ARTICLES

Indirect Tax

Indirect taxes can be either origin based or destination based. Origin based tax (also known as production tax) is levied where goods or services are produced. Destination based tax (consumption tax) are levied where goods and services are consumed. In destination-based taxation, exports are allowed with zero taxes whereas imports are taxed on par with the domestic production.
The Indian taxation system for goods and services is defined by a cascading, distorted tax structure which leads to misallocation of resources, hampering productivity and slower economic growth. To remove this hurdle, a unified and a simple tax system like GST (Goods and Service Tax) is introduced.
The fact that GST is destination based taxation is widely acknowledged. India has now implemented Dual GST which would be CGST and SGST and Inter State Transactions would be governed by IGST which would be equal to CGST and SGST. Therefore, for understanding the basic concept of GST we need to know basics about destination based taxation and what they exactly mean.
Destination Based Taxation as the name suggests is the taxation based on destination or consumption of the goods or services. This principle seeks to tax the goods and services on simple theory that the goods or services should be taxed at the stage where their consumption takes place rather than the point where their origin takes place i.e. production and the entire revenue relating to the goods or services should accrue in the jurisdiction where they are being ultimately consumed.
If A in Gujarat produces the goods and sells the goods to B in Rajasthan, then in such case the tax should be levied and collected and should accrue on the goods in the State of Rajasthan and not in the State of Gujarat.
The concept of destination based taxation has been meticulously followed while prescribing the place of supply of goods /services. However two measure exceptions have been incorporated to the basic rule of destination based taxation.
The first exception to destination based taxation is in respect of services in relation to immovable property as prescribed in section 12(3) of the IGST Act. The other exception is prescribed in section9 with non-obstinate clause whereby place of supply is deemed to be nearest coastal state or union territory. In case of location of supply it is in territorial water or place of supply is in territorial water.
The exceptions to the destination based taxation as explained above greatly impacts the taxes which would be chargeable under GST. In respect of various port activities undertaken by any port let us consider the exceptional provisions visavis the port activities to study the impact it has on the levy on GST.

Under section 9 notwithstanding anything contained in this Act,––
(a) Where the location of the supplier is in the territorial waters, the location of such supplier; or
(b) Where the place of supply is in the territorial waters, the place of supply, shall, for the purposes of this Act, be deemed to be in the coastal State or Union territory where the nearest point of the appropriate baseline is located.

The term location of supplier of services is defined u/s 2(71) of the CGST Act and 2(15) of the IGST Act both the definition are parametrical same. The location of supplier of goods is not defined if we incorporate the above definition of location of supplier of service in section 9 “The term would read as the location of supplier of services is in Territorial Waters”. The definition in clause (a) states “location of the supplier of services” means,—
(a) Where a supply is made from a place of business for which the registration has been obtained, the location of such place of business;

The purpose envisaged in section 9 will get defeated in case the above definition is read in section 9 of IGST to give a meaning to the section 9. It would have to be understood that where the services are rendered in the territorial waters. The location of service provider (supplier) shall be the appropriate baseline. Similarly clause B would be read such that for the recipients of service place of supply shall be in territorial waters and consequently the place shall of supply shall be appropriate baseline.
In respect of immovable property u/s 12(3) (a) and (d) reads as under the place of supply of services,––
(a) Directly in relation to an immovable property, including services provided by architects, interior decorators, surveyors, engineers and other related experts or estate agents, any service provided by way of grant of rights to use immovable property or for carrying out or co-ordination of construction work; or
(b) …
(c) …
(d) Any services ancillary to the services referred to in clauses (a), (b) and (c), shall be the location at which the immovable property or boat or vessel, as the case may be, is located or intended to be located:

The port authorities render various services both in respect of vessel and respect of goods loaded in the vessel.

The first issue that arises and which needs to be dealt is whether various services rendered by port authorities are a composite service and if ‘yes’ which is the principle service? Further whether the services rendered by the port authorities are in relation to immovable property? The term vessel or boat has been used only in the proviso to section 12(3) of IGST Act and therefore whether it will become applicable to the entire section12 (3)?
We will need to analyze some of the basic services rendered by the port authorities
1. Port area Pilotage :- Pilot service to Ship so that their ship/vessel can berth Smoothly
2. Berth Hire charges :- For allowing Shipper to use Port berth for anchoring vessel
3. Dwell Time Charges, this is a storage charges :- charge for container which is stored at Port yard beyond specified period
4. Container Handling Charges :- service like lifting of container from Vessel and is transfer to Yard for storage
Most of the above services especially 1 to 4 are such that they have to be rendered together although they may be billed item wise, where rate of each of them may be different. In such a case can we say that it is a composite supply? If yes this is the principle service. Can we say that principle service is port service & in that case whether port services are immovable property service? Can we say that all the above services are vessel rated services and therefore they are covered under section 12(3)? Can it be argued that each supply of service is a separate service and hence. Place of supply for each type of supply of service should be separately considered.
The above answers will affect the levy of GST only, where recipient of supply is not registered in Maharashtra. Else, the answer of any of the above question will not affect the nature of levy of GST.
The concept of bundled services was different in service tax, since bundled service would be applicable only when one composite price is fixed for a bouquet of services. Whereas the concept of composite services differs in as much as, the values although may be different they may be still be treated as composite supply which consist of one main principle supply.
The definition of composite supply of services reads as under section 2(30),
“composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;
Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.
The definition states that there has to be two or more taxable supplies, naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is principle supply.
In respect of port services the above services are certainly supplied in conjunction in the ordinary course of business but is there is any principal supply? Can we therefore say that it is not a composite supply since there is no principal supply.
Let us now consider what would be the place of supply in case each of the supplies made by the port authorities who are registered in the state where port is situated.

Port area pilotage Territorial water   Sec 9
Berth hire charges Territorial water   Sec 9
Dwell time charges Territorial water  Sec 9
Container handling charges Recipient    Sec 12(2)

One will tend to conclude that since each of the independent supply barring container handling is happening in territorial waters and the port authorities are registered in that state. The tax under the GST regime to levied would be CGST, SGST. It would be therefore probably a business compulsion on the part of the recipient of service to register in the state where the port is situated so as to insure seamless flow of credit.