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GST for ESDM Industries

GST for ESDM Industries

GST for ESDM Industries

Department of Revenue issued a circular clarifying the determination of place of supply of software or design services from a taxable territory to non-taxable territory by Electronics Semi-conductor and Design Manufacturing (ESDM) industries. The circular was released on 11th October 2019 through the circular No. 118/37/2019-GST.

The Government of India (GoI) has provided various scheme and incentives to boost the Indian electronics manufacturing sector. The schemes and incentives were provided to increase productivity, increase employment, increase import and export and create competitiveness in the global market. Few schemes announced by the GoI are:

Clarification Requested from the Trade

The trade had requested the Department of Revenue to clarify whether the goods have to be made physically available by the manufacturer/distributor to the client/customer. The trade community has requested this clarification because the Electronics Semi-conductor and Design Manufacturing (ESDM) industries are involved with producing and supporting software for client abroad. Foreign design companies partnered with Indian manufacturers require design software and Intellectual Property (IP) blocks. The designs are communicated electronically to the clients by the manufacturer. Since the software is being operated electronically, the service rendered by the manufacturer shall be done online. In case of hardware, the prototype shall be serviced in India and sent back for further testing.

Clarification from the Department of Revenue

To clarify, the Department of Revenue has stated that as per Integrated Goods and Services Tax Act, 2017 (IGST Act), Section 168 of Central Goods and Services Tax Act, 2017 and Place of Provision of Service Rules, 2012 the software developed by the manufacturers for the prototype is provided to improve the quality and does not act as a separate entity. Hence the software shall be treated as an auxiliary.

Since the software designed to the client by the manufacturer shall be treated as auxiliary support, the tax shall be calculated as per Section 13(2) of IGST Act. Hence, the origin of the product manufactured will be calculated for GST, even if the delivery place does not fall under GST norms.

Place of Provision

To avoid the geographical issue for GST taxation, the GoI has implemented the Place of Provision of Service Rules, 2012 to determine the place provided or agreed to be provided by the manufacturer. The place of provision can be notified to the manufacturer by Export of Services Rules 2005, Taxation of Services (Provided from out of India and received in India) Rules 2006 and Place of Provision of Services Rules, 2012.

The following shall be the determining factor to check the location of the service provider:

  • The location where the business has been established
  • The location where the services have been provided or received in case of more than one establishment
  • Where the services have been provided or received other than the business establishment
  • If the organisation is placed in the taxable territory, the organisation is liable to pay tax
  • If both the organisation is outside the taxable territory, GST is not applicable

Non-Taxable (Clause 35) and Taxable Territory (Clause 52)

  • As per Chapter V of the Finance Act 1994, the tax shall be applicable to all the states except Jammu and Kashmir
  • Non-Taxable territory shall mean that apart from Jammu and Kashmir all the other states shall be liable to pay tax

For detailed information about the notification, check below


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