Goods Transport services in relation to export of goods to Nepal & Bhutan Impact of Recent Amendments

[Rakesh Garg]

A.           LEGISLATIVE BACKGROUND

1.      Meaning of Export of Service – Sec 2(6) of the IGST Act

“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 or in Indian rupees wherever permitted by the Reserve Bank of India [Words in italic inserted vide IGST Amendment Act, 2018 w.e.f. 01.02.2019]; 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.

2.      Meaning of Recipient of Service – Sec 2(93) of the CGST Act

“Recipient” of supply of goods or services or both, means-

(a)      where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration;

(b)      where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available; and

(c)      where no consideration is payable for the supply of a service, the person to whom the service is rendered,

and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied.

3.      Place of supply in relation to GTA service when both the parties are located in India – Sec 12(8) of the CGST Act

The place of supply of services by way of transportation of goods, including by mail or courier to,––

(a)      a registered person, shall be the location of such person;

(b)      a person other than a registered person, shall be the location at which such goods are handed over for their transportation.

‘Provided that where the transportation of goods is to a place outside India, the place of supply shall be the place of destination of such goods.’ [Proviso inserted vide IGST Amendment Act, 2018, w.e.f. 01.02.2019]

4.      Place of supply in relation to GTA service where location of supplier or location of recipient is outside India – Sec 13(9) of the IGST Act

The place of supply of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of such goods.

5.      Exemption vide Notification No. 9/2017- IGST (Rate), dated 28.06.2017

Entry No. 10D - ‘Supply of services having place of supply in Nepal or Bhutan, against payment in Indian Rupees’.

Inserted vide Notification No. 42/2017- IGST (Rate), dated 27.10.2017; and

Omitted vide Notification No. 02/2019- IGST (Rate), dated 04.02.2019

6.      Explanation (a) to Rule 43(2) of the GST Rules

For the purposes of rule 42 and rule 43, it is hereby clarified that the aggregate value of exempt supplies shall exclude:-

(a)      the value of supply of services specified in the notification of the Government of India in the Ministry of Finance, Department of Revenue No. 42/2017-IT (Rate), dated the 27th Oct., 2017 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide number GSR 1338(E) dated the 27th Oct., 2017;

Inserted vide Notification No. 55/2017, dated 15-11-2017; and

Omitted vide Notification No. 03/2019- CT, dated 29.01.2019 w.e.f. 01.02.2019

 

B.           ANALYSIS

In light of the above-stated provisions, we may analyze the taxability/exemption in the following two scenarios:

Suppose, M/s A (supplier of goods in India) supplies goods to M/s B (recipient of goods in Nepal) through M/s XYZ (the Indian transporter)

Case I: Where consideration for transportation of goods is paid by M/s B (To Pay)

1. Before Amendment in Feb. 2019:

Location of Supplier – XYZ, India;             Location of Recipient – M/s B, Nepal

Place of Supply – Sec 13(9) – Nepal;        Mode of remittance – Indian Rupees

The transaction shall not be treated as export since consideration is received in Indian Rupees.

Therefore, Exemption Entry no. 10D of Notification No. 9/2017- IGST (Rate) effective from 27 Oct. 2017 gave the relief, which exempted such transactions.

Further, an explanation was also added in Rule 43(2), whereby these services were excluded from exempted services; hence, there was no requirement to reverse input tax credit.

2. After Amendment in Feb. 2019:

Location of Supplier – XYZ, India;             Location of Recipient – M/s B, Nepal

Place of Supply – Sec 13(9) – Nepal;          Mode of remittance – Indian Rupees (Permitted by RBI)

Now, the definition of export of service also includes those cases where consideration is received in Indian Rupee.

                After, the amendment, it will be considered as export of service; and hence, zero rated.

Further, explanation (a) in Rule 43(2) has also been omitted.

Since it is zero rated supply, there is no requirement to reverse ITC.

3. Net Impact:

Earlier transaction was treated as exempt supply; and after the amendment, as zero rated supply.

Further, since the service is provided outside India, it will not be subject to reverse charge; and GST, if any, shall be payable on forward charge.

However, transporters are not required to pay tax, if they have furnished LuT.

Case 2: Where consideration for transportation of goods is paid by M/s A (Prepaid)

1. Before Amendment in Feb. 2019:

Location of Supplier – XYZ, India;             Location of Recipient – M/s A, India

Place of Supply – Sec 12(8) – India;         Mode of remittance – Indian Rupees

In this case, the transaction was not treated as export since location of recipient is in India and consideration is received in Indian Rupee.

Exemption Entry no. 10D of Notification No. 9/2017- IGST (Rate) was also not applicable since place of supply is in India (and not Nepal).

Hence, the transaction was taxable.

2. After Amendment in Feb. 2019:

Location of Supplier – XYZ, India;  Location of Recipient – M/s A, India

Place of Supply – Sec 12(8) – Nepal;          Mode of remittance – Indian Rupees (Permitted by RBI)

Now, the definition of export of service also includes those cases where consideration is received in Indian Rupee.

Even after the amendment, the transaction will not be considered as export of service since location of recipient is in India, even though place of supply is Nepal.

Entry 10D of Notification No. 9/2017- IGST (Rate) has also been omitted w.e.f. 04.02.2019; otherwise, the transaction would have been exempt since place of supply is at Nepal.

Hence, the transaction would be taxable.

3. Net Impact:

Earlier transaction was treated as taxable supply; and after the amendment, the situation remains unchanged: Remains taxable.

If that is so, the need to insert proviso in section 12(8) of the IGST Act, stipulating the place of supply, in case of services of transportation of goods to a place outside India, at the destination of goods, is not understood. The Legislature forgot that section 12 of the IGST Act pre-supposes that supplier as well as recipient is located in India; whereas the definition of export of service stipulates that location of recipient is outside India.

Further, the said amendment in section 12(8) of the IGST Act has been brought with a view to promote export; however, under these circumstances, it is not clear that how the proviso has made any difference for promoting the exports?

It is interesting that, in case of services of transport of goods outside India, if the Freight is “prepaid”, transport service is taxable in GST; and if it is “to pay”, it is an export.

Perhaps this is the reason, why a deep dive is needed into all the provisions of the IGST Act relating to determination of place of supply under section 10 to 13 of the IGST Act. 

(By Rakesh Garg, LLB, FCA along with CA Kamakshi Khandelwal and CA Anku Gaba)