in the UK Less suitable for GST within a federal structure, as in India

© Economic Laws Practice 2015 Q&A

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