Registration in case of renting of immovable property – A curious case

[Srinivasan Krishnamachari]

This article is on the applicability of GST when both supplier and recipient of renting of immovable property service are located outside India but the property is situated in India

The provisions for determining place of supply of services are given under sections 12 and 13 of the IGST Act.

Section 12 determines the place of supply of services where the location of supplier of services and the location of the recipient of services is in India. Thus, Section 12 will apply only where the location of supplier as well as the recipient is in India.

Similarly, section 13 determines the place of supply of services where the location of the supplier of services or the location of the recipient of services is outside India.

Thus, this section prescribes the provisions for determining the place of supply in case where either the location of supplier or the location of recipient of service is outside India.

This section uses the word "or", therefore, there arises a question as to which section will apply in case location of both recipient of service as well as supplier of service is outside India.

In case of renting of immovable property service, the place of supply is the place where the immovable property is situated.

This provision is given in both sections 12 (applicable where location of supplier of service and location of recipient of service is in India) and in section 13 (applicable where location of supplier of service or location of recipient of service is outside India in India).

In the given case where both supplier and recipient of renting service are located outside India, section 12 is outright not applicable.

Further, the section 13 uses the word "or" which if literally interpreted will mean that it will apply only if either one of the two supplier or recipient, is located outside India.

 It does not specifically mention that it will also apply if location of supplier as well as the recipient is outside India, since Section 2(11) of the IGST Act defining Import of service requires Service provider to be outside India and recipient to be in India, in addition to place of supply of service having to be in India.

In the given case, there are divergent views;

One view is that sine the given case would appear to be outside the purview of GST as both the supplier and recipient are outside and hence both Section 12 and 13 may be rendered irrelevant. 

Even the charging Sections of CGST/IGST Acts namely Sections 12 and Section 5 respectively will lose their relevance once the transaction in question is held to be outside GST.

This is possibly not correct since location of Immovable property is in India and hence the place supply is the location of the immovable property in India which is a taxable supply.

 In whose hands the said supply is taxable is perhaps the only reasonable question remaining to be resolved.

Section 9 of CGST Act, 2017 states that there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both.

Likewise, charging section 5 of IGST Act, 2017 states that there shall be levied a tax called the integrated goods and services tax on all inter-State supplies of goods or services or both.

Therefore, to fall under the ambit of either of these provisions of CGST/IGST Act, there needs to be either an intra-state or an inter-state supply of service in this case.

The provisions of section 7 (5) would appear some-what applicable to the present case is one view.

Let us therefore visit the said provision briefly. Section 7(5):- Supply of goods or services or both,––
(a) when the supplier is located in India and the place of supply is outside India;
(b) to or by a Special Economic Zone developer or a Special Economic Zone unit; or
(c) in the taxable territory, not being an intra-State supply and not covered elsewhere in this section,
shall be treated to be a supply of goods or services or both in the course of inter-State trade or commerce.

The given case may fall under the residual clause (c) of section 7(5) and accordingly, the supply of service may be treated as inter-state supply and provisions of IGST Act, 2017 will apply, is the said above view.

From the above discussion, one thing can be safely surmised that the intention of government is however clear to levy tax in a case where the place of supply is in India.

In keeping with the above we have to reach inevitably the conclusion that Section 13 of the IGST Act has to be liberally interpreted to include the given case under it.

 By holding this view, the problem would be, the provider of renting of Immovable property service will be required to get himself registered in India. 

Now, paradoxically, since the supplier is liable to be registered in India, the location of supplier and place of supply may be construed to be in the same state.

Accordingly, the present case stands the risk of getting forced out of the purview of Section 13 and get attracted under the ambit of Section 12 of IGST Act. Consequently, CGST and SGST will be payable. This is yet another compulsion that we are faced with here.

Again, there is another view that in case of immovable property, it cannot be said that merely because immovable property is situated in India therefore there is some fixed establishment, as there are no human and other resources and as such it cannot be strictly termed as the place of business of the Supplier.

If this view is accepted, there will be problem as to where the registration is to be taken which is another dilemma we are facing with.

Thus, by accepting the view that Section 13 is applicable, even though the transaction falls under the purview of the charging Section 5 of the IGST Act, the subsequent provisions of Place of supply fail us.

Therefore, we are fetched up with the original confusion on the issue of registration and taxability again. The above discussion clearly indicates that there is a lot of anomaly in the given situation and is sure to trigger a lot of litigation.

 Though it is a rare phenomenon, we still need to find a solution to the issue here and hence this article.

Let us try to capture the scheme of Section 7 of the IGST Act defining Inter-state supply,  so that the readers will have an over view of it to understand its construct in all its ramifications.

Section 7(1) is devoted to inter-state trade and commerce of goods happening within the country, where the location of the supplier and recipient are in two different states to enable levy of IGST on inter-state supply of goods.

Section 7(2) speaks about plain import of goods so as to facilitate levy of IGST on Imports to replace the old level playing levies of CVD and SAD.

Section 7(3) deals with inter-state supply of Services subject to Section 12. 

Section 7(3) though confined to domestic inter-state supply of services, it still includes under its ambit supply of services where the location of the supplier and the recipient are in India but the location of the property is outside India.

 It achieves it by equating the foreign place of supply to the location of the recipient and thereby imparting the character of domestic inter-state supply to such services of even Immovable property located outside India, with the aid of the said Section 12.

Section 7(4) deems all import of services as supply of services in the course of inter-state supply to enable levy of IGST on Import of services which is analogous to Section 7(2) dealing with import of goods.

Both Sections 7(2) and 7(4) find support to treat Imports as inter-state supply from the Explanation to Article 269A of the Constitution that deems the supply of goods or services in the course of import into the territory of India to supply of goods, or services or both in the course of inter-state trade or commerce in order to enable levy and collection of IGST on imports.

It must be noted here that Section 7(4) carefully bears no reference to Section 12 or Section 13 for a reason, that Government reserves the right to levy tax on import of services notwithstanding the fact that the location of both the supplier and the recipient are outside India, with reference to a transaction happening under the ambit of Section 7(4) involving an Immovable property located in India.

But at the same time one must also note that Section 7(2) of IGST Act does not find support for deeming exports as an interstate supply unlike in the case of Imports deemed as interstate supply in terms of Explanation to Article 269A of the Constitution (One Hundred and First) Amendment Act, 2016.

Government is empowered to make such Laws to regulate supply as it deems fit as per Article 269 A (5) of the Constitution, even as there is no specific definition for supply in the Constitution itself.

Section 7(5) is meant to take care of i) Supply of goods and services for i) export ii) to or by a SEZ/SEZ Developer iii) in taxable territory, not being an intra-state supply and not covered elsewhere in this section.

It is a fact that the sole purpose of deeming the supplies happening in such a residual situation referred therein as amounting to Inter-state supply,  is  for ensuring  a share of revenue to the Centre in the IGST levied and collected thereof.

This is known to be the unique purpose of this above provision of the legislation besides providing a clue as to the nature of supply, though not the specific situations when it is supposed to operate and which transaction of supply it deems as inter-state supply.

It would however look this much clear that the said residual clause of Inter-state supply, is not meant to come to play to cover such services as the Immovable property service under it when the place of supply provision is silent where the location of the supplier and recipient of service both being located outside India in relation to a property located in India.

Let us now turn to Section 13(b) of the IGST Act that relates to “services supplied to an individual, represented either as the recipient of service or a person acting on behalf of the recipient, that requires the physical presence of the recipient or the person acting on his behalf, with the supplier for the supply of services”.

 This only means as in the case OIDAR services provided under Section 14 of the IGST Act, even if the Provider of services is not located in India but located abroad, and the service recipient is located in India, the Supplier or the person acting on his behalf, has to register and pay tax involved on the said renting of the property located in India.

If no one is there on the scene of the given transaction to represent in the capacity of the Supplier, then there has to be one designated by the actual supplier located abroad to discharge the liability on his behalf under the head IGST in this case as then it would be right to be construed as import of service and in turn deemed as an inter-state supply as per the provisions of Section 7(4) ibid.

One needs to be further clear that the criteria for determination of a supply, depends on the location of the supplier as much as the location of the recipient/place of performance of service.

That is why there is a deeming fiction created under proviso to Section 12 that in the case of location of Immovable property outside the country, the place of supply shall be the location of the recipient.

Similarly, in terms of Section 12(2)(b)(ii), the place of supply of service made to any other person than the registered person, shall in the absence of address on record of such person be the location of the supplier himself.

The instances are quoted to drive home the fact that the place of supply does not remain uniformly the same. It shifts from place to place depending upon a given transaction and the attendant conditions and the location of the supplier, recipient and place of supply.

One single factor alone does not remain important to determine the nature of a given transaction whether it is intra-state or inter-state and it particularly depends a great deal according to me on the relative location of the supplier with reference to the place of actual supply.

Therefore, the conclusion is that Section 7 of the IGST Act is not a stand-alone provision to determine the intra-state or inter-state nature of a supply.

You need to determine in addition the location of the supplier to arrive at the correct type of tax to be paid i.e whether CGST/SGST or IGST under Section 9 or 5 of respectively the CGST/IGST Acts based on the relative locations of the supplier and recipient with reference to Section 7 ibid

The above situation also fits into the definition of  Import of services under Section 2(11) of  IGST Act, 2017 since the said service provider is located outside India, service recipient(to be designated for this purpose) is located in India and place of supply is in India.

The only shortcoming from which it might be said to suffer unlike OIDAR service is that it can’t be strictly regarded as provided from outside the Country.

Interestingly, in case of goods imported into India, as per Section 11 of the IGST Act, place of supply is the location of the Importer since the subject transaction relates to movable property like goods.

 When the same thing comes to Immovable property, there comes a hitch as to how to fix it as the location of the owner residing outside India?

The only way to enable the levy in this case is through creating a deeming fiction under the IGST Act, with reference to the person responsible for payment of tax as it needs to be deemed as an Import to be able to levy and collect IGST.

But, then Section 2(11) of IGST Act, speaks of only requirement of place of supply of service to be in India and not provided from outside India to qualify as import of service as required in the Service tax days.

The other conditions of Supplier and recipient having to be respectively located outside India and in India to qualify as Import in the above case is however squarely met in terms of the said Section 2(11) of the IGST Act.

Thus charging of IGST and registration by a designated person on behalf of the owner of Immovable property located abroad and remitting the tax himself through his designated representative appear to be a good and compliant solution in this case.

When both supplier and recipient of renting of immovable property service are located outside India and property is situated in India, in the absence of a special procedure as provided under Section14 of the IGST Act as in the case of OIDAR service, there appears to be no other alternative available under the present Law.

The Government will be well within its jurisdiction in my view to use the unfettered powers of Section 7(4) of the IGST Act in the above case and treat it as an import of Service and hence an inter-state supply and levy IGST unlike Section 7(3) of the IIGST Act which hinges on Section 12 to determine the place of supply in the case of domestic inter-state supply of services.

Lastly, it may not be out of context to state that in the case of renting of immovable property for residential purpose, same is not sought to be brought under GST and therefore in the stated circumstances and as also in the case of OIDAR service, when such a service is provided by Business to Consumer, there will be no tax implications under GST.                                   

K.Srinivasan IRS
The Author is an Assistant Commissioner, GST, Chennai and the views of the Author are strictly personal.

Discussions to this article

[JAIPRAKASH RUIA]

Dear Sir, Very good article. Please continue writing on GST matters.

[JAIPRAKASH RUIA]

Sir, write some thing on Storage services availed by Importer in port area in one state ( Gujarat) but service receiver and provider in another state ( Maharashtra). Taxability and credit of GST ?

[CASanjay Kumawat]

Dear Sir,

Thanks to cover this issue.

In your article, you have discussed the deeming fiction, for the sake of ease relevant para is reproduced:

"The only way to enable the levy in this case is through creating a deeming fiction under the IGST Act, with reference to the person responsible for payment of tax as it needs to be deemed as an Import to be able to levy and collect IGST."

But In the landmark decision of Govind Saran Ganga Saran v. Commissioner of Sales Tax 1985 (4) TMI 65 - SUPREME COURT, the Hon’ble Supreme Court held that one of the canons of taxation is that there must be a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax. If this component is not fulfilled, the Apex Court stated that “it is difficult to say that the levy exists in point of law”.

Therefore, in view of the Hon’ble Supreme Court ruling, it may not possible to create deeming fiction for levy of GST where supplier, as well as the recipient, is located outside INDIA.

Your views please.

[Srinivasan Krishnamachari]

In your article, you have discussed the deeming fiction, for the sake of ease relevant para is reproduced:

"The only way to enable the levy in this case is through creating a deeming fiction under the IGST Act, with reference to the person responsible for payment of tax as it needs to be deemed as an Import to be able to levy and collect IGST."

But In the landmark decision of Govind Saran Ganga Saran v. Commissioner of Sales Tax 1985 (4) TMI 65 - SUPREME Court, the Hon’ble Supreme Court held that one of the canons of taxation is that there must be a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax. If this component is not fulfilled, the Apex Court stated that “it is difficult to say that the levy exists in point of law”.

Therefore, in view of the Hon’ble Supreme Court ruling, it may not possible to create deeming fiction for levy of GST where supplier, as well as the recipient, is located outside INDIA.

Your views please.

Dear Sanjay Kumwat,

In the erstwhile FA,1994 Section 66 C provided for determination of place of provision of supply notwithstanding the fact that both service provider and recipient were outside the taxable territory.

Similarly, Article 269A(5) provides for formulation of place of supply provisions under the GST regime.

Since the situation on hand needs to be likened to a transaction of Import/inter-state supply, a deeming fiction under the IGST Act can be made to the effect that the place of supply is the location of the property and the supplier abroad can be designated as the person liable to tax rightfully under the IGST Act supported by the CAA,2016.

This is my humble opinion without prejudice to the Hon'ble SC decision quoted above.

Regards

Author