In the current taxation system, taxes are collected by multiple governments at multiple places. First excise is collected by Central Government at the place of production, then VAT is collected by the state government at the point of sale. Also, certain state and district municipalities collect entry taxes/octroi thereby creating too many complexities in the current tax regime. With the GST coming in, all these complexities will be replaced with a DESTINATION based tax. In this post we will highlight what it means and why is it so important to determine place of supply. The concept of ‘place of supply’ will play a vital role in deciding the nature of tax to be levied on the movement of goods and services, as well as, the respective Government entitled to receive its share of GST.
As understood earlier there are 3 types of GST i.e.,
- IGST (Integrated GST)
- CGST (Central GST)
- SGST (State GST) which is replaceable by UTGST (Union Territory GST) in case of UTs
When a registered tax payer is supplying goods/services on interstate basis he is paying IGST, and when he is supplying goods/services within the boundary of same state (or Union territory) then he is paying CGST + SGST (or UTGST). Hence, from where the products are being supplied or what is the place of supply determines which kind of tax will be applicable.
The location of the supplier and the place of supply together define the nature of the transaction:-
- Location of Supplier: It is the registered place of business of the supplier
- Place Of Supply: It is the registered place of business of the recipient
For example, Arvind Electronics Ltd has its registered place of business in Ahmedabad, Gujarat, and it supplies air conditioners to GKB Air Conditioners Ltd., whose registered place of business is in Vadodara, Gujarat. Since the location of Arvind Electronics Ltd is in Gujarat and its place of supply is also in the same state – this is an intra-state supply, and tax charged will be CGST and SGST. However, if Arvind Electronics Ltd has its registered place of business in Ahmedabad and supplied air conditioners to Laxman Air Conditioners Ltd whose registered business is in Bangalore, Karnataka – this will be an Inter-state supply, and tax charged will be IGST.
Even if the suppliers are within the state of Import/ Export of goods or services, and Supply of goods or services to or by SEZ developer or SEZ units — its considered as inter-state supplies. A SEZ is a Special Economic Zone area in which business and trade laws are different from rest of the country, located within a country’s national borders.