Value Added Tax on supplies to offshore blocks Source: The Financial Express June 2, 2009 Author: Rajeev Dimri With some Indian offshore exploration blocks recently going live, the applicability of Value Added Tax (‘VAT’)/ Central Sales Tax (‘CST’) on material supplied from the mainland to such ‘economic islands’ (located beyond 12 nautical miles from shore) can become contentious as the Revenue may not always accept a no-VAT approach. Illustrations of modes of material supply are (1) direct supplies from outside (and possibly transiting through) India; (2) imported and stocked in India, for onward supply; (3) direct domestic supplies; and (4) domestic supplies for stocking at offshore location and onward supply. While the first mode of supply is typically uncontested, the other three modes have been subjected to rigorous scrutiny. One (key) reason provided for scrutiny is the debate on whether such supplies constitute an ‘export’ for the purposes of VAT/ CST; because, though VAT regulations define an ‘export’ to mean movement of goods out of India pursuant to a sale, and certain decisions have questioned this approach on the basis that materials supplied either do not cross the national boundary (pursuant to a sale) or are not supplied to another country. On the first contention, there are certain precedents, say, in the context of fuel and food supplied to vessels operating on international routes, where ‘export’ status has been denied. There is however a level of merit in questioning the applicability of such decisions as supplies to production blocks cross Indian borders under a (single) transaction of sale, regardless of the point of delivery or transfer of risk. The second contention is linked to the court evolved jurisprudence that an export under VAT regulations should have the feature of an import into another country. Again, such jurisprudence has evolved in an era when supplies to offshore production blocks were not prevalent or insignificant. The revenue has also argued that supplies to such production blocks (which may fall within India’s Exclusive Economic Zone (EEZ) or Continental Shelf (CS)) do not cross the boundaries of India at all, on the reasoning that India’s EEZ/ CS are subject to the jurisdiction of Central levies like the income tax, customs and excise, and service tax. However, in the author’s view, this analogy has to be weighed against the proposition that such Central taxes have been individually extended beyond the ‘traditional’ territorial limits of India (12 nautical miles) by due process of law. Therefore, the meaning of India for the purposes of such taxes would differ from VAT since no such extension has been incorporated for the latter. Another fall out is that such supplies are generally sought to be taxed as an inter-state sale; this poses a unique situation as imposition of CST (as an inter-state sale) requires goods to move from one state to ‘another’, while (here) no recipient state can be said to exist on the high seas. Thus, the constitutional validity of imposition of CST would be of concern. Effectively, this appears to result in a legislative void as imposition of VAT may be difficult given that the materials exit the originating state; however, since the materials would not exit ‘India’ or be imported into another country, it would not be capable of being treated as an export as well. It would help if the Central government re-looks at this proposition, and may be evaluates amending the CST regulations to clarify that supplies to offshore locations would qualify as an ‘export’. The Revenue could also possibly to rely on contractual provisions relating to the point of delivery or transfer of title, especially if occurring in the territory of India, to wrest jurisdiction. The industry would have to place reliance on precedents under the CST regime, which state that such factors have limited relevance when a (singular) sale results in an inter-state movement of goods, since delivery or transfer of title may be contractually mandated at the factory gate or the buyer’s premises without changing the tax treatment. For ease of assessments, the industry should commence specifying and recording points of delivery etc on such supplies. The taxability of onsite sales (our 4th illustration) of cooked food or off-the-shelf items would also be scrutinised; its important here to distinguish a sale to, and a sale at, high seas. With the General Sales Tax (GST) regime in India being proposed from April 2010, and the introduction of the concept of consumption based taxation (which is new to VAT, though touched upon from a service tax perspective), taxing the consumption of goods outside India should [ideally] fall outside the ambit of GST. As tax policy is becoming a tool for economic objectives, offshore production blocks would be bolstered through certainty of tax on various procurements if an amendment clarifying an export status on such supplies is introduced; additionally, such amendment would be GST compliant. This could go a long way in reducing tax risks on bids for long term contracts and bolster the financial performance of (both) vendor and offshore operator.