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'Bill to - Ship to' Model under the draft India GST law

SEPTEMBER 15, 2016

By Ramnarayan Balakrishnan

UNDER the current VAT/ CST regime, the "Bill to - Ship to" model can be classified under two scenarios, as explained below:

A. The Current VAT/ CST regime

Those in the field of Indirect taxation would be familiar with both the above scenarios and the related documentation/ declaration form particulars.

B. The proposed GST regime

Chapter V, Section 5(2A) of the draft IGST Act reads as below (verbatim):

"Where the goods are delivered by the supplier to a recipient or any other person, on the direction of a third person, whether acting as an agent or otherwise, before or during movement of goods , either by way of transfer of documents of title to the goods or otherwise, it shall be deemed that the said third person has received the goods and the place of supply of such goods shall be the principal place of business of such person. "

It could be inferred from the above section that, the supply can be intra-state, but the tax trigger/ place of supply would be the location of the third person who gives instructions for delivery of the goods.

In other words, a person could supply goods intra-state (which ideally should trigger CGST + SGST), but, if the "third person" who gives instructions for such supply is located outside the particular state, then, regardless of the actual movement of goods, the location of such person would be deemed to be the place of supply and result in triggering of IGST.

As a corollary, if the 'third person' discussed under Section 5(2A) of the IGST Act, is located in the same state as the supplier but issues instructions for delivery of the goods on inter-state basis (which ideally should trigger IGST), then, regardless of the actual movement of goods, his location would be deemed to be the place of supply and result in triggering of CGST + SGST.

The aspects discussed above are only in relation to the first leg of the transaction, i.e. between the Supplier of goods and the 'third person', whether located within or outside the state.

The next point to reckon with would be the nature of the second leg of the transaction, i.e. between the 'third person' and the ultimate customer who receives the goods.

Whether a transaction triggers IGST or CGST+SGST is based on whether the supply is interstate or intra-state. Insofar as the 'bill to - ship to' model is concerned, there is just one transaction of movement of goods from the Supplier to the Ultimate Customer. The transactions between the 'third person' and the Ultimate Customer are just paper transactions. This being the case, it is not clear as to how the second leg of the transaction would be treated.

Consequently, the eligibility of input credit corresponding to the above transaction is also ambiguous.

The VAT/ CST scenarios we adopted earlier would be as given below under the GST 'Bill to - Ship to' model:

Hopefully, before the country embarks on its GST voyage, it would be in the fitness of things that the essentials are made crystal clear by the authorities concerned. Else, with the 'skimpy' threshold limits that is proposed to be adopted, we may end up with a GST nightmare!

(The author is Senior Analyst - Tax Research, Vertex Tax Solutions India Private Limited and the views expressed are strictly personal.)

(DISCLAIMER : The views expressed are strictly of the author and Taxindiaonline.com doesn't necessarily subscribe to the same. Taxindiaonline.com Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)

 


 RECENT DISCUSSION(S) POST YOUR COMMENTS
   
 
Sub: 'Bill to - Ship to' Model under the draft India GST law

Flow chart depicted in current VAT?CST regime is incorrect,
Transaction withing same state:
As unless the third person registered in the same state, cannot raise Tax Invoice. If unregistered,then which State VAT Act allows third person to raise Tax Invoice.

Even CST Sales Transaction shown seems incorrect. As per Supreme Court Judgement, First transaction has to be interstate.

Further Bill To and Shipp To Flow chart depiction of transaction seems tobe incorrect, as the rules stated above in article and transaction depicted in flow chart seems contrary.

Posted by Vikash Khanna
 
Sub: Reply to Queries from Mr Vikash Khanna


Question 1: Transaction within same state: As unless the third person registered in the same state, cannot raise Tax Invoice. If unregistered, then which State VAT Act allows third person to raise Tax Invoice.

Answer: Under scenario one, I have mentioned ‘buyer located in any state'. as such, if he is located within the state (and of course, registered), he has to raise a tax invoice on the ultimate customer. If he is located outside the state (and is therefore not registered within the state), the VAT charged by the supplier would become a cost for him. Nevertheless, since the movement of goods originates and terminates in the same state, the second leg of the transaction, (i.e. the sale effected by the buyer to the ultimate customer), would have to suffer VAT only. The ultimate customer might have to pay purchase tax, if the middleman located outside the state is unable to raise a VAT invoice on him.


Question 2: Even CST Sales Transaction shown seems incorrect. As per Supreme Court Judgement, First transaction has to be interstate.

Answer: The above question itself seems a bit ambiguous. I am not sure if by ‘transaction’ the gentleman means a sale or the movement of goods. Both are different. In an in-transit sale transaction effected under Section 6(2) of the CST Act, there is only ONE INTER-STATE MOVEMENT OF GOODS. However, before the goods reach their destination in the other state, MULTIPLE SALE TRANSACTIONS can be carried out by merely endorsing the document of title to goods and issue of C/E1/E2 forms. In my diagram, I have adopted a scenario in which there is only one sale transaction effected under Section 6(2) of the CST Act.

Question 3: Further Bill To and Ship to Flow chart depiction of transaction seems to be incorrect, as the rules stated above in article and transaction depicted in flow chart seems contrary.

Answer: The scenario which he refers to is not clear. I have discussed Bill To and Ship to transactions under existing tax regime as well as under GST. Not sure which he is referring to.


Posted by vertex vertex
 
Sub: Replies to the below queries by the author of the article

Question 1: Transaction within same state: As unless the third person registered in the same state, cannot raise Tax Invoice. If unregistered, then which State VAT Act allows third person to raise Tax Invoice.

Answer: Under scenario one, I have mentioned ‘buyer located in any state’; as such, if he is located within the state (and of course, registered), he has to raise a tax invoice on the ultimate customer. If he is located outside the state (and is therefore not registered within the state), the VAT charged by the supplier would become a cost for him. Nevertheless, since the movement of goods originates and terminates in the same state, the second leg of the transaction, (i.e. the sale effected by the buyer to the ultimate customer), would have to suffer VAT only. The ultimate customer might have to pay purchase tax, if the middleman located outside the state is unable to raise a VAT invoice on him.


Question 2: Even CST Sales Transaction shown seems incorrect. As per Supreme Court Judgement, First transaction has to be interstate.

Answer: The above question itself seems a bit ambiguous. I am not sure if by ‘transaction’ the gentleman means a sale or the movement of goods. Both are different. In an in-transit sale transaction effected under Section 6(2) of the CST Act, there is only ONE INTER-STATE MOVEMENT OF GOODS. However, before the goods reach their destination in the other state, MULTIPLE SALE TRANSACTIONS can be carried out by merely endorsing the document of title to goods and issue of C/E1/E2 forms. In my diagram, I have adopted a scenario in which there is only one sale transaction effected under Section 6(2) of the CST Act.

Question 3: Further Bill To and Ship to Flow chart depiction of transaction seems to be incorrect, as the rules stated above in article and transaction depicted in flow chart seems contrary.

Answer: The scenario which he refers to is not clear. I have discussed Bill To and Ship to transactions under existing tax regime as well as under GST. Not sure which he is referring to.

Posted by Ramnarayan Balakrishnan
 
Sub: Applied GST rate is incorrect

In scenerio 1 under GST regime , IGST is applied on supply made by supplier to customer on the direction of third person(buyer), this is incorrect. In this case SGST & CGST will be charged as supplier and third person are located in the same state A.

In scenerio 2 under GST regime , CGST & SGST is applied on supply made by supplier to customer on the direction of third person(buyer), this is incorrect. In this case IGST will be charged as supplier and third person are located in the different states.

Posted by shanu parakh
 

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