SCOPE AND MEANING OF SUPPLY IN GST

[Dr. Sanjiv Agarwal]

Statutory Provisions

Section 7 of CGST Act 2017 provides for scope of supply as under:

(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.

(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.

(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.

Scope of Section 7

Section 7 provides the scope of supply. This section provides for activities to be treated as supply. This clause further provides that certain activities, specified in Schedule I of the Act, even made or agreed to be made without a consideration shall be treated as supply. This section also provides activities which are neither supply of goods nor supply of services.

Meaning and Interpretation of Supply

Supply is the taxable event in GST. The term ‘Supply’ has been defined in an inclusive manner. The word ‘includes’ in definition is used to enlarge the meaning of the words or phrases occurring in the body. Thus the specific transactions listed in Section 7 are only illustrative and the definition would be widened to include other similar kind of transactions.

 It may be noted that the term ‘transfer’ used in the definition of supply has not been used in rest of GST law. Whereas the term ‘removal’ has been defined in the Act but the same has not been included in the definition of supply. The provisions in section 31 in respect of issuance of invoice are in reference to removal. The term ‘transfer’ included in the definition of ‘supply’ can be read as including removal also.

The ‘barter’ is different from ‘exchange’ only to the extent that in barter goods and/or services are exchanged for goods and/or services. In exchange, goods and/or services besides other goods and/or services could also be exchanged for property. Thus, exchange is a wider word than barter. In commercial world, the words barter and exchange are used interchangeably.

The GST has to be calculated on a numerical value. Valuation will become important in the transactions of exchange or barter. The valuation in such transactions will be arrived at on the basis of Valuation Rules, which have been be notified under GST separately.

Licence is a permission by one person to another to do some act which would be unlawful without such permission. In the commercial world, licencing is at the heart of exploitation of intellectual property rights. A software developer would normally issue licence of copyright to the end user of software.

Rent is a consideration for hiring some goods or property for a specified period of time. In the transactions of renting of immovable property, rent could be provided for in the lease or tenancy agreement signed between landlord and tenant. The same term could be used for hiring of a movable property.

Leasing is a contract by which one party agrees to convey an estate in property to another person for a consideration. The lease could be of immovable property or movable property. In the contract of lease, the ownership is not transferred and is retained by the lessor but the possession and right to use is transferred to the other party called lessee.

Though the terms rental and leasing are used inter-changeably, there is a slight difference in the two. Lease is a contract to rent an asset for a set period of time and for set terms and conditions. Lease is generally for a longer period of time in which both the parties are required to observe terms and conditions of lease provided in the lease agreement.

Disposal means alienate the ownership of the goods. Example: Sharp Limited is a manufacturer of calculators. It decided to donate 1000 calculators to a school. This transaction would be called disposal of calculator (finished goods) by Sharp Limited.

The words ‘agreed to be made’ have been provided in the definition of supply to tax the advance receipt of payment against a contract for the supply of goods and/or services.

Even non-monetary consideration has been included in the definition of Consideration. In the case of contracts of exchange or barter the total consideration will be treated non monetary and would require to be valued on the basis of valuation principles to be laid in rules of GST law.

 It is important to note that in a transaction of supply, the payment of consideration could be made by a person other than the recipient also. The term recipient in section 2(93) in this regard provides the recipient to be a person who is liable for making the payment. In case the liability of the recipient is discharged by some other person, it will not make any change in the position of recipient in the transaction of supply.

Doing an act which was not expected to be done or not doing an act which was expected to be done by the respective party having monetary considerations will be part of consideration for the purpose of GST.

Any subsidy received from Central or State Government would not be includable in taxable value but subsidy received from any other source which is linked to the product will be part of taxable consideration.

The taxability of deposits will depend on the treatment given to such deposits. In case these deposits are not adjustable, then these will not become part of consideration but in case some kind of adjustments are made in the deposit amount, then such deposit will be considered as advance payment received and would be taxable.

Any transaction of supply of goods and/or services to be taxable should be in the course or furtherance of business. In case the supply is determined not made in the course or furtherance of business, it will not be leviable to GST.

The terms ‘commerce’ and ‘trade’ are often used inter-changeably. While commerce refers to large scale business activity, while trade describes commercial traffic within a state or a community.

Import of services whether in the course of business or whether for personal use will be considered supply and would be taxable. Thus, import of services even by a non-taxable person would also be taxable in GST. The import of goods will continue to be subject of Customs law.

Supplies under Schedule-I

Besides the transactions of supply with consideration, certain forms of transactions as mentioned in Schedule I of the Act have also been considered as taxable supply in GST. Such transactions are as follows:-

• Permanent disposal of business assets on which input tax credit has been taken.
• Supply of goods and services between a related person or distinct person in the course or furtherance of business.

It is pertinent to note that the employer and employee has been defined as related persons. However, services provided by an employer to an employee will not be considered taxable for an amount up to INR 50,000/- in a financial year.

• Supply of goods,-

by a principal to his agent, where the agent undertakes to supply goods on behalf of principal.

• by an agent to his principal, where the agent undertakes to buy such goods on behalf of his principal.
•  Importation of services by a taxable person from a related person or any of his establishment outside India, in the course or furtherance of business.

The transactions of supply between a principal and agent and also between two branches of the same person would be considered as a taxable supply. The transactions of stock transfers would become taxable in GST.

 In respect of importation of services by a taxable person, it is important to note that the importation of services for a consideration has been considered as taxable supply in section 7(1)(b) and importation of services without consideration from a related person or own establishment located outside India has been considered taxable under Schedule I. Hence, importation of service without consideration by a non-taxable person would not be taxable.

Supplies under Schedule II

Presently, one of the areas of dispute is the classification of goods and service correctly as these definitions have widened to a very large extent. GST law attempts to resolve this dispute by providing Schedule II in the Act, which prescribes which item will be considered goods and which item will be considered service. In this regard, the Central or State Governments have the power to declare any item as goods or service or nothing of the two. But this power by the Government can be used only with the approval of GST Council.

Supplies under Schedule III

Schedule-III can be considered as Negative List in GST as this Schedule provide for the activities which will not be considered as goods or service. This, inter-alia, includes:-

•  Services of an Employee to an Employer in the course of his employment.
• Services by any Court or Tribunal.
• Services performed by Elected Representative or persons holding Constitutional posts.
• Services performed by foreign diplomatic Missions in India.
• Services of funeral, burial, cremation etc.
• Sale of land and building.
• Actionable claims other than betting and gambling

Such services carried out by Central or State Governments or a local authority. It is important to note that the services which are taxable in the hands of other persons would be taxable even if carried out by Government or a local authority.

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Discussions to this article

[KASTURI SETHI]

Sir,

Pl. refer to Schedule-III (Sale of land and building). The inclusion of 'sale of land' in the negative list (Schedule-III) is justified. How inclusion of 'building' into this Schedule is justified ? Any building cannot come into existence without construction service. No building can be completed without involving labour and supervision of contractor. The ingredient of providing taxable service from one person to another person for consideration is very much present. The law says (Pre-GST era and Post-GST era both ) if the whole payment is received after completion of building or occupation of building, whichever is earlier, no tax is payable treating the same as sale and not service. If the whole payment is received after the completion or occupation, the element of service disappears ??? When it is not possible to construct any building without contractor or Company playing the role of contractor, how far it is legally justified to include 'sale of building' in the negative list (Schedule-III) ? The payment factor cannot be allowed to camoflauge the service factor. Since the all the parameters of service stand conformed to, the words, "sale of building" should be excluded from the Schedule-III. It clearly falls in the ambit of taxable service.