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Unregistered 'fixed establishment'- Impact in GST

Madhukar N Hiregange 
on 11 December 2018

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GST needs one to register in the State/s where one provides taxable supplies. (section 22) This is in line with the principle of registration in the place of consumption/ destination. However, the place from where the origin takes place needs to be registered. In the direct taxes the presence of a permanent establishment or a fixed establishment (FE) connotes that there is a profit attributable which needs to be taxed in that jurisdiction. In earlier service tax law and now in GST we see this aspect having some impact.

This article examines the impact of such an establishment in GST. The definition of FE has been directly borrowed from the EU VAT regulation. Section 2 (50) of the CGST Act defines it as:

A place other than registered place -Which is characterized by - Sufficient degree of permanence (in terms of time) and - Suitable structure in terms of human (employees/ outsourced) and Technical resources (communication and computing equipment) to -Supply services, or To receive and use services for its own needs.

Analysis of this definition can lead to the following ingredients to be a FE:

a. Temporary site or location may not be a FE,

b. There should be a suitable structure of personnel and technology,

c. Supply or receipt of services should be in such FE The transaction in goods has a clear trail of the movement evidenced by transporters/ couriers. The intermittent stage of storage of goods and invoicing thereafter may need registration. Warehouses/ sales offices/ branches of the entity would be said to be place of business. Goods imported into India could be through the ports, airports or land which is easily regulated. Services however are much more challenging in the past and now a days even more difficulty due to the digital age with the “cloud” providing a repository of services. The businesses have also become quite complex with global businesses having connections through related parties, affiliates who could be located anywhere in the world. The Business to Business (B2B) have been controlled through a reverse charge mechanism where import of services is taxable at the same rate as local services with the difference of the recipient being made liable. The place of supply (IGST Act) in these cases plays a key role to decide import or export. India being a federal country we have taxes which accrue directly to the States, amount which accrue to the centre and later partially devolve to the States. Therefore States would be keen to see that the GST from services consumed in the State are collected by them. We understand the issues in services through a few examples:

1. A contractor who gets orders from the Government Departments/ PSUs in different States for digging of tunnels is based at Karnataka from where he controls the works, supplies or gets supplied goods and services needed in the project sites. All the goods/ services get billed to him either IGST ( if out of the State) or SGST + CGST if within Karnataka. He avails all the eligible credits and invoices under IGST to his customers out of the State and SCGST + CGST for those in Karnataka. His projects take from 1-3 years. Theoretically he could work from his registration in Karnataka and there would be no loss of revenue for the States where he does his project as IGST is charged.

However the following questions could be raised:

whether 1-3 years constitutes sufficient degree of permanence?;
whether there existed human and technological structure? ;
whether the site office receives services for its own use? If any of the answers is positive then it would be preferable to be registered in each of the States.

Further if input services are related to immovable property then the ITC would not be available in the States since one is not registered. The alternative of having a Input Service Distributorship could be examined if only a few such services exist.

2. An engineering firm from Hyderabad gets orders to install solar plants on factory roof tops in different States. The work takes about 2-5 days depending on the extent. All supplies are made from Hyderabad as in 1st example. In this case maybe the need to register in each of the States may not be there.

3. A manpower service provider based out of Chennai provides software/ telecom engineers to KPO units in Maharashtra and Gujarat. He needs to get all the legal compliances like PF/ ESI etc done in the particular States. All compliances done on the net from Chennai. At time she engages consultants in Gujarat/ Maharashtra. In this case it can be said that there is no FE in Gujarat or Maharashtra.

4. A high net worth individual from Delhi owns a big mall in Kochi. A small office in the basement of the mall supports for maintenance and recovery. All the major activities are carried out from Delhi. He needs to have a registration in Kerala.

5. Another HNW individual from West Bengal has commercial properties in 5 States. The rental terms include the maintenance by the tenant. He bills from WB. No need to be registered in all States.

6. LeeAm- is a US based online line web site which sells online games, music and e-books hosted on "cloud" to anybody in the world. Indians frequent this site and place orders and pay online by various means. Under GST even if not for business the individual is liable. However , the provider of OIDAR (Online information and data base access and retrieval services needs to be registered (through a representative) and needs to pay the GST on behalf of the individuals. In case of B2B services the need to ensure that there is no dispute raised by the States on tax accruing to them is important. Since taxes are paid there can be no allegation of mala fide. However needing to pay the correct tax and seeking refund of taxes already paid can be a cumbersome exercise. Recently the Kerala High Court has come up with a ruling that refund need not be applied for.

If this ruling is replicated then we may have the law being amended to allow this adjustment at the back end. However at times this may end up with a dispute on the eligibility of the ITC in which case there could be a cause of concern. There are no decisions in GST as on date and the EU VAT decisions may provide some guidance. It is also possible that even though there is no revenue loss on the whole the State officers may sou moto require all those who operate and provide services in their State to be registered which would involve administrative and administrative costs.

Therefore for those who are in doubt erring by taking a registration of seeking clarity from the Commissioner/ Advance Ruling Authority could be options though the possibility of revenue bias may exists in both decisions. In times to come it is possible that the definition of FE may include even a virtual technological presence but till then one can understand as above.

The author can also be reached at madhukar@hiregange.com


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