In the last update, we had discussed about the general rule for the determination of Place of Supply of Service. The general rule provides that wherein recipient is a registered person i.e. B2B Supply or in case wherein recipient is unregistered person i.e. B2C Supply but his address is available on record, location of such recipient would be the place of supply of service. In case recipient is an unregistered person i.e. B2C Supply and his address is not available on record, then location of the supplier would be the place of supply of service. However, there are certain specific rules for determination of place of supply of service. There is rationale behind application of the specific rules for determination of place of supply of service. In today’s update let’s discuss the rationale behind the general and specific rules for determination of place of supply of service.
a) Rationale of Destination Based Taxation and How in GST model being adopted in India Revenue would be transferred to Destination State:
As we all know, that GST is destination based taxation. In case of destination based taxation, the revenue accrues to the Jurisdiction wherein consumption takes place.
Place of supply rules are used to determine that place where the goods and/or services are provided or are being consumed and that state would have levied taxes and revenue directly would have accrued to such Jurisdiction. Just as we do in case of Imports wherein we levy taxes in the importing country and the revenue remains with the country wherein goods are imported and the exports in the exporting country are tax free. It’s not that the taxes are levied by the exporting country and then transferred to the importing state. In an Ideal destination based taxation, importing state levy the taxes and retain the taxes.
However, since in India, we are not strictly following the destination based taxation but have implemented a system whereby origin based taxation has been converted into destination based taxation i.e. taxes would be levied and collected in Origin State by Centre and then transferred to the destination State. Thus revenue would ultimately flow to the destination state but not directly by getting the right to levying the taxes but by transfer of revenue from the originating state to destination state through Centre.
Therefore, now place of supply rules would still determine the place where the goods and/or services are provided but would not identify the place which have the right to levy taxes but the place which has the right to receive the taxes from the Central Government.
b) How the General Rule in determination of Place of Supply of Service in B2B Transactions facilitates Destination Based Taxation:
Taking an Example, A Located in Jaipur has supplied services to B located in Delhi. B in Delhi used those services for providing further services to the C Located in Mumbai. C located in Mumbai used those services for providing further services to D Located in Chennai.
A, B and C are registered persons and D is the final consumer.
The general rule is that in case of B2B Supplies, place of supply of service is the location of the registered person. This rules is based upon the principle of destination based taxation as the revenue accrues to the Jurisdiction where the registered person is located and therefore, as the revenue accrues to the location where the registered person is located, therefore that jurisdiction can allow credit of the taxes paid.
Thus as in the above example, revenue would accrue to the jurisdiction of Delhi, Maharashtra respectively for allowing the credit to the registered person and finally to Tamilnadu as services would be finally consumed in Tamilnadu.
In case of supply of services by A to B, As revenue in would accrue to Delhi, credit of the taxes paid to A would be allowed to B. In case of supply of services by B to C, revenue would be accruing to Maharashtra, therefore credit of the taxes paid to B would be allowed to C. In case of supply of services by C to D, revenue would be accruing to Tamilnadu. However, as D is a unregistered person, therefore no credit would be allowed to D.
Following are the benefits of having a thumb rule of treating the location of registered person as place of supply of service and revenue therefore accrues to the Jurisdiction where the registered person is located.
- Allows Free flow of Credit from one registered person to another:
This general rule in case of B2B Supplies allows free flow of credit from one person to another. The revenue accrues to the Jurisdiction wherein registered person is located and relevant jurisdiction allows the credit of the taxes paid to the registered person.
- Facilitates linking of supply chain from one business to another for identification of jurisdiction wherein services acquired would be used in the course or furtherance of business in case of business to business supplies
The fact that in case of B2B supplies, place of supply of services is treated as the place where registered person is located and the revenue of the transaction goes to the Jurisdiction wherein the registered person is located allows linking of the supply chain. This linking of chain wherein credit of taxes paid to A is allowed to B, credit of Taxes paid to B is allowed to C.
This linking of the chain allows a trail to be formed wherein the transaction can be tracked from the origination to the final point of consumption. The basic objective behind classification of B2B Supplies is not to tax them but to facilitate a link from the origination to the end point of the transaction. In fact, the basic theme of destination based taxation is that the businesses should be relieved of taxes and taxes should never form part of the cost until the services or goods finally reach to the consumer.
- Facilitating the ultimate aim of identification of Jurisdiction and imposition of tax burden on final consumer in case of business to consumer supplies.
The fact that revenue accrues to the jurisdiction wherein the registered person is located facilitates linking of the entire transaction from the origination to end point and forms a trail to track the eventual flow of transaction from the business to the end consumer also allows a check on the evasion of the taxes if any.
c) How the General Rule in determination of Place of Supply of Service in B2C Transactions culminates in accrual of the final revenue to the place where the services are consumed:
The general rule in case of B2C Supplies is place of supply of service would be the location of the customer wherein address exists on record and if the address does not exists on record then the place of supplier would be place of supply of service. The fact that in case of B2B supplies, tax never forms part of the cost and allowed as a credit against the tax payable results in free flow of the credit till the point the services are not consumed.
Once the services are consumed through B2C transaction, supply chain comes to an end and results in tax forming pat of the cost of the service. There is no further flow of credit and the state where the chain ends retains the taxes as its revenue.
- Facilitates identification of the likely place where the consumer is going to consume the services and to levy tax as per the laws applicable in the likely jurisdiction wherein the final consumption of the goods or services would take place.
The general rule that location of the customer wherein address exists on record would be the place of supply of service allows the accrual of the revenue to the jurisdiction of consumption. In case the address does not exists on record then it is deemed that the services has been consumed at the location of the supplier itself by the consumer.
d) Why separate rules are required to be formed in specific situations
The question now arises that why specific rules for determination of place of supply of service are required. Why not general rule be made applicable for determination of place of supply of service in all cases.
- OECD Guidelines issued in the Month of November 2015 on “Determining the place of taxation for Cross-Border supplies of services and intangibles”, throws some light upon the fact that why specific rules are required in certain cases:
It is recognised that these general rules might not give an appropriate tax result in every situation and, where this is the case, the allocation of taxing rights by reference to another proxy might be justified.
The guidelines further provides that
Such a rule will use a different proxy (e.g. location of movable or immovable tangible property, actual location of the customer, or place of effective use and enjoyment) to determine which jurisdiction has the taxing rights over a supply of a service or intangible that is covered by the rule.
The guideline further provides a simple example that why in certain cases specific rule is required rather than the general rule. Say for Example in case of registered person, general rule specifies that the place of supply of service is location of the registered person. However in case of supply of services provided by way of admission to a cultural, artistic, sporting, scientific, educational, or entertainment event or amusement park or any other place and services ancillary thereto, place of supply of service is the place where the event is actually held or where the park or such other place is located
The same considerations could apply to services that consist of granting the right to access events such as a concert, a sports game, or even a trade fair or exhibition that is designed primarily for businesses. If a ticket can be purchased at the entrance of the building where the event takes place, businesses as well as final consumers can be recipients of the service. In these cases, under the general rule based on the customer’s location for business-to-business supplies, the supplier is confronted with the difficulty and risk of identifying and providing evidence of the customer’s status and location. Efficiency, as well as certainty and simplicity, might then not be met. Fairness could be at risk.
2. Five point criteria laid down by OECD Guidelines for framing specific place of supply/taxation rules for a given transaction:
The guidelines further lay down a Five point criteria for the assessing the desirability of a specific rule of place of supply
- Efficiency of compliance and administration: Compliance costs for taxpayers and administrative costs for the tax authorities should be minimised as far as possible.
- Certainty and simplicity: The tax rules should be clear and simple to understand so that taxpayers can anticipate the tax consequences in advance of a transaction, including knowing when, where and how to account for the tax.
- Effectiveness: The tax rules should produce the right amount of tax at the right time and the right place.
- Fairness: The potential for tax evasion and avoidance should be minimised while keeping counteractive measures proportionate to the risks involved.