SEPTEMBER 27, 2016

By Mohammad Salim, CA

THE determination of place of provision of service is an important aspect in determining taxability of a service as only the taxable services provided in a taxable territory are subjected to service tax.

The determination of the place where the service has been provided is currently governed by Place of Provision of Services Rules, 2012 as promulgated by Government of India vide Notification No 28/2012-ST dated 20-6-2012 (as amended) under the powers conferred to it by Section 66C of the Chapter V of Finance Act, 1994.

In regard to above, there are three apparent changes under the GST Model Law. First one being that the term "provision" has been replaced with the term "supply" as GST is leviable on the "supply" of goods and services. Accordingly, under GST the ‘place of provision of service' will be referred to as ‘place of supply of service'. The other apparent change is the mandating of the principles of the determination of place of supply of service within the IGST Act instead of separate set of Rules and various changes in the principles governing the determination of place of supply. Further, under GST regime, apart from determining taxability of the service the place of supply of service would also determine as to whether the supply is inter state in which case IGST would be levied or intra state in which case CGST and SGST both will be charged.

Under the Model GST Law, the determination of "place of supply of services" is governed by Section 6 of IGST Act.

Let us discuss now about how the place of supply of banking and other financial services shall be determined under Model GST law and whether there is any change in its determination in comparison with the existing Rules in this regard.

Section 6(13) of the IGST Act mandates about the determination of place of supply of banking and other financial services, and it reads as under:-

(13) The place of supply of banking and other financial services including stock broking services to any person shall be the location of the recipient of services on the records of the supplier of services:

Provided that if the service is not linked to the account of the recipient of services, the place of supply shall be location of the supplier of services.

The term "Location of supplier of service" has been defined in Sec 2(65) of SGST / CGST Act as under:-

"location of supplier of service" means:

(i) where a supply is made from a place of business for which registration has been obtained, the location of such place of business ;

(ii) where a supply is made from a place other than the place of business for which registration has been obtained, that is to say, a fixed establishment elsewhere, the location of such fixed establishment;

(iii) where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provision of the supply; and

(iv) in absence of such places, the location of the usual place of residence of the supplier;

The above definition is more or less identical to the definition of "location of service provider" as given in Rule 2(h) of the Place of Provision of Services Rules, 2012.

The definition of term "account" has not been given in the GST Model Law. However the term "account" has been defined currently under Rule 2(b) of Place of Provision of Service Rules, 2012 as under:-

"account" means an account bearing interest to the depositor, and includes a non-resident external account and non-resident ordinary account.

Assuming that the above definition would be injected into the GST law it can be stated that the Banks, FIs, NBFCs providing banking and other financial services to its account holders which bears interest i.e. Saving Bank Account, Recurring Deposits Accounts, Fixed Deposit Accounts, NRE and NRO Account etc. the place of supply of service would be the location of the service recipient on record of supplier of service. However, in case of supply of banking and other financial services not linked to the ‘account' the place of supply would be the location of the supplier of service.

Now let us compare the above position with the existing law wherein Rule 9 of the Place of Provision of Services Rules, 2012 is relevant which inter alia mandates that the place of provision of services provided by Banking Company or a financial institution, or a non-banking financial company, to account holders shall be the location of the service provider.

In regard to the services provided by above entities to persons other than account holders the determination of place of provision of services would generally be governed by Rule 3 (Default Rule) of Place of Provision of Services Rules, 2012 which states that the place of provision of service is the location of the service recipient.

Now in order to have better understanding and to appreciate the difference between the existing statute and GST Model Law in regard to the principles governing the determination of the place of provision / supply of banking and other financial services the comparative position is illustrated as under:-

From the above table it is evident that the rule regarding determining the place of provision / supply of services in respect to banking and other financial services has been completely reversed under the GST Model Law in comparison to the existing Rules. Therefore the banking and other financial services which are at present non-taxable as the place of provision is outside taxable territory may become taxable under GST regime and similarly such services which are currently taxable may be rendered non taxable under the GST era.