Place of Supply outside India - no gap in Law
JANUARY 08, 2018
By K Srinivasan, IRS
WHAT prodded me to pen this piece is the article "Place of Supply outside India – Taxability Conundrum" carried in this column recently.
The Central government always had the powers under Article 286 of the Indian Constitution to formulate principles for determining when a sale or purchase of goods is said to take place in the course of inter-state trade or commerce including in the course of import and export.
In Article 286, on introduction of GST, the words 'sale or purchase of goods' has been substituted by the words 'supply of goods or services or both' to unify all references to commercial transactions attracting GST into a single term 'supply'.
An explanation under the new Article 269A was inserted at that time to equate imports to an inter-state supply of goods or services or both.
Notably, export out of the territory of India has not been equated to an inter-state supply.
Instead, Article 286(2) had retained the erstwhile powers of to formulate principles by Law, to specify when a supply for import or export takes place amounting to supply in the course of inter-state trade or commerce.
This is besides reserving the powers to impose tax on cross-border trade or commerce outside the state but within the Country referred to in both the erstwhile and the present new Article 286(1)(a).
Being a constitutional matter, for saving the trouble of reference the erstwhile Article 286(1) and (2) are reproduced hereunder:
(1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place-
(a) outside the State; or
(b) in the course of the import of the goods into, or export of the goods out of, the territory of India.
(2) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1).
Now, even after the amendment of Article 286(1)(a), Parliament continues to place restriction only on a state to tax supply of goods or services or both, when such supply takes place in any of the ways mentioned in amended new clauses (1)(a) and (b) of Article 286, i.e. outside the State and in the course of the import of the goods into, or export of the goods out of, the territory of India and not on itself as could be clearly seen from the amended new clause (2) of Article 286.
Article 246 of the Constitution of India no doubt provides the authority to levy taxes by allocation between the Centre and States.
Apart from giving the authority to levy taxes, an important restriction has always been there under Article 265 of the Constitution of India which states that 'No tax shall be levied or collected except by authority of law'.
This did not imply that the power to make laws as given by the Constitution to the Parliament in the above scenario, had some restriction in allowing the Government to tax supplies wherein supply is in the course of import of goods or services into India or where the goods or services are exported out of India.
It would therefore be incorrect to conclude that with regard to situation covered in Article 286(1)(b) above, where place of supply is outside India, no tax could be levied as per the Constitution of India.
It is pertinent to note that import by default has been recognized as an equivalent of inter-state supply in the Constitution itself and in addition Section 7 of IGST Act also supplements it.
Whereas, exports of goods or/and services are understood to take place when the supplier is in India and the place of supply is outside India in terms of Section 7 of the IGST Act.
However, it does not stipulate supply for Export to be strictly out of the territory of India.
The definition of Export under Section 2(18) of the Customs Act, 1962, with its grammatical variations and cognate expressions means taking goods out of India to a place outside India.
There is a semantic understanding that "out of India" need not necessarily mean out of the territory of India. For example, a person located in India causes supply of goods from Singapore to the US.
In the above case, the inward remittance of the transaction may be in foreign exchange for India and whether we can call the above transaction as Export, since the person causing the supply is located in India and the place of supply is outside India and the proceeds are also realized in foreign currency.
It is again interesting to note that the IGST Act (Section 7(4) refers) adopts the definition of Imports as found in explanation inserted under Article 269A of the Constitution but not for exports since there exists none in the Constitution itself.
The Customs Act itself does not adopt the definition of Export in line with the said Article of the Constitution. Therefore, the IGST Act is unable to go beyond that?
The taxability for import of goods and point of taxation is said to be driven by the Customs Act, 1962 which states that all taxes at the time of importation will be collected when the import declarations are filed before the customs authorities for customs clearance.
As per Section 16 of the IGST Act, 2017, it has been stated that certain supplies will be taxed as zero-rated supplies under the law.
As per Section 16(1) of the IGST Act:
"zero rated supply means any of the following supplies of goods or services or both, namely:
(a) Export of goods or services or both;
(b) Supply of goods or services or both to a Special Economic Zone developer or Special Economic Zone Unit"
In order to be subjected to zero rate of tax, one should satisfy the definition of export of goods or services or fall within supply to SEZ developer/unit.
As per Section 2 of the IGST Act, export of goods and export of services have been defined as the following:
"Export of goods with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India"
"Export of services means the supply of any service when –
(i) The supplier of service is located in India
(ii) The recipient of service is located outside India
(iii) The place of supply of service is outside India
(iv) The payment for such service has been received by the supplier of service in convertible foreign exchange and
(v) The supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in Section 8."
If the conditions laid down in the definition are not satisfied, one should not consider them as part of zero-rated supply.
For instance, if there is an export of service wherein the consideration is not received in convertible foreign exchange, it will not be considered as a zero-rated supply.
Now, the question that arises is if one does not fall within the ambit of zero rated supply, should tax be payable in India even if the place of supply is outside India?
Here it is pertinent to refer Section 7 of the IGST Act, 2017 which covers inter-state supplies. Section 7(5)(a) states the following:
"Supply of goods or services or both when the supplier is located in India and the place of supply is outside India shall be treated to be a supply of goods or services or both in the course of inter-state trade or commerce."
Hence, even if the place of supply is outside India and it does not fall within the definition of export of goods/services, it will be deemed as inter-state supply.
The chargeability section of the IGST Act, 2017 purports to tax all inter-state supplies and it may seem here that tax needs to be paid on such supplies wherein the place of supply is outside India but doesn't get covered within the ambit of export of goods or services.
Here, a parallel may be drawn with import of goods for which Section 7(2) of the IGST Act states the following:
"Supply of goods imported into the territory of India till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-state trade or commerce".
Here, high sea sales i.e. supply in the course of import before crossing of customs frontiers is deemed to be an inter-state supply.
However, it is not leviable to GST because the proviso to the chargeability section 5 states that IGST shall be levied at the point when customs duties are levied i.e. the filing of import declarations.
Hence, there is no cause for confusion in respect of chargeability for import of goods. Only when bill of entry is filed, GST will be levied. Any supplies before filing of such bill of entry will not be taxable.
This proviso mainly helps to avert multiple-taxation of goods while still being in the course of Import into the territory of India until the final clearance is made by filing an ex-bond Bill of Entry.
Such a parallel provision to exempt supplies wherein the place of supply is outside India has neither been warranted nor has been made in respect of supplies which are not zero rated.
So as per the IGST Act, such supplies which are in the course of inter-state trade or commerce may be leviable to IGST if they do not fall within the definition of zero rated supply.
Let us consider three different trade situations -
a) where the supply of goods from a second country to a third country by a person causing the supply is in India, and the other two are relating to
b) consideration not received in convertible foreign currency, and the last
c) supplier and recipient are merely establishments of a distinct person.
The first point above is not considered to be export of goods because it does not involve taking the goods out of India. The goods are transferred from one country to the other on instructions of a supplier in India.
The second point is not export of services within the GST law as export of services requires receipt of consideration in convertible foreign exchange.
The third point above is also not export of services within the GST law as the supplier and recipient should not be establishments of a distinct person for coverage under export of services.
Since, all the three supplies above have been covered within the ambit of inter-state supplies and are not zero-rated, they are to be considered as taxable supply as per the IGST Act, 2017.
In situations where the place of supply is outside India but they do not get covered within the definition of export of goods or services, the Constitution of India does allow leviability of GST on it and the IGST Act, therefore, rightly covers such supplies under its ambit for levy of IGST.
For this purpose, the IGST Act may have to be read with the Customs Act and in line with Articles 246A(2), 269A(5) and 286 of the 101st Constitutional Amendment Act, 2016.
The reason for Article 269A refraining from deeming export to be an inter-state transaction of trade or commerce for it would otherwise make it difficult to amend the position in subordinate Legislations if needed in future through the ordinance route.
Other things remaining equal, if physical export of services are freed from any tax liability albeit conditions of export not being fully met, by simply blocking the Input stage credits involved in those export of services by adding a suitable provision under Section 17(5) of the CGST Act, it will still bring much relief to the Export Industry.
This will help restore parity of the legal position of Law between post Negative list and post GST regimes with regard to relief from tax liability despite the non-fulfillment of certain conditions of export especially non-receipt/non-realization of foreign exchange.
At best, the ways and means of regulating the levy and collection of tax on the above instances of exports may be fine-tuned in the IGST Act, if the Government is gracious to confer certain benefits on Zero-rated supplies when made outside India, despite non-fulfillment of certain conditions specified therein.
In the humble opinion of the Author, no way there lies any threat to the authority of law to levy tax by the Government on imports and exports under the IGST Act in the situations cited above so as to be held ultra vires Article 265 of the Constitution of India.
To sum up, with a line borrowed from the Hon'ble apex court decision in Bata India Ltd. [2002-TIOL-207-SC-CX] - No intriguing conundrum perplexes our mind.
(The author is Assistant Commissioner, GST, Chennai and the views expressed are strictly personal.)
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