Issues with place of supply provisions under GST

Place of supply provisions under the GST law has a huge impact on your taxes, returns, and input tax credit. Today we will dive deep into some of the issues that we may confront while putting these provisions in practice.

Manufacturers or traders that sell goods frequently ask the buyer to pick up the items at the factory gate or shop. This is called Ex Works (EXW) under incoterms, and under these circumstances, all further transportation costs and risks are assumed by the buyer.

Whether such sales attract the Integrated GST (IGST), which is levied by the central government on the interstate supply of goods and services, or the Central GST (CGST) and State GST (SGST), which are levied by the central and state governments on a local supply, is a question quite often worrying to companies and their advisors.

Section 10(1)(a) and (c) of the IGST Act provides some valuable information here, as indicated below:

1. “Where the supply involves movement of goods, …, the place of supply of such goods shall be the location of the goods at the time at which the movement of goods terminates for delivery to the recipient”
2. “Where the supply does not involve movement of goods, …., the place of supply shall be the location of such goods at the time of the delivery to the recipient”

To determine the place of supply for an EXW, one must first decide if the supply involves the movement of goods — especially when the risk and transportation of goods thereafter is the responsibility of the buyer.

This will often be established in the contract between the parties. As there are several different types of contracts, let us examine how they can be worded and interpreted.

If the contract states that the seller will arrange the transportation and ensure goods are delivered to the buyer’s premises even if the sale is EXW, then it can be safely concluded that the supply involves the movement of goods. In this case, the seller arranges for the transportation but recovers the transportation charges from the buyer. Risks incurred after the factory gate are also borne by the buyer.

The supply is for delivery to the buyer. If the buyer gets the delivery in another state, the supply would attract IGST. If the delivery is in the same state as the buyer, CGST+SGST would apply.

Let us take another example: Someone from Pune goes to Delhi and buys a pair of jeans in a shop. This, too, is an EXW sale, but there is no contract stipulating the movement of goods after the jeans are handed over to the buyer in the shop. Even the seller is not bothered about where these jeans are transported by the customer after the payment is made.

It can safely be assumed in such cases that the supply did not involve the movement of goods. Subsection 1(c) should apply here: The place of supply is the shop itself and CGST+SGST apply.

A more complicated case would be when the buyer arranges for the transportation of goods purchased Ex Works and asks the seller to hand over these goods to the transporter of his choice.

This scenario raises several questions. First: Would handing over the goods to the transporter appointed by the buyer amount to giving delivery to the buyer? While GST law does not answer this question, the 1930 Sale of Goods Act can offer some help. It is clear from section 33 of this Act that the delivery of goods sold may be made by doing anything that has the effect of putting the goods in the possession of the buyer or any person authorized to hold them on the buyer’s behalf.

Whether one can refer to the Sale of Goods Act is another question, as definitions from other statutes cannot be routinely borrowed unless these statutes are pari materia – i.e., dealing with the same or similar subject matter. I believe the Sale of Goods Act and GST Act can be considered “pari materia” as both deal with the sale/supply of goods. Assuming this, delivery to the transporter can be construed as a delivery to buyer. If such delivery happened in the state of the seller, then the tax to be charged would be CGST+ SGST.

But if the seller is fully aware that the goods handed over to the transporter are destined for a buyer in another state, would IGST apply?

I believe it would require a lot of documentary support to show that the seller was fully aware that the goods are destined for delivery to the buyer in another state. When transportation is arranged by the buyer, it would be very difficult to prove this beyond doubt. It will surely lead to litigation as the seller’s state will question any IGST charged on such a sale. Therefore, in this case, a contract or a purchase order that specifically mentions the place of delivery of the goods, irrespective of the person arranging for transportation or bearing risk, would be essential to prove the intent of the buyer and seller.

What we find here is that even a simple sale for delivery to the buyer can invoke different interpretations. Rather than sparking litigation, the parties should carefully word their contracts to clearly bring out their intent: If the delivery is identified as the customer’s premises, that should be brought out clearly in the contract or the PO. A stitch in time often saves nine.

Avalara is an experienced application service provider (ASP) partnering with licensed GST Suvidha Providers (GSPs). To understand how Avalara India GST can help you with GST compliance automation, contact us through  https://www.avalara.com/in/products/gst-returns-filing.

This blog is contributed by Dr Waman Parkhi, Partner, KPMG India.