Is GST Applicable on Supply of Goods when Vendors and Customers are Located Outside India?

GST is taxable on supply of goods and services within, into, and outside India. However, disputes have arisen on whether GST is applicable in situations where the transaction in undertaken by an Indian company but supplied to and from non-taxable territories.

Goods and services tax, as introduced in 2017, is levied in India on the supply of goods and services into, within, and from India. i.e. goods and services supplied within India is taxed by GST and as well as goods and services  that are imported and exported to and from India.

Generally, GST is chargeable on the taxable supply of goods and services by any supplier that is considered ‘taxable’ under GST. Further, under the reverse charge mechanism scheme, import of services is also taxable but the liability is to be borne by the recipient of services.

Confusion and disputes arise in the instances when the supply of goods and services is being provided by vendors when they are not placed in India and they are being sold to customer in non-taxable areas i.e. areas outside India. Tax authorities argue that in the event the goods are sold by vendors outside India to customers outside India, it will still be taxable in India if they have any offices located in taxable areas. Until very recently there was no clarity on this issue until the Authority for Advance Ruling passed a relevant ruling.
 
What is taxable supply?

The taxable event under GST in India is the supply of goods or services, in exchange for consideration. ‘Supply’ has been defined as, “all forms of supply of goods or services or both that includes sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.”

When the supply of goods is from outside India into an area in India (i.e. taxable area), it is calle import of goods. In that case GST will be applicable on the import value of the goods under the Integrated Goods and Service Tax, over and above the import duties levied on the goods at customs clearance. Import of services is also similarly taxable under GST.

Supply of goods and service is the taxable event under GST, and the place of supply is generally the location at which the GST will be levied. Under GST law, any person providing such a supply is a taxable supplier and is required to receive registration under the Central GST scheme and the relevant state schemes.

The place of supply of goods and services can be determined as: (i) the location of the supply of goods and services, (ii) the location of the recipient of the goods and services. It may defer on a case to case basis.
 
When the Vendors and Customers are located outside India:

The Authority for Advance Ruling of Gujarat recently clarified on whether GST can be levied when an Indian company supplies goods located outside India to customers also located outside India- in the case of M/s. SPX Flow Technology (India) Pvt. Ltd.
The facts of the case were as follows:
  • M/s. SPX Flow Technology with registered offices in Ahmedabad, is a company engaged in the business of manufacture of goods like pumps designed for handling water, single and multi-stage pumps designed for handling water, single and multistage pumps, dairy machine etc. These products fall under Chapter 84 of the GST tariff Rules.
  • They also have an international trading business by which they trade materials developed in their parent company in Poland to recipients located in different countries. In this particular transaction, the goods were being trade from the Poland office to the recipient who is located in Bangladesh.
  • The order would be received by the company in India, then sent and processed by the company in Poland who would then ship the goods to Bangladesh.
  • An invoice would then be generated by the Polish company which would be paid for by the Indian company. A commercial invoice would then be issued by the Indian company for collection of payment from the Bangladesh Company.
The taxpayers alleged that since the goods were shipped straight from Poland to Bangladesh there was so tax incidence created in India as it would not fall within import of goods or services under the Integrated Goods and Service Act. They contended that this transaction is a matter of supply of goods from a non-taxable territory to another non-taxable territory and hence it cannot attract any GST.

The AAR held as follows:
  • That on a conjoined reading of the IGST Act and the Customs Act, it is clearly found that IGST on import of goods is levied only at the time when the customs duties are levied and collected on the goods as determined under section 12 of the Customs Act
  • They also further made a reference to a previous case of M/s Synthite Industries Ltd., Ernakulam, Kerala wherein it was held that “the goods are liable to IGST when they are imported into India and the IGST is payable at the time of importation of goods into India; The applicant is neither liable to GST on the sale of goods procured from China and directly supplied to USA nor on the sale of goods stored in the warehouse in Netherlands, after being procured from China, to customers, in and around Netherlands as the goods are not imported into India at any point.’’ 
  • The Indian company is covered under Schedule III of the CGST Act which states that a taxable supply of goods from a non-taxable territory to another non-taxable territory, (without entering India) cannot be taxable in India. The present company will fall within this exemption and cannot be taxed under GST.
 
The AAR rules that the Indian company in this case is acting as a third party supplier on behalf of the Polish parent company, and would hence be covered as a supplier under the CGST Act. Further, since the principle place of business of the company is in India and they are issuing the invoices and receiving payment, the supply can be considered to arise in India and end in Bangladesh, and hence it is an interstate supply of goods. However, it is also not an export of goods from India since it does not cross India’s geographical borders. Under normal circumstances, this would make it chargeable under GST.

But the newly added exemption under Schedule III of the CGST Act prevents charging GST when the goods are being supplied from a non-taxable territory to another non-taxable territory in such cases. The situation of the applicant company clearly falls within this exemption, and since the goods do not cross the Indian boundary they cannot be taxed in India.
 
Conclusion:

The ruling helps provide some clarity in regard to the confusion surrounding the taxability of such services. If companies are confused regarding whether their transactions (similar to the ones referred above) would be taxable, the following points should be considered:
  • IGST on goods and services is levied on the supply of such gods and services within India, and on the import of goods and services into India. If the goods and services are not entering into Indian Territory, they will not be taxable in India.
  • If a company is acting on behalf of an international company and goods and services were being traded by an Indian company on behalf of an international company, then those transactions will be taxable under GST.
  • The exception to the above rule: GST will not be applicable in such transactions if the goods are being traded solely from one non-taxable territory to another non-taxable territory, without entering India.