The government will soon introduce rules on ‘place of supply’ which will clearly define what should be considered the place of supply for levying service tax. Rules on ‘time of supply’ are also being prepared by the finance ministry, to define the point at which liability to pay tax would arise.
The finance ministry will put the draft rules on its website by the end of this month for taking industry feedback. The rules, being framed for smooth implementation of the Goods and Services Tax (GST), would be based on best international practices, said a finance ministry official.
In the existing tax regime, place of supply is not a big issue because service is taxed by the Centre and the place of levy does not affect revenue receipts. In GST, however, the place of supply will have to be clearly defined to avoid disputes among states in case of inter-state transactions.
At present, the liability to pay service tax is on the provider in most cases. When the service is coming from outside the country, the recipient has to pay the tax on a reverse-charge basis. For taxation of services provided from outside, the government follows rules on export and import of services.
“In GST, the taxable event is supply. If someone is travelling by air from Delhi to Chennai via Mumbai, it should be clear which state will collect the tax. For example, where you buy the ticket could be the place of supply,” said R Muralidharan, executive director, PriceWaterhouseCoopers.
The Task Force of 13th Finance Commission on GST had also given suggestions on ‘place of supply’ rules based on international tax practices, especially in the European Union. It suggested levying tax on supply of B2B (business to business) services in the state of destination and not of origin. It said for multi-establishment business entities the place of destination should be the place of predominant use of service, and if there is no such place the mailing address of the recipient as stated on the invoice should be the place of destination.
For B2C (business to consumer) services, the task force has suggested that the place of supply should be the state in which the supplier is located, which could be defined as the place where the services are performed. If there is no unique place of performance of the service, the place of supply could be as the state where the supplier’s establishment most directly in negotiation with the recipient is located.
Time of supply will explain the point at which tax would be levied — invoice date, due date or payment date. Currently, different taxes are levied by the Centre and the states at various stages. The service tax is levied on the receipt of payment, excise duty is imposed by the fifth of following month and sales tax is levied when the sale happens. These variations will be eliminated in GST.
