Concept of supply
SCOPE OF SUPPLY {SECTION 7 OF CGST ACT}
· Section 7(1): For the purposes of this Act, the expression "supply" includes:
a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
b) import of services for a consideration whether or not in the course or furtherance of business;
c) the activities specified in Schedule I, made or agreed to be made without a consideration; and
d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.
· Section 7(2): Notwithstanding anything contained in sub-section (1),
a) activities or transactions specified in Schedule III; or
b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council,
shall be treated neither as a supply of goods nor a supply of services.
· Section 7(3): Subject to the provisions of sub-sections (1) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as:
a) a supply of goods and not as a supply of services; or
b) a supply of services and not as a supply of goods.
OVERVIEW OF SUPPLY:
INCLUSIONS
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EXCLUSIONS
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ü Supply For Consideration In Course Or Furtherance Of Business {Section 7(1 )(a)}
ü Importation Of Services For Consideration Whether Or Not In Course Or Furtherance Of Business {Section 7(1 )(b)}
ü Supply Without Consideration {Section 7(1 )(c)+ Schedule I}
ü Activities To Be Treated As Supply Of Goods Or Supply Of Services {Section 7 (1 )(d) + Schedule II)}
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Activities To Be Treated
Neither As Supply Of Goods
Nor Supply Of Services
{Section 7(2) + Schedule III}
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SUPPLY FOR CONSIDERATION IN COURSE OR FURTHERANCE OF BUSINESS {Section 7(1)(a) of CSST Act}
Section 7(1)(a) of CGST Act provides that a supply of goods/services should be carried out for consideration in the course or furtherance of business.
MODES OF SUPPLY:
Ø Section 7(l)(a) of CSST Act includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for consideration in the course or furtherance of business.
Ø Sale and Transfer:
Earlier, VAT was levied by State Governments on sale of goods within their respective states wherein 'sale1 was defined to mean transfer of property in goods for consideration. Under CSST Act, sale has been treated as a form of supply leviable to GST.
Ø Barter and Exchange:
• Barter transactions involve only exchange of goods/services whereas exchange may cover a situation where the goods are partly paid for in goods and partly in money.
• When there is a barter of goods or services, same activity constitutes supply as well as consideration. By making a specific inclusion in the definition of supply, all barters and exchanges have been made liable to GST.
Ø Licence, Lease, Rental etc:
• Licences, leases and rentals of goods were earlier treated as services where the goods were transferred without transfer of right to use (effective possession and control over the goods) and were treated as sales where the goods were transferred with transfer of right to use.
· Under the GST regime, such licences, leases and rentals of goods with or without transfer of right to use are covered under the scope of 'supply of services' because 'there is no transfer of title in such supplies. Such transactions are specifically treated as 'supply of services' under Schedule II of CGST Act.
CONSIDERATION:
Ø One of the essential conditions for the supply of goods and/or services to fall within the ambit of GST is that the supply should have been made for a consideration.
Ø However, consideration does not always mean money. It covers anything which might be possibly done, given or made in exchange for something else.
Ø Further, consideration need not always flow from the recipient of the supply. It can also be made by a third person.
IN COURSE OR FURTHERANCE OF
Ø GST is essentially a tax on only commercial transactions. Hence, only those supplies which are made in the course or furtherance of business qualify as 'supply' under GST.
Ø Resultantly, any supplies made by an individual in his personal capacity do not come under the ambit of GST unless they fall within the definition of business.
Example: Rishabh buys a car for his personal use and after a year sells it to a car dealer. Sale of car by Rishabh to car dealer is not a supply under C&ST Act because supply is not made by Rishabh in the course or furtherance of business.
Ø In order to understand the term 'in the course or furtherance of business', we need to understand the term 'business'. Business has been defined u/s 2(17) of CGST Act to include, inter-alia, any trade, commerce, manufacture, profession, vocation etc whether or not undertaken for a monetary benefit. Business also includes any activity or transaction which is incidental or ancillary to the afore-mentioned listed activities.
Example: Sundaram Acharya, a famous actor, paints some paintings and sells them. The consideration from such sale is to be donated to a Charitable Trust - 'Kind Human'. The sale of paintings by the actor qualifies as supply even though it is a one-time occurrence.
IMPORT OF SERVICES FOR CONSIDERATION{Section 7(1)(b)of C&ST Act}
Ø Section 7(1 )(b) of CGST Act expands the scope of the term 'supply' by including importation of services for a consideration within its ambit irrespective of the fact whether such importation is in the course or furtherance of business or not.
Ø Section 7(i)(b) of CGST Act (ie importation of services for consideration) is the only exception to the condition of supply being in course or furtherance of business.
Example: Mr M, a proprietor, has received designing services for his house from an architect located in New York at an agreed consideration of US $5,000. The import of services by Mr M shall be treated as a supply u/s 7(lXb) of C&ST Act even though it is not in the course of or furtherance of business.
SUPPLY WITHOUT CONSIDERATION - SUPPLY
As a general rule, for an activity to qualify as supply, the same should have been provided for consideration. However, Section 7(1 )(c) of CGST Act read along with Schedule I of CGST Act lists down the following four cases where existence of consideration is not a pre requisite for an activity to qualify as supply:
1. PERMANENTTRANSFER/DISPQSAL.OF
BUSINESS ASSETS:
Ø Transfer/disposal of business assets by an entity on permanent basis without consideration shall be regarded as supply if input tax credit has been availed on procurement of such assets.
Ø This clause is wide enough to cover transfer of business assets from holding to subsidiary company or vice versa without consideration.
Example: donation of old laptops to charitable schools by XVZ & Co at the time of purchase of new laptops will qualify as supply provided input tax credit has been availed by XYZ & Co on such laptops.
Example- A cloth retailer gives clothes from his business stock to his friend free of cost. In this case, transfer of business stock would amount to supply if he had claimed input tax credit on his procurement of such business stock.
2. SUPPLY RELATED PERSONS/DISTINCT PERSONS.:
Transactions involving supply of goods/services/both without consideration between related persons or distinct persons as specified u/s 25 of CGST Act will qualify as supply provided such supply has been made in the course or furtherance of business.
{The meaning of 'related persons' has been discussed earlier in this topic whereas the concept of 'distinct persons' has been discussed in detail under 'Chapter 9 - Registration'}
Ø TAXABILITY OF STOCK TRANSFERS/BRANCH TRANSFERS:
Under the earlier law, no tax was applicable on stock transfers/branch transfers since such transactions do not involve transfer of property in goods. However, under the GST regime, stock transfers/branch transfers between different locations (with separate GST registrations) of same legal entity will qualify as 'supply'.
Example: Kaghubir Fabrics transfers 1,000 shirts from his factory located in Lucknow to his retail showroom in Delhi so that the same can be sold from there. The factory and retail showroom of Kaghubir Fabrics are registered in the states where they are located. Although no consideration is charged, supply of goods from factory to retail showroom constitutes supply.
Ø EMPLOYER-EMPLOYEE TRANSACTIONS:
• The definition of 'related persons' covers employer-employee relationship within its scope. Accordingly, all employer-employee transactions should be regarded as supply irrespective of the fact whether consideration is involved or not.
• However, Schedule I of C&ST Act provides that gifts given by an employer to an employee shall not be treated as supply if the amounts of gifts given during a financial year does not exceed Rs 50,000. However, gifts exceeding Rs 50,000 shall be subject to GST.
• Moreover, Schedule III of CGST Act clearly states that services provided by an employee to the employer in the course of or in relation to his employment shall not be treated as supply of services. Therefore, any kinds of benefits given by an employer to his employee in terms of contractual agreement entered into between the employer and the employee will not be subject to GST.
• Example: Where an employer provides free housing to his employee, when the same is provided in terms of the contract between the employer and employee and is part and parcel of the employee's remuneration package, no GST implications should arise on such free housing.
3. SUPPLY OF GOODS BETWEEN PRINCIPAL & AGENT:
Supply of goods by a principal to his agent, without consideration, where the agent undertakes to supply such goods on behalf of the principal is considered as supply. Similarly, supply of goods by an agent to his principal, without consideration, where the agent undertakes to receive such goods on behalf of the principal is also considered as supply. Example: ABC Manufacturers Ltd engages Raghav & Sons as an agent to sell goods on its behalf. For this purpose, ABC Manufacturers Ltd has supplied the goods to Raghav & Sons. Supply of goods by ABC Manufacturers Ltd to Raghav & Sons will qualify as supply even though no consideration has been recovered from Raghav & Sons
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4. IMPORT OF SERVICES FROM RELATED PERSONS LOCATED OUTSIDE INDIA:
Import of services by a taxable person from a related person or from any of his establishments located outside India in the course or furtherance of business shall be treated as supply irrespective of the presence of consideration.
Example: ABC Associates received legal consultancy services from its head office located in Malaysia. The head office has rendered such services free of cost to its branch office. Since ABC Associates and the branch office are related persons, services received by ABC Associates will qualify as supply even though the head office has not charged anything from it.
Example: Sumit, a proprietor registered in Delhi, has sought architect services from his brother located in US, with respect to his newly constructed house in Delhi. Although services have been received by Sumit without consideration from a related person, the transaction will still not qualify as supply since the same has not been received in course or furtherance of business.
ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS/SERVICES
Section 7(l)(d) of C&ST Act read along with Schedule II of C&ST Act enlists various matters/transactions which are to be treated as supply of either goods or services. The matters listed under Schedule II are primarily those which had been entangled in litigation in the earlier regime owing to their complex nature and susceptibility to double taxation.
S.No.
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Nature Of Transaction
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Nature of Supply
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1.
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a) Transfer of title in goods
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Supply of Goods
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b) Transfer of right in goods/undivided share in goods without transfer of title in goods
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Supply of Goods
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c) Transfer of title in goods under an agreement which stipulates that property shall pass at a future date
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Supply of Goods
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2.
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· Lease, tenancy, easement, license to occupy land
· Lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly
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Supply of doods
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3.
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Any treatment or process which is applied to another person's goods
Example: Job work performed by a job worker like dyeing of fabric in various colours
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Supply of Goods
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4.
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a) Goods forming part of business assets are transferred or disposed-off by/under directions of person carrying on the business so as no longer to form part of those assets, whether or not for consideration
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Supply of goods
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b) Goods held/used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, by or under the direction of a person carrying on a business, whether or not for consideration
Example: A director using company's car for personal travels
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Supply of Goods
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c) Goods forming part of assets of any business carried on by a person who ceases to be a taxable person, shall be deemed to be supplied by him, in the course or furtherance of his business, immediately before he ceases to be a taxable person
EXCEPTIONS:
Ø Business is transferred as a going concern to another person; or
Ø Business is carried on by a personal representative who is deemed to be a taxable person
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Supply of Goods
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5.
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• Renting of immovable property
• Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer before its completion provided some part of the consideration is received before the issuance of completion certificate
• Temporary transfer or permitting the use or enjoyment of any intellectual property right
· Development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology
software
• Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act
• Transfer of right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration
Supply of Services
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Supply of Goods
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6.
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Following Composite Supplies'.
a) Works Contract
{Works contract has been defined u/s 2(119) of CGST Act to mean a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract}
b) Supply of food or any other article for human consumption or any drink by way of or as part of any service or in any other manner whatsoever
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Supply of Goods
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7.
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Supply of goods by any unicorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration
Example : A local club supplies snacks to its members during its monthly meeting for a nominal payment.
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Supply of Goods
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ACTIVITIES TO BE TREATED NEITHER AS SUPPLY OF NOR AS SUPPLY OF SERVICES
Activities covered within the scope of Section 7(2) shall be treated neither as supply of goods nor as supply of ices. Resultantly, such activities shall not be liable to GST.
Scetion7(2)(a) – ACTIVITIES UNDER SCHEDULE III;
fallowing activities covered under Schedule III of CGST Act can be termed as 'Negative List' under the &ST regime:
1. Services By An Employee To His Employer In The Course Of Or In Relation To His Employment.
Ø Services provided by an employee to his employer during the course of employment are not taxable under GST law.
Ø Services provided outside the course of employment for a consideration would qualify as a supply and thus liable to GST. Example: If an employee provides private coaching to his employer's children, such services would not get covered under the above exclusion and would be liable to GST.
Ø Amounts paid by the employer to the employee for premature termination of a contract of employment are treated as amounts paid in relation to services provided by the employee to the employer in the course of employment. Thus, such amount would not be liable to GST.
Nature of Transaction
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Whether regarded as 'services carried out during the course of employment'?
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Services provided by a casual worker to employer who gives wages on daily basis to the worker
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Yes. These are services provided by the worker in the course of employment.
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In case the casual workers are employed by a contractor, like a building contractor or security agency services, who deploys them for execution of a contract or for provision of security services
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§ Yes. Services provided by the casual workers to the contractors are in the course of employment.
§ However, services provided by the contractor to his client by deploying such workers would not be a service provided by the workers to the client in the course of employment. The consideration received by the contractor would therefore be taxable if other conditions of taxability are present.
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Services provided on contract basis by a person to another
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No. Services provided on contract basis (ie principal-to-principal basis) are not services provided in the course of employment.
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2. Services By Any Court Or Tribunal Established Under Any Law For The Time Being In Force
3. Functions/Duties Performed By Following Persons:
Ø the functions performed by the Members of Parliament, Members of State Legislature, Members of Panchayats, Members of Municipalities and Members of other local authorities;
Ø the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or
Ø the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or a State Government or local authority and who is not deemed as an employee before the commencement of this clause.
4. Services Of Funeral, Burial, Crematorium Or Mortuary Including Transportation Of The Deceased
5 . Sale of Land and Sale of Building Subject To Paragraph 5(b) Of Schedule II
6. Actionable Claims, Other Than Lottery, Betting And Gambling
ACTIVITIES NOTIFIED BY GOVERNMENT:
Ø Section 7(2)(b) of CGST Act provides that activities undertaken by Central Government/State Government/Local Authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the GST Council, shall be treated neither as supply of goods nor as supply of services.In terms of the above provision, services by way of any activity in relation to a function entrusted to a Panchayat under Article 243G of the Constitution has been notified.
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PRACTICAL PROBLEMS
Problem 1:
R is a supplier of goods located in Mumbai. In October 2017 he has imported Consultancy Services for Development of IT Software from U.S.A. for a stipulated consideration of $ 80,000. Will the import of consultancy services be treated as supply?
Solution
The importation of service in the above case shall fall within the ambit of term "supply” as it is for a consideration and in the course or furtherance of business and shall be liable to IGST
Problem 2
R is a supplier of goods located in Chandigarh. In November 2017, he has imported ' Architecture Services' from a relative consultant located in Germany, without any consideration (monetary or non-monetary) for construction of his personal house.
(a) Will the import of architecture services for personal use be treated as supply and liable to IGST?
(b) What will be your answer if the above services have been imported by R in the course or furtherance of business?
Solution
(a) Since, there is no consideration and it is for personal use, importation of service in the given case shall not fall within the ambit of term 'supply' and not liable to IGST.
However, in the above example if the import of Architecture Service is for a consideration, it shall fall within the scope of term 'supply', although services have been imported for personal purposes.
(b) Since the services have been imported from a related person and these are in the course or furtherance of business, it will be treated as supply even if it is without consideration,
Problem 3
A dealer of washing machines, who has availed input tax credit on washing machines, permanently transfers a washing machine from his stock-in-trade, for personal use at his residence.
Will this transfer for personal use be treated as supply and liable for GST?
Solution
Such transaction though without, a consideration shall constitute supply and be liable to GST, as it is a permanent transfer of washing machine for his personal use.
Problem 4
R, a Chartered Accountant, purchased 3 laptops of value Rs. 2,40.000 on 1.10.2017 and paid IGST amounting Rs. 67,200 thereon. He availed ITC of Rs. 67,200 in his books on the same day. After 3 years of using the laptops, he has donated one laptop to a college when its fair market value is Rs. 30,000.
Will such donation be treated as supply and liable to GST?
Solution
In the above case, R shall be liable to pay an amount under GST equivalent to:
(a) The input tax credit availed on the said laptop as reduced by the input tax credit attributable to 3 years for which asset has been used in business, Input credit availed at the time of purchase of laptop = Rs. 22,400 (1/3 of the total input credit of Rs.67,200)
Useful life of the laptop 5 years
Unused period 2 years
Therefore, GST amount payable (Rs. 22,400 x 2/5) Rs.8,960
(b) Tax payable on the fair market value of such capital goods as determined under section 15, i.e. 30,000 x 28% = 8,400.
Whichever is higher.
Thus, R shall be liable to pay GST amounting to Rs. 8,960 on donation of such laptop.
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