The Designer Who Charged the Wrong Tax Head: A Place of Supply Lesson That Froze Rs 2 Lakh

The Business and the Blunder

Meghna runs a small interior design studio in Pune with three employees. Most of her work is local, but last year she landed a dream project: designing the office of a growing tech firm in Bengaluru. The contract was worth Rs 22 lakh, and she was thrilled.

When she raised her invoices, she did what she always did for every bill: she split the GST into CGST and SGST. On a taxable value of Rs 22 lakh at 18 percent, that meant Rs 1.98 lakh charged as CGST plus SGST combined. The client's accounts team paid the invoice, and Meghna deposited the tax to the government.

Months later, the Bengaluru client's auditor flagged a problem. The client could not claim input tax credit smoothly because the tax charged did not match the nature of the supply. Meghna had made an inter-state supply but paid it as if it were intra-state.

The GST Problem: Getting Place of Supply Wrong

Under GST, whether you charge IGST or CGST plus SGST depends entirely on the place of supply, not on where your office is located.

For most services, the place of supply is the location of the recipient (the client), as laid out in Section 12 of the IGST Act. Meghna's supplier location was Maharashtra, but her client's location for this contract was Karnataka. Under Section 7 of the IGST Act, when the supplier and place of supply are in different states, it is an inter-state supply and IGST applies.

Meghna should have charged IGST at 18 percent. Instead, she charged CGST and SGST of Maharashtra. The result:

• The Karnataka client struggled to reconcile the credit.
• Meghna received a notice asking why an inter-state supply was reported as intra-state.
• She now technically owed IGST, while the CGST and SGST she had already paid sat frozen with the government.

That is nearly Rs 2 lakh stuck in the wrong tax head.

How She Solved It Correctly

Meghna's CA walked her through the fix, and importantly, reassured her that the law provides relief for exactly this kind of honest mistake.

Under Section 77 of the CGST Act and Section 19 of the IGST Act, if a taxpayer pays tax under the wrong head believing a supply to be intra-state when it was inter-state (or vice versa), they can pay the correct tax and claim a refund of the wrongly paid tax. Crucially, no interest is charged on the delayed correct payment in such genuine cross-charge situations.

Here is the step-by-step approach she followed:

1. Corrected the reporting by amending the affected invoices in a subsequent GSTR-1, reclassifying the supply as inter-state with IGST.
2. Paid the IGST due through the next GSTR-3B so the client could claim credit correctly.
3. Filed a refund application for the wrongly paid CGST and SGST, citing Section 77.
4. Kept the contract and correspondence ready as proof that the client's location was Karnataka.

Within the refund timeline, her wrongly paid tax was released.

The Key Lesson for Readers

The tax rate was the same 18 percent either way. Meghna did not underpay tax. But charging the wrong head still cost her weeks of stress, a notice, and blocked working capital.

The takeaway is simple: always determine place of supply before you decide the tax head. For services, it is usually the recipient's location. For goods, it is generally where the goods are delivered. Your own office address does not decide it. This matters most when you serve clients across state lines, which is increasingly common for consultants, designers, IT professionals, and freelancers.

How GSTClear Helps

GSTClear automatically checks the place of supply against the recipient's state before an invoice is finalised, flagging when IGST should apply instead of CGST and SGST. It reconciles your GSTR-1 and GSTR-3B, highlights tax-head mismatches before they become notices, and guides you through Section 77 refund claims if a correction is needed. For a small studio like Meghna's, that means fewer errors and no frozen cash.

Don't let a place-of-supply slip lock up your money. Set up GSTClear today and invoice every inter-state client with confidence.

FAQ

What decides whether I charge IGST or CGST plus SGST?

The place of supply. If the supplier's location and the place of supply are in different states, it is an inter-state supply and IGST applies. If both are in the same state, charge CGST and SGST.

Will I pay interest if I paid the wrong tax head by mistake?

Under Section 77 of the CGST Act and Section 19 of the IGST Act, if you genuinely misclassified a supply, you pay the correct tax and claim a refund of the wrongly paid tax without being charged interest for that correction.

How is place of supply decided for services?

For most services it is the location of the recipient, as per Section 12 of the IGST Act. There are specific exceptions, such as services relating to immovable property, where it is the location of the property.