Goods and Services Tax and the Place of Supply
With India progressing towards the implementation of a common Goods and Services Tax (GST), Prime Minister, Narendra Modi, recently said, "The Goods and Services Tax is a long needed revolution that is becoming a reality". With less than a year for the implementation of this new tax structure, the most talked about development with respect to GST is the introduction of the Place of Supply (POS) Rules.
POS Rules would be applicable to the sale of goods as well as the supply of services. Once enacted, these rules will define the place of supply for transactions subject to tax. Thus, it is important to discuss them in the context of GST. At present, there is not much information regarding POS available in the public domain or in any government-issued document. In order to decipher the likely POS Rules, we will have to refer to countries where they are already prevalent. Accordingly, in this update we have discussed the current POS Rules in Malaysia and Canada.
Malaysia adopted the National (Central) GST Model, effective 1 April 2015. Canada, on the other hand, functions under the Concurrent Dual GST Model.
Malaysia's GST Regime
While the Malaysian government had scheduled to introduce GST during the third quarter of 2011, implementation was delayed and it was finally introduced on 1 April 2015.
Malaysia has a separate set of rules defining goods and services. The following table summarises Malaysia's POS Rules:
|Place of supply
||Goods are treated as supplied in Malaysia if it involves:
Goods are treated as supplied outside Malaysia if it involves:
- The removal from a place in Malaysia to another place in Malaysia (Local Supply)
- The removal from a place in Malaysia to a place outside Malaysia (Export)
- The removal from a place outside Malaysia to a place inside Malaysia (Import)
- The removal from a place outside Malaysia to another place outside Malaysia
||Services are treated as supplied in Malaysia if the supplier belongs to Malaysia.
Services are treated as supplied outside Malaysia if the supplier belongs to a country other than Malaysia.
Canada's GST Regime
According to the Canada Revenue Agency, a harmonised sales tax (HST) applies to the same base of property and services as the GST in Canada. HST is imposed in provinces that have harmonised their provincial sales tax with the GST and accordingly, these provinces are referred to as 'participating provinces'. In the remaining provinces and territories, GST is imposed on taxable goods and services. In these provinces, there may also be a provincial sales tax or a retail sales tax.
When a taxable supply is made in a 'participating province' it is subject to HST, and if such a supply is made in a 'non-participating province', it is subject to GST. The rate of tax is determined by the province or territory in which the supply is made. Thus, to determine whether a supply is made in Canada and/or in or outside a participating province, it becomes essential to refer to the POS Rules.
The following table summarises Canada's POS Rules:
|Place of supply
||The place of supply is where the goods are delivered or made available to the customer. As regards 'leases', there are special rules.
||Generally, the rules for the supply of services are based on the home or business address of the recipient (or any other address of the recipient) obtained by the supplier in the normal course of business except for certain types of services for which specific place of supply rules apply.
However, there are numerous rules that override the generic rule such as specific place of supply rules for services with respect to real property, tangible personal property, litigation, brokerage, air navigation, telecommunication, freight transport, passenger transport, internet access, repairs maintenance, etc.
||A supply of real property is considered to be made in a province if the property is situated in that province.
|Intangible Personal Property (IPP)
||In general, the place of supply would be determined based on where the IPP may be used and the location of the recipient.
Besides, there are specific provisions pertaining to IIP that relate to goods, real property, services and IIPs whose usage is based on specific provinces in Canada.
The Way Forward
As understood from the applicable legislations governing Malaysia and Canada, determining the place of supply could be quite challenging. Thus, to ensure that GST is successfully implemented, the government must expedite the release of the POS Rules into the public domain for discussion and debate. This is essential as businesses need to align their practices with the proposed GST regime, and represent their concerns before the government well before the introduction of the GST legislation.
The 122nd Constitutional Amendment Bill, 2014 (CAB)
The prospective Indian GST regime focuses on the Concurrent Dual GST Model, where taxes will be levied concurrently by both the central and state governments. This intent has been expressed under the CAB as introduced in the Lok Sabha (the lower house of Parliament) on 19 December 2014.
However, to enable the introduction of GST, the CAB must be approved by both houses of Parliament. The government plans to discuss (and if possible, pass) the CAB on GST in the second half of the Union Budget Session 2015-16, which began on 20 April 2015 (today). Thereafter, ratification by state legislatures would be required. It will be essential to monitor the progress on GST in the upcoming sessions of Parliament as these developments will set the tone for its effective implementation from 1 April 2016.