Introduction
The Central Board of Indirect Taxes and Customs (‘CBIC’) issued a circular[i] on 31.12.2024, clarifying the place of supply for online services provided to unregistered recipients under the Integrated Goods and Services Tax Act, 2017 (‘IGST Act’) and the Goods and Services Tax Rules, 2017 (‘CGST Rules’). This clarification aims to ensure the correct allocation of tax revenue between states and address non-compliance issues arising under the IGST Act and the CGST Rules.
A common compliance issue has been the misallocation of tax revenue due to suppliers declaring their own location as the place of supply instead of the recipient’s state. This error stems from a misinterpretation of s. 12(2)(b) of the IGST Act, read with r. 46 of the CGST Rules. The CBIC has now emphasized that suppliers of online services, including digital content platforms, cloud service providers, and e-commerce operators, must record the recipient’s state on invoices for all such supplies, irrespective of the transaction value.
To prevent revenue loss and ensure uniform implementation of GST laws, the CBIC has reinforced the requirement for accurate invoicing. This move is expected to improve tax allocation among states, reduce compliance gaps, and streamline GST enforcement across the country.
Background
Under the IGST framework, the place of supply determines the state entitled to receive tax revenue. According to s. 12(2)(b) of the IGST Act, for services to registered persons, the place of supply is the location of the recipient. For services to unregistered persons:
If the recipient’s address is on record, their location is considered the place of supply.
In the absence of an address on record, the supplier’s location is used instead.
The CBIC has identified widespread non-compliance in the digital services and e-commerce spaces, where suppliers incorrectly defaulted their own location as the place of supply, even when the recipient’s state name was available. This misreporting has led to revenue discrepancies, especially in sectors where services are delivered electronically across multiple states.
Key Clarifications
1. Mandatory Declaration of the Recipient’s State
A combined reading of s. 12(2)(b) of the IGST Act, s. 31(2) of the Central Goods and Service Tax Act, 2017 (‘CGST Act’), and r. 46 of the CGST Rules establishes that for all online services supplied to unregistered recipients, the recipient’s state must be recorded on the tax invoice, irrespective of the transaction value.
The proviso to r. 46(f) explicitly states that in the case of Online Information and Database Access or Retrieval (‘OIDAR’) services, e-commerce transactions, and other online services, the state name recorded on the invoice is deemed to be the address on record for determining the place of supply. This ensures that tax revenue is correctly assigned to the recipient’s state, preventing undue benefits to supplier-based tax jurisdictions. Failure to comply with this requirement may result in penalties and legal repercussions under s. 122(3)(e) of the CGST Act.
2. Applicability to Digital and E-Commerce Services
The CBIC has clarified that these rules apply broadly to all forms of online service transactions, including but not limited to:
OIDAR services: Cloud services, e-books, music and video streaming, data storage and retrieval services, and online gaming (excluding betting and gambling-related online games).
E-Commerce transactions: Subscription-based digital services, such as OTT platforms, e-newspapers, e-magazines, online telecom and data services, and digital marketplaces facilitating third-party transactions.
Other digital services: App-based financial services, online advertising, AI-driven services, and digital consulting.
3. Compliance Obligations
Registered suppliers must take proactive steps to comply with this clarification. They are required to:
Collect and record recipient details, including the recipient’s state, before service fulfilment.
Ensure that their invoicing systems correctly reflect the place of supply based on the recipient’s location.
Suppliers must reflect the recipient’s state and corresponding place of supply in Form GSTR-1/1A when filing their outward supplies and update internal GST compliance protocols to align with the CBIC’s clarification.
Establish a mechanism to verify and store recipient location details, especially for automated online transactions.
4. Consequences for Non-Compliance
Businesses that fail to comply with this circular may face several consequences, including:
Penalty provisions: Failure to mention the recipient’s state on invoices may attract penalties under s. 122(3)(e) of the CGST Act.
Heightened risk of tax scrutiny: The CBIC’s circular suggests increased enforcement measures, making non-compliant businesses more likely to face audits and investigations by tax authorities.
Liability for misallocated tax: If a business incorrectly assigns its own location as the place of supply instead of the recipient’s state, tax authorities may require a reallocation of tax and impose interest or penalties for incorrect reporting.
Conclusion
Since it was observed that suppliers often declared their own location as the place of supply for online services to unregistered persons, the CBIC’s clarification marks a crucial step in ensuring accurate tax allocation and improved compliance under GST. By mandating that suppliers record the recipient’s state on invoices, the government seeks to curb revenue leakages, mitigate tax misallocations, and establish a uniform taxation framework for digital services.
This circular necessitates immediate action for businesses to reassess invoicing systems, customer data collection mechanisms, and GST reporting protocols. Digital service providers, ranging from e-commerce platforms to OTT streaming services and cloud-based solutions, must align with these regulatory changes to avoid potential penalties.
As the digital economy continues to expand, the government is expected to tighten tax regulations on online transactions across states and international borders. This circular signals a move toward stricter tax compliance requirements for digital businesses. Companies operating in multiple states must implement systems to track customer locations and update their tax processes accordingly and accurately.
End Note
[i] Circular No. 242/36/2024-GST [F. NO. CBIC-20001/14/2024-GST].
Authored by Dhruv Goel at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.