Every few weeks a trader tells us the same story. A buyer in another state calls to say the invoice is wrong. The seller charged CGST and SGST, the buyer needed IGST, and now the buyer's accountant will not book it. The seller assumes a quick revised invoice will sort it out. It usually doesn't, because by then the tax has already gone out in GSTR-3B under the wrong head.
Place of supply is the single field on a GST invoice that decides whether a sale is intra-state or inter-state, and therefore whether you charge CGST plus SGST or IGST. Get it wrong and the total on the invoice can still look perfectly fine. The rate is the same, the rupee amount is the same. The problem only shows up later, in the buyer's input tax credit or in a notice. This article walks through where small businesses most often get place of supply wrong and what the law lets you do about it.
Why place of supply matters more than the rate
Under GST, the tax type follows a simple test. If the location of the supplier and the place of supply are in the same state, it is an intra-state supply and you charge CGST and SGST. If they are in different states, it is inter-state and you charge IGST.
So the question is never "where is my customer's office?" in a loose sense. It is "what does the IGST Act say the place of supply is for this kind of transaction?" For goods, that is mainly Section 10 of the IGST Act. For services between parties in India, it is Section 12. The two work differently, and most mistakes come from applying the goods logic to services or the other way round.
Rule 46 of the CGST Rules also requires a tax invoice to show the place of supply along with the name of the state where the supply is inter-state. Many small businesses leave this field on its default value in their billing software, which is exactly how the errors creep in.
Common place of supply mistakes we see
1. Bill to one state, ship to another
A distributor in Gujarat receives an order from a retailer whose head office is in Maharashtra, but the goods are to be delivered to the retailer's branch in Gujarat. The invoice is made out to the Maharashtra GSTIN.
For goods involving movement, the general rule under Section 10(1)(a) is that the place of supply is where the movement terminates for delivery. But Section 10(1)(b) covers the bill to ship to case: where goods are delivered to a recipient or any other person on the direction of a third person, the third person is treated as having received the goods, and the place of supply is the principal place of business of that third person. In our example, the buyer giving the instruction sits in Maharashtra, so the supply is inter-state and IGST applies, even though the truck never left Gujarat.
Small sellers often go by the delivery address alone and charge CGST and SGST here. That is the mistake.
2. Services billed to a registered buyer in another state
For most services where both parties are in India, Section 12(2) says that when the recipient is registered, the place of supply is the location of that recipient. A digital marketing agency in Pune serving a GST registered client in Bengaluru should be charging IGST. Agencies that think of themselves as "local businesses" sometimes default to CGST and SGST because the work is done in their own office.
3. Services to unregistered customers
For an unregistered recipient, the place of supply is the recipient's address on record, if one exists, and otherwise the location of the supplier. A tuition centre or consultant that captures the customer's address in its CRM or billing system should use it. If no address was ever recorded, the supplier's own location applies. This is one of the quieter reasons to keep proper customer records instead of a WhatsApp chat and a cash receipt.
4. Services linked to immovable property and events
Section 12 has specific rules that override the general one. Services directly related to immovable property, such as an architect, interior designer or a hotel stay, take the location of the property as the place of supply. An interior designer in Delhi working on a client's flat in Noida is supplying a service whose place of supply is Uttar Pradesh. Event related services also have their own rule. Before you invoice, check whether your service falls into one of these special categories.
5. Wrong state on the customer master
The most boring cause is also the most common. The customer's state was entered incorrectly once, or the GSTIN belongs to one state while the address field shows another, and every invoice since has repeated the error. A quick check that the first two digits of the buyer's GSTIN match the state on the invoice catches a lot of this.
What happens if you charged the wrong tax type
Suppose you charged and paid CGST and SGST on what was actually an inter-state supply. You cannot simply move the money from one head to the other. The law treats it as tax paid under the wrong head.
Section 77 of the CGST Act and Section 19 of the IGST Act deal with this. A person who paid CGST and SGST on a transaction later considered inter-state is entitled to a refund of the tax wrongly paid, and must pay the correct tax, in this case IGST. The same applies in reverse. Importantly, Section 77(2) and Section 19(2) say no interest is payable on the amount due under the correct head in such a case.
The refund has a deadline. Rule 89(1A) of the CGST Rules, inserted by Notification No. 35/2021 dated 24 September 2021, says the refund application in Form GST RFD-01 must be filed within two years from the date of payment of tax under the correct head. Circular No. 162/18/2021-GST clarified a few practical points. A taxpayer who spots the error on their own, without any order from an officer, can still claim the refund once they have paid under the correct head. But if the original invoice was corrected by issuing a credit note, the refund under Section 77 is not available.
In plain terms: you pay the right tax now, you claim the wrong tax back later, and in between your cash is locked up. For a small business working on thin margins, that cash flow hit is the real cost of a place of supply error.
Why your buyer cares even more than you do
From the buyer's side, a supply that should have attracted IGST but came with CGST and SGST does not sit cleanly with their own records, and their accountant may hold back the credit until it is fixed. This is why B2B buyers push back hard on these invoices, and why repeat errors can quietly cost you a customer. If you sell to larger companies, assume their accounts team checks the tax type on every bill.
A simple monthly routine to catch errors early
You don't need a full audit to stay out of trouble. Before filing GSTR-1 each month, take twenty minutes for these checks:
- Filter all B2B invoices where the buyer's GSTIN state code differs from your own. Every one of these should carry IGST unless a specific rule says otherwise.
- Filter all invoices where you charged IGST but the buyer's state code matches yours. Check each one for a bill to ship to or special service rule.
- Look at any invoice where the delivery address and billing address are in different states and confirm which rule you applied.
- For service businesses, list your services that relate to immovable property or events and confirm the place of supply logic for each.
- Fix wrong state codes in the customer master so the same error does not repeat next month.
Catching an error before GSTR-1 is filed is far cheaper than fixing it after. Once tax is paid, you are into the refund route described above.
Getting it right at the point of billing
Most of these mistakes happen at the moment the invoice is created, usually by someone in a hurry. The fix is less about knowing every section of the IGST Act and more about setting up your billing process so the place of supply is decided deliberately. Store the correct state and GSTIN for each customer, record a ship to address separately when it differs, and make sure your billing tool picks CGST and SGST or IGST based on those fields rather than on a default.
If you are a small business owner, it is worth spending an hour with your CA going through your top ten customers and your main service lines to agree the place of supply for each. Write it down. It will save you a refund application later.
References
- Integrated Goods and Services Tax Act, 2017: Sections 10, 12 and 19
- Central Goods and Services Tax Act, 2017: Section 77
- CGST Rules, 2017: Rule 46 and Rule 89(1A)
- CBIC Notification No. 35/2021 Central Tax, dated 24 September 2021
- CBIC Circular No. 162/18/2021-GST, dated 25 September 2021
About the author: Hamza Hai is co-founder of IndiaCRM (indiacrm.in), a free CRM and GST billing app for Indian small businesses. This article is for general information and is not professional tax advice; please consult your CA for your specific facts.
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