MAY 15, 2017

By Prajakta Menezes, Principal Associate, Khaitan & Co.

THE provisions of the Integrated Goods and Services Tax Act, 2017 (IGST Act) are applicable to the whole of India except the state of J&K [ Section 1(2) of the Integrated Goods and Services Tax Act, 2017]. Correspondingly, the term "Taxable territory" has been defined to mean the territory to which the provisions of the IGST Act apply. This means that the scope of taxable territory is to cover whole of India excluding J & K.

Traditionally, the purpose of taxable territory is to define the jurisdiction for the purpose of levy. However, under GST, can a situation ever arise where a service is supplied outside the taxable territory and is still subject to tax? Well, interestingly, under IGST, the answer seems to be 'Yes'.

The settled position of not taxing the services provided outside the taxable jurisdiction has now been unsettled by the provisions of the IGST Act, apparently from the drafting of levy and collection provisions under section 5 read with the section 7(5) of the IGST Act.

The levy and collection provisions under the IGST Act have been stipulated without any reference to taxable territory. This is coupled with the section 7(5)(a) which creates a deeming fiction whereby even services supplied outside India by a supplier located in India are treated as inter-state supply.

One can contend that a scenario where service supplier is in India and place of supply is outside India could be covered as exports and hence zero rated. However it cannot be disregarded that qualification as export of service comes with a set of conditions and all the conditions need to be satisfied cumulatively. Failing in even one condition like non-receipt of consideration in convertible foreign currency can bar a service from qualifying as export. This means that a service which is supplied at a place outside India can still be taxed, if it doesn't qualify as export.

This will also mean that services provided by branch/ liaison office or representative office to its overseas entity will be subject to IGST since they are treated as distinct persons for the purpose of export and hence their services never qualify as export.

The fundamental fallacy in the aforesaid provisions is that it authorises the levy and collection of a destination based consumption tax beyond Indian Territory, in contravention of the fact that GST legislation operates within Indian Territory alone. The provision appears to be highly inconsistent with the object and purport of law and defies territorial jurisdiction.

The contradiction in the law is further evident from the differential treatment extended to domestic vis-à-vis cross border transactions. Section 7(5)(c) of the IGST Act stipulates that services supplied in the taxable territory which is not an intra-state supply and not covered elsewhere will be treated as inter-state supply. Does this mean that services where place of supply is J & K, which is not a taxable territory, will remain outside the ambit of IGST by virtue of section 7(5)(c) while the same service if supplied outside India, say Canada will attract IGST by virtue of section 7(5)(a).

At present, under service tax law, a transaction for which place of provision of service is outside India doesn't attract any tax, irrespective of the fact whether it qualifies as an export of service or not. While the place of supply provisions are largely adopted from the existing service tax provisions, it is surprising to note that the underlying essence of not taxing a service which is beyond the taxable territory has not been maintained.

GST is a much awaited law not only in India but globally, with an expectation to see India transform into an unified tax market. Fallacies under the law as discussed above need to be corrected at the earliest to avoid any ambiguity over cross border transactions and to ensure that exports from India are not adversely impacted.

(The views expressed are strictly personal).