The concept of supply under GST ensures comprehensive taxation of all economic activities. It captures a wide range of transactions to simplify and unify the indirect tax system while reducing the cascading effect of taxes. Proper classification of supplies and understanding the rules governing taxable events, place of supply, and tax rates is critical for compliance and efficient business operations under GST. In this article we shall discuss inter-state supply and intra-state supply.

Need for Accurate Determination of the Nature of Supply under the IGST Act

The accurate determination of the nature of supply—whether it is inter-state supply or intra-state supply —is critical under the IGST Act for the following reasons:

• Correct Tax Applicability: The classification of supply determines whether IGST, CGST, and SGST are applicable. In the case of inter-state Supply, IGST is applicable. In case of intra-state supply, CGST and SGST are applicable. Errors in classification can result in incorrect tax collection, leading to compliance issues and potential penalties.
• Revenue Allocation between Centre and States: GST is a destination-based tax, meaning the state where the goods or services are consumed is entitled to the revenue. For interstate supplies, the IGST collected is shared between the Centre and the destination state. For intra-state supplies, the revenue is split between CGST (Centre) and SGST (State). Incorrect determination of the nature of supply may lead to disputes over revenue sharing between states or between the Centre and the states.
• Avoidance of Double Taxation or Non-Taxation: Misclassifying a transaction can lead to double taxation resulting in charging both IGST and CGST/SGST on the same transaction. It may lead to non-taxation meaning not charging any tax due to confusion about the nature of the supply. Proper determination ensures that the correct tax is applied and prevents revenue leakage or overburdening businesses.
• GST Return Compliance: GST returns (e.g., GSTR-1, GSTR-3B) require proper reporting of interstate and intra-state transactions in specific sections. Incorrect classification can lead to mismatches in returns and notices from tax authorities.
• Reverse Charge Mechanism (RCM) Applicability: In some cases, IGST is payable under the reverse charge mechanism (RCM) (e.g., import of services). Accurate determination of the nature of supply ensures that reverse charge liability is applied only where applicable.
• Legal and Operational Implications: Incorrect tax classification can attract interest on unpaid tax, penalties, and potential litigation with tax authorities. Frequent errors in tax compliance may affect a business’s credibility with tax authorities and customers.
• Special Transactions: Certain supplies, such as those involving Special Economic Zones (SEZs), exports, or high seas sales, have specific rules under the IGST Act. Misclassification in these cases can result in denial of benefits like zero-rating for exports or refunds for SEZ supplies.
• Impact on Input Tax Credit (ITC): Input tax credit eligibility depends on the correct classification of tax paid (IGST vs. CGST/SGST). Misclassification can lead to a delay or denial of ITC claims or incorrect offsetting of taxes.
• E-Commerce and Interstate Transactions: E-commerce operators must accurately classify transactions for tax collection at source (TCS) under GST. Businesses operating in multiple states need to ensure the correct nature of supply to avoid disputes and ensure compliance.
• Audit and Assessment: Tax authorities closely scrutinize the nature of supply during GST audits and assessments. Errors in determining the nature of supply can result in additional scrutiny, demands for tax, or reassessment.

Thus, accurate determination of the nature of supply is essential under the IGST Act to ensure proper tax application, compliance, and revenue distribution. Businesses must understand the GST laws, carefully evaluate each transaction, and implement robust systems to avoid errors that can lead to financial and legal consequences.

Inter-State Supply:

Supply between Two States or Two Union Territories or State and Union Territory:

Under the IGST Act, 2017, Interstate Supply refers to transactions where the location of the supplier and the place of supply are in different states, different union territories, or a state and a union territory. These supplies are governed by Section 7 of the IGST Act.

According to Sections 7(1) and 7(3) of the IGST Act, 2017, a supply of goods or services is treated as interstate supply in the following cases:

a) Location of Supplier and Place of Supply are in Different States: For example, a supplier in Maharashtra (State) supplies goods to a recipient in Gujarat (State). It is inter-state supply and IGST is applicable.

b) Location of Supplier and Place of Supply are in Different Union Territories: For example, a supplier in Dadra Nagar Haveli (Union Territory) supplies goods to a recipient in Chandigarh (Union Territory). It is inter-state supply and IGST is applicable.

c) Location of Supplier and Place of Supply are in a State and Union Territory: For example, a supplier in Andhra Pradesh (State) provides a service to a recipient in Chandigarh (Union Territory). It is inter-state supply and IGST is applicable.

Import of Goods or Services:

According to Section 7(2) of the IGST Act, 2017, supply of goods imported into the territory of India, till they cross the customs frontiers of India, shall be treated to be a supply of goods in the course of inter-State trade or commerce. In this case IGST is levied at the time of customs clearance.

According to Section 7(4) of the IGST Act, 2017, supply of services imported into the territory of India shall be treated to be a supply of services in the course of inter-State trade or commerce. Such services are subject to IGST.

Export of Goods or Services:

According to Section 7(5) of the IGST Act, 2017, supply of goods or services or both are treated as inter-state supply in the following cases:

a) Export out of India: In this case, the supplier is located in India and the place of supply is outside India. For example, a supplier is in India providing goods or services to the recipient in Australia. It is considered inter-state supply. This supply is zero-rated, meaning no tax is levied on the supply, and the exporter can claim a refund of input tax credit.

b) Supply to or by SEZ Units: In this case there is supply to or by a Special Economic Zone developer or a Special Economic Zone unit. For example, goods are supplied from Dronagiri SEZ in Maharashtra to XYZ Co. in Pune. Any supply to or from a SEZ is considered an inter-state supply and is subject to IGST.

c) Supplies in High Seas: Supplies that take place beyond India’s territorial waters are also treated as interstate supplies.

E-Commerce Transactions Across State Borders:

If a supplier delivers goods across state borders (even through a warehouse within the state), it may fall under interstate supply.

Intra-State Supply:

Under the Integrated Goods and Services Tax (IGST) Act, 2017, Intra-State Supply refers to transactions where the location of the supplier and the place of supply are within the same state or union territory. These supplies are governed by Section 8 of the IGST Act. Intra-state supplies are subject to CGST (Central GST) and SGST (State GST)/UTGST (Union Territory GST), and not IGST.

According to Sections 8(1) and 8(2) of the IGST Act, 2017, supply of goods or services where the location of the supplier and the place of supply of goods or services are in the same State or same Union territory shall be treated as intra-State supply. For example, a supplier in Rajasthan sells goods to a buyer in Rajasthan. Since the supplier and place of supply are in the same state, this is an intra-state supply and attracts CGST and SGST.

Exclusions from Intra-State Supply

According to Section 8(1) of the IGST Act, 2017, certain transactions, even if occurring within the same state, are not treated as intra-state supplies and are instead classified as interstate supplies under Section 7 of the IGST Act. These include:

• Supply to or by an SEZ (Special Economic Zone): Supplies to or by an SEZ unit are always considered interstate supplies.
• Imports and Exports: Import and export of goods or services are not intra-state supplies.
• Supplies in Territorial Waters: If the location of the supplier or the place of supply is in territorial waters, it is treated as an interstate supply.

Intra-state supply is a fundamental concept under GST, applicable when both the supplier and the place of supply are in the same state or union territory. Such transactions attract CGST and SGST. Proper classification between intra-state and interstate supplies is critical for accurate tax compliance and filing.

Conclusion:

The distinction between inter-state supply and intra-state supply under the GST Act is fundamental for determining the applicable tax—IGST for interstate supplies and CGST and SGST for intra-state supplies. This classification ensures proper revenue sharing between the Centre and the states, as GST is a destination-based tax system.

Interstate supply refers to transactions where the location of the supplier and the place of supply are in different states, union territories, or a state and a union territory. It also includes imports, exports, supplies to or by SEZs, and transactions in territorial waters or high seas. IGST is levied on such supplies, ensuring seamless movement of goods and services across state borders without cascading taxes.

Intra-state supply, on the other hand, involves transactions where the location of the supplier and the place of supply are within the same state or union territory. These supplies attract CGST and SGST, with the tax revenue being shared equally between the Centre and the respective state or union territory.

Accurate determination of the nature of supply is critical for compliance, avoiding disputes, and ensuring the correct tax is applied. Misclassification can lead to double taxation, revenue leakage, or penalties. Businesses must understand the rules for determining the place of supply, maintain accurate records, and comply with GST regulations to ensure smooth operations and avoid legal complications under the GST framework.