Section 2 (52) of CGST Act- “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;
Services:
Section 2 (53) of the CGST Act- “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;
For removal of doubt, it is hereby clarified that the expression “services” includes facilitating or arranging transactions in securities. (Inserted by GST Amendment Act, 2018
Person
Section 2 (84) of CGST Act-“person” includes—
(a) an individual;
(b) a Hindu Undivided Family;
(c) a company;
(d) a firm;
(e) a Limited Liability Partnership;
(f) an association of persons or a body of individuals, whether incorporated or not, in India
or outside India;
(g) any corporation established by or under any Central Act, State Act or Provincial Act or
a Government company as defined in clause (45) of section 2 of the Companies Act, 2013;
(h) any body corporate incorporated by or under the laws of a country outside India;
(i) a co-operative society registered under any law relating to co-operative societies;
(j) a local authority;
(k) Central Government or a State Government;
(l) society as defined under the Societies Registration Act, 1860;
(m) trust; and
(n) every artificial juridical person, not falling within any of the above;
Location of supplier of services : Section 2 (71) of CGST Act
“location of the supplier of services” means,—
(a). where a supply is made from a place of business for which the registration has been obtained, the location of such place of business;
(b).where a supply is made from a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;
(c)where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provisions of the supply; and
(d) in absence of such places, the location of the usual place of residence of the supplier;
Consideration: Section 2 (31) of CGST ACT
“consideration” in relation to the supply of goods or services or both includes––
(a). any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b).the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:
Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;
Business: Section 2 (17) of CGST ACT
“business” includes––
(a)any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);
(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such ansaction;
(d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;
(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;
(f) admission, for a consideration, of persons to any premises;
(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;
(h) services provided by a race club by way of totalisator or a licence to book maker in such club ; and
(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities;
Import of services: Section 2 (11) of IGST Act
‘‘Import of services” means the supply of any service, where––
the supplier of service is located outside India;
the recipient of service is located in India; and
the place of supply of service is in India;
Money: Section 2 (75) of CGST Act
“money” means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value;
Securities : Section 2 (101)
“securities” shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956;
Actionable claims: Section 2 (1)
“Actionable claim” shall have the same meaning as assigned to it in section 3 of the Transfer of Property Act, 1882
Taxable person: Section 2 (107)
“taxable person” means a person who is registered or liable to be registered under section 22 or section 24
Composite Supply: Section 2(30) of CGST Act
“composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;
Illustration.— Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;
Mixed Supply: Section 2 (74) of CGST Act
“mixed supply” means two or more individual supplies of goods or services ,or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.
Illustration.— A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately;
Principal Supply: Section 2 (90) of CGST Act
“principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary;
Registered Person: Section 2 (94) of CGST Act
“registered person” means a person who is registered under section 25 but does not include a person having a Unique Identity Number.
Capital Goods: Section 2 (19) of CGST Act
“capital goods” means goods, the value of which is capitalised in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business;
Related persons: Explanation to section 15 of the CGST Act
For the purposes of this Act,––
(a) persons shall be deemed to be “related persons” if––
such persons are officers or directors of one another’s businesses;
such persons are legally recognised partners in business;
such persons are employer and employee;
any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them;
one of them directly or indirectly controls the other;
both of them are directly or indirectly controlled by a third person;
together they directly or indirectly control a third person; or
they are members of the same family;
(b) the term “person” also includes legal persons;
(c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.
Agent: Section 2 (5) of CGST Act-
“agent” means a person, including a factor, broker, commission agent, arhatia, del credere agent, an auctioneer or any other mercantile agent, by whatever name called, who carries on the business of supply or receipt of goods or services or both on behalf of another
Manufacture : Section 2 (72) of the CGST Act
“manufacture” means processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character and use and the term “manufacturer” shall be construed accordingly.
Basic Provisions of Levy under GST
In this chapter we will discuss levy of GST and related provisions. These provisions are contained under section 7 (concept of supply), Section 8 (composite supply and mixed supply) and section 9 (1) & 9(2) of CGST Act and corresponding provisions from IGST Act. Readers are expected to first read the chapter “Background” before commencing reading of this chapter for better understanding.
Charge of GST is levied under section 9 of CGST Act and section 5 of IGST Act.
Both these sections contain five sub sections. However, we will discuss first two sub sections only here as remaining three sub sections are discussed in detail at relevant place in this book.
Section 9 (1) and 9 (2) of CGST Act
Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.
The central tax on the supply of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel shall be levied with effect from such date as may be notified by the Government on the recommendations of the Council.
Section 5 (1) and 5 (2) of IGST Act
Subject to the provisions of sub-section (2), there shall be levied a tax called the integrated goods and services tax on all inter-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 of the Central Goods and Services Tax Act and at such rates, not exceeding forty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person:
Provided that the integrated tax on goods imported into India shall be levied and collected in accordance with the provisions of section 3 of the Customs Tariff Act, 1975 on the value as determined under the said Act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962.
The integrated tax on the supply of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel shall be levied with effect from such date as may be notified by the Government on the recommendations of the Council.
Commentary on charging sections
In any taxation law, charge must be established clearly by a charging section. Four ingredients must be present to establish charge of tax. These ingredients are as under
On what tax shall be levied ( Transaction on which tax shall be levied )
On which value tax shall be levied ( how to derive value on which tax is to be levied)
At what rate tax shall be levied.
Who is a person liable to pay tax
In section 9 of CGST Act and Section 5 of IGST Act, these questions are answered as under-
On what tax shall be levied ( Transaction on which tax shall be levied )
In case of CGST and SGST, tax is to be levied on all intra-state supplies of goods or services or both. In case of IGST, tax is to be levied on all inter-state supplies of goods or services or both. As per section 8 of IGST Act, if location of the supplier and place of supply are in same state or union territory then it is called intra-state transaction and as per section 7 of IGST Act, if location of the supplier and place of supply are in different states or union territory it is called inter-state transaction (there are other legs of this concept also which are discussed at relevant place in this book). Location of supplier of goods is not defined under GST as it is apparent that the place from which a person makes supply of goods is the location of supplier of goods. However, location of supplier of service cannot be established with such clarity. Hence section 2 (71) of the CGST Act defines location of the supplier of services. (See definition portion).
Charge is on SUPPLY of goods and services. Supply has been defined under section 7 of the CGST Act. This has been discussed later in this chapter.
What is goods and what is service?
Goods has been defined under section 2 (52) as-
“goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;
Services are defined under section 2 (102) as under-
“services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;
For removal of doubt, it is hereby clarified that the expression “services” includes facilitating or arranging transactions in securities. (Inserted by GST Amendment Act, 2018)
As explained earlier, GST is levied on supply of Goods and services. Hence understanding what is called Goods and what is called services becomes important. Definition of Goods is similar to what we have understood in earlier indirect tax regime of excise, VAT, CST etc. i.e. The important test of being goods is movability. However, definition of service is quite different from what was given in service tax regime (clause 44 of section 65B of Finance Act, 1994).
From both these definitions, we need to discuss three things. 1. Money 2. Securities and 3. Actionable claims. Money and securities are excluded from the definition of Goods as well as from the definition of services. However it is important to note that activities relating to use of money or its conversion by cash or by any other mode from one form currency or denomination to another form, currency or denomination for which a separate consideration is charged is covered under the definition of services. Same is applicable to services of facilitating or arranging transactions in securities.
Chargeability of Actionable Claims
Let us discuss taxability of Actionable Claims
As per section 2(1) of CGST Act, “actionable claims” shall have the same meaning as assigned to it in section 3 of Transfer of Properties Act, 1882.
As per section 3 of Transfer of Properties Act, 1882, Actionable claim” means a claim to any debt, other than-
a debt secured by mortgage of immoveable property or
by hypothecation or pledge of moveable property, or
to any beneficial interest in moveable property not in the possession,
either actual or constructive, of the claimant,
which the Civil Courts recognise as affording grounds for relief,
whether such debt or beneficial interest be existent, accruing, conditional or contingent.
In short, actionable claim is a claim or debt for which a person can take action. i.e he can reach to court for recovery. Actionable claims for a layman represents an unsecured debt. For example, Mr. A needs to recover Rs. 15000 from Mr. B against sale of some goods. For Mr. A it is actionable claim.
GST on actionable claims
As per definition of Goods, actionable claims are included in the definition of Goods. Hence, we can say that actionable claims are Goods. However, clause 6 of schedule III Actionable Claims other than lottery, betting and gambling are neither supply of Goods nor supply of services. Hence we can say that actionable claims except Lottery, betting and gambling are not chargeable to GST due to applicability of Schedule III.
On which value tax shall be levied ( how to derive value on which tax is to be levied)
It has been mentioned under section 9 of CGST Act and section 5 of IGST Act that GST shall be levied on the value of supplies to be determined under section 15 of the CGST Act. Section 15 of the CGST Act has been discussed in detail in chapter of valuation.
At what rate tax shall be levied.
It has been mentioned under section 9 of the CGST Act and Section 5 of the IGST Act hat GST shall be levied at such rates, not exceeding forty per cent., as may be notified by the Government on the recommendations of the Council. We have discussed in detail role and formation of GST council. Rate of GST is recommended by GST council and it will be made applicable through a notification issued by central/state government.
Who is a person liable to pay tax
As per section 9 of the CGST Act and section 5 of the SGST Act, tax shall be payable by a taxable person. As per section 2 (107) of the CGST Act, “taxable person” means a person who is registered or liable to be registered under section 22 or section 24.
It is important to understand here that taxability is linked with registration. This means if a person is registered he is always considered as a taxable person. Once you are registered or liable for registration GST can be levied. For example, Aggregate Turnover of Mr. X is Rs. 5,00,000/- only. Hence, he is not liable to take registration under section 22. But if he takes voluntary registration, he is required to pay GST immediately and cannot get exemption from GST up to Rs. 20 Lakhs Aggregate Turnover. In short, once registration is taken a person is always a taxable person irrespective of the amount of his Aggregate Turnover. (Provisions of section 22 and section 24 we will discuss in registration chapter)
Further, as per this section 9, supply of alcoholic liquor for human consumption is outside the ambit of GST. However, it is pertinent to note that supply of petroleum crude, high speed diesel oil, motor spirit, natural gas and aviation turbine fuel are not kept outside the charging section. Instead, it has been mentioned that they shall be included in GST from a date that shall be notified by the Government on the recommendation of GST council. It means that for future inclusion of alcoholic liquor for human consumption in to GST, charging section needs to be amended by passing an amendment in parliament. However, for future inclusion of petroleum products in to GST, charging section need not be amended as it already gives power to central government to notify date from which such products can be included in GST ( on the recommendation of GST council ).
Concept of Supply
Supply is defined under section 7 of the CGST Act as under-
(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;
(1A) 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.
Commentary on concept of supply
Supply is a new concept introduced in GST. As explained in background chapter earlier, 101st Constitutional Amendment Act gives power to central as well as state government to levy tax on supply of goods and services. (for detailed understanding see Background). Earlier before GST regime there was no concept of Supply in indirect taxes. Hence, it becomes extremely important to understand what really constitutes supply. Section 7 of the CGST Act defines Supply as mentioned above. However, this definition is inclusive one and has many ingredients to it as explained above. Further, these ingredients also contains exceptions. Readers are requested to get thorough understanding of these exceptions. These exceptions are importation of services and activities mentioned in schedule I. These are discussed at length in respective chapters.
Further, there is a huge importance of schedule II and Schedule III also. Let us understand importance of these schedules. Readers’ attention is requested to the fact that schedule I and Schedule III are related to chargeability. However, schedule II has nothing to do with chargeability. As per schedule I, for certain activities charge of GST shall be attracted even if there is no consideration involved. Further, as per schedule III, certain activities can neither be treated as supply of Goods nor supply of services even if all ingredients of section 7 are present and consequently cannot be brought to charge under GST. Hence, both Schedule I and Schedule III are linked to chargeability. However, same is not the case with Schedule II. Schedule II differentiates activities or transactions between supply of Goods and supply of services. Schedule II per se does not determine whether some transaction is supply or not. Role of schedule II starts only after it is determined that the activity or transaction is supply. Further, its role is limited to determine whether the supply is supply of Goods or supply of Services. (Readers are requested to go through list of activities/transactions covered under schedule I, II and III given at the end of this chapter)
Definition of supply is an inclusive definition. It means definition of supply is not limited to the examples given like sale, transfer, barter, exchange, license, lease, etc. Scope of the definition can be extended to all forms of supplies.
There are two important ingredients of the definition of supply.
It should be made for consideration
It should be made in the course or further of business.
Consideration has been defined under section 2(31) of the CGST Act (see definition portion at the beginning of the chapter). For a layman, consideration means –“Something in Return”. Consideration has a very wide interpretation. Consideration can be monetary or it can be non-monetary also. Monetary consideration can be paid by cash, cheque, demand draft etc. Non-monetary consideration is paid in the form of goods or services. To find out value of such consideration we need to apply section 15 of the CGST Act (discussed in the chapter of valuation). To do something in return of supply of goods or services is consideration but even forbearance to do something can also be a consideration. For example, non-competition agreements. There is only one thing which is excluded from the definition of consideration which is government subsidy.
There are instances of deposits being paid in respect of supply of goods or services. For example, at the time of taking dealership of a car company, dealer pays Rs. X as deposit. Another example can be rent deposit or telephone deposit. As per proviso to section 2 (31) of the CGST Act, such deposits cannot be called consideration unless the supplier applies such deposit as consideration for the supply. For example, a rent deposit taken by landlord shall not be called consideration for supply of renting service till the deposit is set off against outstanding rent.
In case of non-monetary consideration, there arises a question of what is supply and what is consideration for supply. For example, Mr A sells furniture to Mr. B who in return gives television to Mr.A. Here, is there a supply of furniture or supply of television? Readers need to understand that here there is no single supply. Mr A has supplied furniture whereas Mr B has supplied television. In another sense, this is a barter transaction. For Mr A, supply is of furniture and consideration is television. Whereas for Mr B, supply is of television and consideration is furniture. As discussed earlier when consideration is other than monetary, valuation shall be done under section 15 and rules made thereunder (we shall discuss this in the chapter of valuation).
Supply of goods or services or both should have a link with the consideration received. In legal terms we call it “quid pro co”, which in a normal language translates as “a favour or advantage granted in return for something”. If there is no link between the two we cannot say that the activity is a supply. For example a temple run by a charitable trust receives donation from one partnership firm. Name of the firm is written as a donor on the wall of the temple. Now here can we say that the trust provided advertisement service to the firm and donation received is a consideration for this service? The answer is a clear NO. There is an absence of quid pro co here and hence cannot be called supply.
Another example can be of grant or donation given to a research institute by a company. The company may be a beneficiary of the findings of the research but establishing quid pro co is essential.
Supply should be made in the course or furtherance of business. Definition of business given in the Act is so wide that it gives a little scope of discussion. (See definition portion at the beginning of the chapter). Let us take an example of a club or society providing service to its members. Under Income Tax Act, this has been kept out of taxation by applying concept of mutuality. i.e. One cannot earn income from himself. Society and its members ( or a club or its members) cannot be considered as separate person. However, by deeming fiction added in the definition of GST, such transactions fall within the net of GST. ( There are contrary rulings also given by Some Authority of Advance Ruling). As per first clause of the definition of business given under section 2 (17) of CGST Act, business includes-
any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit
Here it is important to understand the meaning of trade, commerce, manufacture, profession, vocation, adventure and wager.
As per dictionary meaning, trade means activity of buying and selling or exchanging goods or services or both between people or countries.
Commerce is another similar word. It means activity of buying and selling especially on large scale.
The word manufacture has been defined under section 2 (72) as - processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character and use and the term “manufacturer” shall be construed accordingly.
Dictionary meaning of profession is a paid occupation, especially which involves prolonged training and a formal qualification.
There are almost similar meanings assigned to vocation, adventure and wager. Out of all these words used to define business, the word “commerce” is very broad and as per opinion of the author, it covers all other words used to define business.
While the term “business” has been defined under GST law, the term “in the course or furtherance of” has not been defined in GST law. This phrase “in the course or furtherance of business” has its importance for section 16 (eligibility of taking input tax credit). The Explanatory Memorandum relating to the A New Tax System (Goods and Services Tax) Bill 1998 states -
‘In the course or furtherance' is not defined, but is broad enough to cover any supplies made in connection with your enterprise. An act done for the purpose or object of furthering an enterprise, or achieving its goals, is a furtherance of an enterprise although it may not always be in the course of that enterprise.
Hence, activities which are not only directly related to business but also those which have indirect relation to business shall also be covered. Question arise as to whether any activity where there is sale of goods or services shall be covered within the definition of supply? Let us take an example, a salaried person sells gold ornaments lying at his home to gold merchant. Is this transaction called supply? And will it be covered under GST? If we go by the literal meaning, this is a trade ( buying and selling of goods/service). Now assigning such meaning to things shall make everything covered under supply and the result shall be so absurd that it shall defeat the purpose of GST. Similar can be a case when a university sells some scrape. As per author’s opinion, such transactions cannot be called business and cannot be covered under the definition of supply. The thing which is sold (in our example by a salaried person or a university ) if was bought for selling or for using in a Business then its sale can be called trade and can be covered under GST. However, each case needs to be analysed differently and courts will have a task of interpreting whether the activity shall be a business or not.
However both these ingredients in the definition of supply- i.e consideration and in the course or furtherance of business contain exceptions i.e. In case of import of services even if importation is not in the course or furtherance of business, it will be considered as supply. This is to make taxation of importation of service commensurate with importation of goods. In case of importation of goods, as per Customs Act, 1962, custom duty is required to be paid whether or not the importation is in the course or furtherance of business. GST intends to treat goods and services parallel, hence importation of services whether in the course or further of business or not are leviable to GST.
Further, for activities mentioned in schedule I of CGST Act, even if no consideration is charged, definition of supply will be attracted. (See Note-1 at the end of Para-1)
Further section 7(3) provides that 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 supply of goods and not as a supply of services; or
a supply of services and not as a supply of goods.
Amendment to section 7(1) by Finance Act 2021 and some advance rulings in case of clubs and association of persons
In case of Lions Club of Poona Kothrud (2019), Maharashtra Appellate Authority for Advance Ruling held that GST cannot be levied on membership fees collected by the club from its members. To nullify many such rulings, a new clause has been inserted after section 7(1)(a). This clause is clause (aa). This new clause is as under—
aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration.
An explanation has also been inserted below this clause as under—
Explanation – For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another.
This clause and its explanation has been inserted to clarify a situation where a member of an association supplies goods or services to the association or vice versa. It is clarified that such activity or transaction if carried out by a person other than individual then it will fall within the definition of supply.
Paragraph 7 of the Schedule II has also been omitted due to this amendment. This para was as under—
Supply of Goods
The following shall be treated as supply of goods, namely—
Supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.
Transactions considered neither as supply of goods nor as supply of service Section 7(2)
As per section 7 (2), notwithstanding anything contained in sub-section (1),–
activities or transactions specified in Schedule III; or
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.
Following supplies are notified as neither supply of goods nor supply of service under section 7 (2)
1. activities or transactions undertaken by the Central Government or State Government or union territory or any local authority in which they are engaged as public authority, shall be treated either as a supply of goods nor a supply of service, namely:-
“Services by way of any activity in relation to a function entrusted to a Panchayat under article 243G of the Constitution or to a Municipality under article 243W of the Constitution.”
(Added by notification 14/2017-CTR dated 28/06/2017 as amended by notification no 16/2018-CTR dated 26/07/2018)
2. activities or transactions undertaken by the State Governments in which they are engaged as public authorities, shall be treated neither as a supply of goods nor a supply of service, namely:-
“Service by way of grant of alcoholic liquor licence, against consideration in the form of licence fee or application fee or by whatever name it is called.”
(Added by notification 25/2019-CTR dated 30/09/2019)
This subsection has an overriding effect over subsection (1), for activities mentioned in schedule III there can be no levy of GST because they will be treated neither as supply of goods nor as supply of Services. Activities mentioned in schedule III are explained in Note-3 at the end of this chapter
Concept of Composite Supply vs Mixed Supply Section 8
Concept of Composite supply and mixed supply has been inserted in CGST law to cover a situation where more than one goods or services are supplied in conjunction.
In this situation there arises a question of classification and consequently the applicability of GST rate.
As per section 8 of CGST Act, the tax liability on a composite or a mixed supply shall be determined in the following manner, namely:—
(a). a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and
(b). a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.
Composite supply has been defined under section 2 (30) as under
“Composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;
Illustration.— Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;
Mixed Supply has been defined under section 2 (74) as under
“Mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.
Illustration. — A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately;
Here it is important to note that the definition of Composite supply does not contain words “for a single price”. Hence even if separate price is charged for two or more supplies they may constitute composite supply if they are naturally bundled and supplied in conjunction with each other in the ordinary course of business.
Further the term Principal Supply has also been defined under section 2 (86) as the supply of goods or services which constitute the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary.
Schedule I, II and III of CGST Act
Concept of levy under GST cannot be understood fully without understanding schedule I to III of CGST Act. As I have mentioned earlier in this chapter, Schedule I gives list of activities or transactions that can be called supply even if consideration is not charged. There is a huge importance of schedule II and Schedule III also. Let us understand importance of these schedules. Readers’ attention is requested to the fact that schedule I and Schedule III are related to chargeability. However, schedule II has nothing to do with chargeability. As per schedule I, for certain activities charge of GST shall be attracted even if there is no consideration involved. Further, as per schedule III, certain activities can neither be treated as supply of Goods nor supply of services even if all ingredients of section 7 are present and consequently cannot be brought to charge under GST. Hence, both Schedule I and Schedule III are linked to chargeability. However, same is not the case with Schedule II. Schedule II differentiates activities or transactions between supply of Goods and supply of services. Schedule II per se does not determine whether some transaction is supply or not. Role of schedule II starts only after it is determined that the activity or transaction is supply. Further, its role is limited to determine whether the supply is supply of Goods or supply of Services.
Schedule I
ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION
1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.
2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business: Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.
3. Supply of goods— (a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or (b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.
4. Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business.
Commentary on Schedule I
We have discussed that there are two important tests for considering any activity or transaction as supply under section 7. First it is made with consideration and second it is in the course or furtherance of business. Hence, free supply cannot be called supply and cannot be taxed under GST. However this rule contains one exception. Transactions or activities mentioned in Schedule I shall be considered as supply even if they are made without charging consideration. Hence condition of charging condition given under section 7 has been dispensed with for activities or transactions mentioned under schedule I. Let us understand each of the entries given under schedule I
Permanent transfer or disposal of business assets where input tax credit has been availed on such assets:
Here the key term is “Business Asset”. However, the term business asset has not been defined under GST Act. Hence, we need to understand this term in normal parlance. Business Asset can mean any asset which is used in business. It can be tangible asset like inventory or machinery. Or it can be intangible also like software or licence fees. Hence the term business asset has a wide meaning. Hence even if a business asset is permanently transferred or disposed of without charging any consideration then it shall be covered within the definition of “Supply” provided that Input tax credit has been taken on the business asset. It is important to note here that this entry shall be triggered only on those business assets on which ITC has been taken.
For example, Mr. A purchased a car for Rs. 9,00,000 and as Input Tax Credit on motor vehicle is not available under section 17(5) he did not avail the credit. Later on, he disposed off this car without charging any consideration. In this situation disposal of car will not be covered under Schedule-1 as ITC was not availed on the given business asset.
Mr. B purchased goods on which he availed ITC. After few days he gave these goods to Mr. C as free samples. In this situation even if goods are given as free samples GST is required to be paid.
This entry extends our discussion to larger area of section 17 (5) (blocked credit), section 18 (6) (removal of capital goods), section 15 (valuation) and related circular no 92/2019. When a business asset is transferred without consideration. Let us take an example of free samples. As per section 17 (5) (h) of CGST Act, ITC on goods lost, stolen, destroyed, written off or disposed of by way of gift or fee sample is blocked. (This has been discussed in detail in the chapter on Input Tax Credit). Hence if a sample is given free then the supplier has two options. Either he reverses the ITC taken on such sample under section 17 (5) (h) or he needs to pay GST on supply of the free sample under entry I of schedule I. It is important to note that once ITC is reversed then entry I of schedule I shall not be attracted. Reversal of ITC shall mean non availment of ITC for entry I of schedule I.
Circular 92/2019 has also clarified another similar issue in case of certain sales promotion schemes. There are schemes like Buy One Get One Free where supplier provides additional item free on purchase of certain products. For example, toothbrush is supplied free with toothpaste. In such schemes actually, nothing is provided free of charge. Price of the item supplied free is already included in the price of main item. Hence, in this situation neither section 17 (5) (h) shall be attracted nor entry I of schedule I shall be attracted.
There also is a concern about the value on which GST needs to be paid when business asset is permanently transferred or disposed of. If the business asset is other than capital goods then we need to make valuation as per Rule 27 under section 15 (4). As per this Rule, value of the asset transferred shall be the open market value of the goods or services or both and if open market value is not available, value of supply of goods or services or both of like kind and quality.
As per explanation to the said rule,
“open market value” of a supply of goods or services or both means the full value in money, excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made;
“supply of goods or services or both of like kind and quality” means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials, and the reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both.
Let us say, Item A is supplied free of cost by Mr. X as free sample to Mr. Y. Here, value of item A shall be the price charged by Mr. X from other customers at the same or near time when it is supplied to Mr. Y. If Mr. X has not sold item A to anyone and hence valuation is not possible as per this method then value of item similar to item A (let us say item B) shall be taken as value of item A for charging GST. Further the rule says if this method is also not possible then Rule 30 or Rule 31 shall be followed in that order. (This is discussed in detail in chapter of valuation).
In case of transfer of capital goods, there is a little debatable issue that I have considered appropriate to discuss here. As per section 18 (6), In case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed ( five percentage points for every quarter or part thereof from the date of issue of the invoice for such goods- Rule 40-2 ) or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher:
Provided that where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value of such goods determined under section 15.
Question arises here as to when capital goods are supplied without consideration tax shall be paid by following section 18 (6) or the valuation shall be done as per valuation rules 27. Readers can observe from wordings of section 18 (6) that transaction value needs to be considered under section 15. Transaction value means price charged from the recipient of supply. In case the capital goods are removed without charging consideration then there is no question of any transaction value being present. Transaction value cannot be equated with assessable value as per valuation rules. Hence, as per author’s view, section 18 (6) comes in to play only when there is presence of transaction value. In case the capital goods are removed without consideration then valuation must be done as per valuation rules and applicability of section 18 (6) cannot be permitted.
Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:
Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.
This entry covers transactions between “Related Persons”. The term related persons is defined by explanation to section 15. (See definitions portion at the beginning of this chapter). Valuation of the transactions done without consideration shall be done as per valuation rules (discussed in the chapter of valuation).
Employees and employer are considered as related persons. Proviso to this clause states that gifts not exceeding fifty thousand rupees in value in a financial year by employer to employee shall not be treated as supply. It is important to read clause I of Schedule III which says that services by employee to the employer in the course of or in relation to his employment is neither supply of goods nor supply of service.
From the above paragraph an important question arises as to Gift from Employer to employee is a consideration for supply of service by employee to employer or it is a separate supply by employer to employee? If we treat gift received by employee as a consideration for his supply of services made to his employer it will fall under clause I of schedule III and hence not liable to tax. However if we treat Gift from employer to employee as a separate supply then Gift exceeding Rs. 50000 in a financial year will become taxable supply as employer and employee are related persons. Further the term “Gift” has not been defined in the Act. Now a days employees receive many non-monetary benefits from employer, hence answering this question becomes extremely important especially in the absence of definition of the word “Gift”. Because if any reward received by employee from employer is treated as “ Gift” then employer is required to pay GST on such rewards given to employee. Hence it is advisable to mention all considerations to be received by employee from employer in the terms of employment, otherwise it may be treated as “Gift” and may attract GST.
Supply of goods— (a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or (b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.
Here, supply of only Goods are covered and not services. Transactions of supply of goods between principal and agent, even if made without consideration are treated as Supply.
Here it is extremely important to understand the scope and ambit of the principal – agent relationship. Not all the principal-agent relationship shall be covered under this entry. First, this entry covers only transactions of goods. Hence, provision of service s is not covered here. Further, as per section 182 of the Indian contract act, 1872, an “agent” is a person employed to do any act for another, or to represent another in dealings with third person. Hence, crucial element is the representative character of the agent.
There is a difference between agent and business facilitator. Business facilitator only facilitates transaction between two persons. He himself does not supply goods on behalf of the principal. He merely charges fees or commission. Invoice for supply of goods is raised by the supplier directly on the customer. Here, we cannot say that there is a presence of principal- agent relationship. Establishment of principal-agent relationship is also important from the registration point of view. As per section 24 (vii), persons who makes taxable supply of goods or services or both on behalf of other taxable person whether as agent or otherwise is required to get himself registered irrespective of his turnover.
The issue of principal-agent relationship has been discussed in circular No. 57/31/2018-GST dated 04-09-2018. As per this circular, the key factor for determining relationship under GST would be whether the invoice for the further supply of goods on behalf of principal is being issued by the agent or not . if-
The invoice is being issued by the agent in his name then, any supply of goods from the principal to agent shall fall within the hold of this entry.
The invoice is issued by the agent to the customer in the name of the principal, such agent shall not fall within the ambit of Schedule-1
Hence , crucial point is whether or not the agent has authority to pass or receive the title of the goods on behalf of principal
Following examples will clarify the issue.
Example: 1
Mr. A appoints Mr. B to procure certain goods from the market. Mr. B identifies various suppliers who can provide the goods as desired by Mr. A, and asks the supplier (Mr. C) to send the goods and issue the invoice directly to Mr. A. In this scenario, Mr. B is only acting as the procurement agent, and has in no way involved himself in the supply or receipt of the goods. Hence, in accordance with the provisions of this Act, Mr.B is not an agent of Mr. A for supply of goods in terms of Schedule I.
Example: 2
M/s XYZ, a banking company, appoints Mr. B (auctioneer) to auction certain goods. The auctioneer arranges for the auction and identifies the potential bidders. The highest bid is accepted and the goods are sold to the highest bidder by M/s XYZ. The invoice for the supply of the goods is issued by M/s XYZ to the successful bidder. In this scenario, the auctioneer is merely providing the auctioneering services with no role played in the supply of the goods. Even in this scenario, Mr.B is not an agent of M/s XYZ for the supply of goods in terms of Schedule I.
Example: 3
Mr. A, an artist, appoints M/s B (auctioneer) to auction his painting. M/s B arranges for the auction and identifies the potential bidders. The highest bid is accepted and the painting is sold to the highest bidder. The invoice for the supply of the painting is issued by M/s B on the behalf of Mr. A but in his own name and the painting is delivered to the successful bidder. In this scenario, M/s B is not merely providing auctioneering services, but is also supplying the painting on behalf of Mr. A to the bidder, and has the authority to transfer the title of the painting on behalf of Mr. A. This scenario is covered under Schedule I. A similar situation can exist in case of supply of goods as well where the C&F agent or commission agent takes possession of the goods from the principal and issues the invoice in his own name. In such cases, the C&F/commission agent is an agent of the principal for the supply of goods in terms of Schedule I. The disclosure or non-disclosure of the name of the principal is immaterial in such situations.
Example : 4
Mr A sells agricultural produce by utilizing the services of Mr B who is a commission agent as per the Agricultural Produce Marketing Committee Act (APMC Act) of the State. Mr B identifies the buyers and sells the agricultural produce on behalf of Mr. A for which he charges a commission from Mr. A. As per the APMC Act, the commission agent is a person who buys or sells the agricultural produce on behalf of his principal, or facilitates buying and selling of agricultural produce on behalf of his principal and receives, by way of remuneration, a commission or percentage upon the amount involved in such transaction. In cases where the invoice is issued by Mr. B to the buyer, the former is an agent covered under Schedule I. However, in cases where the invoice is issued directly by Mr. A to the buyer, the commission agent (Mr. B) doesn’t fall under the category of agent covered under Schedule I.
In Example 1 and Example 2, Mr. B shall not be liable to obtain registration in terms of clause (vii) of section 24 of the CGST Act. He, however, would be liable for registration if his aggregate turnover of supply of taxable services exceeds the threshold specified in sub-section (1) of section 22 of the CGST Act.
In Example 3, M/s B shall be liable for compulsory registration in terms of the clause (vii) of section 24 of the CGST Act. In respect of commission agents
In Example 4, notification No. 12/2017 Central Tax (Rate) dated 24.06.2017 has exempted “services by any APMC or board or services provided by the commission agents for sale or purchase of agricultural produce” from GST. Thus, the services provided by the commission agent for sale or purchase of agricultural produce is exempted. Such commission agents (even when they qualify as agent under Schedule I) are not liable to be registered according to sub-clause (a) of subsection (1) of section 23 of the CGST Act, if the supply of the agricultural produce, and /or other goods or services supplied by them are not liable to tax or wholly exempt under GST. However, in cases where the supply of agricultural produce is not exempted and liable to tax, such commission agent shall be liable for compulsory registration under sub-section (vii) of section 24 of the CGST Act. 10.
Import of services by a person from a related person or from any of his other establishments outside India, in the course or furtherance of business.
Import of services is defined under section 2 (11) of the IGST Act (See definition portion). This clause is required to be understood with section 7 (1) (b). As per section 7 (1) (b), if services are imported for consideration it will be covered under supply even if it is not in the course or furtherance of business. As per clause 4 of schedule I importation of services by taxable person from related person or his other establishment outside India shall be treated as supply even if it is without consideration if the supply is made in the course or furtherance of business. Other aspects of importation of services have been discussed in the chapter of reverse charge mechanism and place of supply.
Schedule II
ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES
1. Transfer
(a) any transfer of the title in goods is a supply of goods;
(b) any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services;
(c) any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods.
2. Land and Building
(a) any lease, tenancy, easement, licence to occupy land is a supply of services;
(b) any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.
3. Treatment or process –
Any treatment or process which is applied to another person's goods is a supply of services.
4. Transfer of business assets
(a) where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person;
(b) where, by or under the direction of a person carrying on a business, goods held or 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, the usage or making available of such goods is a supply of services;
(c) where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him 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, unless— (i) the business is transferred as a going concern to another person; or (ii) the business is carried on by a personal representative who is deemed to be a taxable person.
5. Supply of services: The following shall be treated as supply of services, namely:—
(a) renting of immovable property;
(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.
Explanation.—For the purposes of this clause—
(1) the expression "competent authority" means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:— (i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or (ii) a chartered engineer registered with the Institution of Engineers (India); or (iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;
(2) the expression "construction" includes additions, alterations, replacements or remodelling of any existing civil structure; (c) temporary transfer or permitting the use or enjoyment of any intellectual property right; (d) development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software; (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and (f) transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration.
6. Composite supply -The following composite supplies shall be treated as a supply of services, namely:—
(a) Works contract as defined in clause (119) of section 2; and
(b) Supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.
7. Supply of Goods The following shall be treated as supply of goods, namely:—
Supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.
Schedule III
Activities or transactions covered under Schedule III shall not be considered as supply of goods or supply of services. Hence, they cannot be charged to GST. Schedule III is reproduced below-
ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES
1. Services by an employee to the employer in the course of or in relation to his employment.
2. Services by any court or Tribunal established under any law for the time being in force.
3. (a) the functions performed by the Members of Parliament, Members of State Legislature, Members of Panchayats, Members of Municipalities and Members of other local authorities;
(b) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or
(c) 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, subject to clause (b) of paragraph 5 of Schedule II, sale of building.
6. Actionable claims, other than lottery, betting and gambling.
Explanation.—For the purposes of paragraph 2, the term "court" includes District Court, High Court and Supreme Court.
7. Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India. (Inserted by GST Amendment Act, 2018)
8.
A. supply of warehoused goods to any person before clearance for home consumption.
B. Supply of goods by the consignee to any other person by endorsement of documents of title to the goods, after the goods have need dispatched from the port of origin located outside India but before clearance for home consumption. (Inserted by GST Amendment Act, 2018)
Warehoused goods shall have the same meaning as assigned to it in the Customs Act.
Commentary on Schedule III
Let us understand each of the entries of schedule III
Services by an employee to the employer in the course of or in relation to his employment.
Here services provided by employee to the employer during the course of employment are covered. GST law does not explain how to test whether any relationship is a relationship of employer-employee or not. However, this has been tested and decided in many other legal and judicial papers. Without going into complications of deciding how to establish employer-employee relation let us understand some basic elements for deciding who is an employee.
Employee of a business directly works for the enterprise (employer) and he is not an independent contractor. An employee is a person whose daily work is directed or controlled by the business, particularly when the method of executing duties is defined and an integral part of day-to-day operations. Employees generally work at a specific location or remotely during a specified time period. However, none of these elements can be called final test of deciding who is an employee, they are only indicative in nature.
Needless to say that GST has complicated taxation of transactions between employee and employer by drafting entry 2 of schedule I. As per entry 2 of schedule I, supply of goods or services or both between related persons (employer and employee are called related persons as per definition) when made in the course or furtherance of business is chargeable to GST even if made without consideration. There are lot of transactions between employee and employer which are made without consideration. Consideration for employee for his service to the employer is normally received in the form of salary. Salary is clearly in the course or in relation to employment and hence outside the purview of GST due to entry 1 of schedule III. However, there are many other monetary or non-monetary rewards received by employee from the employer for which there remains a scope of dispute regarding taxability. For example, employee receives some bonus or commission or some gift from employer. As far as gift is concerned, proviso to entry 2 of schedule I prescribes that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to employee shall not be treated as supply. There arises a question whether bonus or commission or other perquisites or gifts are received in the course of or in relation to employment or not? Let us assume that a dealer of car gives one car to each employee who has achieved a particular target. Here, question remains whether car dealer is required to pay GST on this gift to employees or not.
There can be an aggressive view that anything received by employee from employer can only be in the course of or in relation to employment and cannot be taxed under entry 2 of schedule I because they are covered under entry 1 of schedule III. However, it is very risky to follow this view till it is put to judicial scrutiny by court of law. Conservatively, it is appropriate to clearly draft terms of employment wherein it compensation payable to employees should be clearly spelled out. So that all these compensation payable to employee get covered under entry 1 of schedule III and consequently do not attract GST.
Entry no 2, 3 and 4 are self-explanatory.
Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.
Sale of land cannot be taxed under GST. A building which is sold after receipt of completion certificate is also outside the purview of GST. This has been discussed in detail in a chapter related to Real Estate sector.
Actionable claims, other than lottery, betting and gambling.
Actionable claims are considered as goods. However all actionable claims except lottery, betting and gambling are kept outside GST by entry 6 of schedule III.
As per section 2(1) of CGST Act, “actionable claims” shall have the same meaning as assigned to it in section 3 of Transfer of Properties Act, 1882.
As per section 3 of Transfer of Properties Act, 1882, “Actionable claim” means a claim to any debt, other than-
a debt secured by mortgage of immoveable property or
by hypothecation or pledge of moveable property, or
to any beneficial interest in moveable property not in the possession,
either actual or constructive, of the claimant,
which the Civil Courts recognise as affording grounds for relief,
whether such debt or beneficial interest be existent, accruing, conditional or contingent.
Hence, actionable claim is a claim or debt for which a person can take action. i.e he can reach to court for recovery. Actionable claims for a layman represents an unsecured debt. For example, Mr. A needs to recover Rs. 15000 from Mr. B against sale of some goods. For Mr. A it is actionable claim.
7.
Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India. (Inserted by GST Amendment Act, 2018)
8.
A. supply of warehoused goods to any person before clearance for home consumption.
B. Supply of goods by the consignee to any other person by endorsement of documents of title to the goods, after the goods have need dispatched from the port of origin located outside India but before clearance for home consumption. (Inserted by GST Amendment Act, 2018)
Warehoused goods shall have the same meaning as assigned to it in the Customs Act.
These two entries are inserted by GST Amendment Act, 2018. In case of import of goods, tax is levied under custom law only. However, as per proviso to section 5 (1), the integrated tax on goods imported into India shall be levied and collected as per provisions of section 3 of the Customs Tariff Act, 1975 on the value as determined under the custom act at the point when duties of customs are levied on the said goods under section 12 of the Customs Act, 1962. Hence we can say that the charge of IGST in case of importation of goods is linked with Customs Act. Let us understand the provisions of Customs Act for charging import duty.
Under Customs, whenever goods are imported there are two types of bill of entries which are filed. One is bill of entry for warehousing. In this bill of entry goods are not cleared for home consumption but are kept in a warehouse. Such goods are called warehoused goods. Second is a bill of entry for home consumption. In this type of bill of entry, goods are cleared for home consumption after paying import duty at the rate applicable on the date of filing this bill of entry. In case the goods are warehoused, import duty is not required to be paid but a double duty bond (i.e. a bond equal to double amount of import duty payable) shall be furnished. Import duty shall be paid only when the warehouse goods are cleared for home consumption by filing bill of entry for home consumption. It is possible that such warehoused goods are sold by the owner before filing bill of entry for home consumption. In this situation, when the purchaser furnishes fresh double duty bond, the seller’s bond shall be released. Here the purchaser shall pay import duty when he files bill of entry for home consumption for clearing the warehoused goods. In short, whenever, warehoused goods are sold there is no liability to pay import duty. Import duty shall be paid only when the bill of entry for home consumption is filed by the last buyer of warehoused goods. As per Customs Act, importation is completed only when bill of entry for home consumption is filed.
Hence we can say, as per Customs Act, importation is completed only when bill of entry for home consumption is filed. Hence, applying the same concept in GST, all the sales (for example high sea sales) before the goods are cleared from home consumption are kept outside GST through entry 7 and 8 of schedule III.
Queries and opinion of author
Is lottery chargeable to GST?
Author’s opinion
Chargeability of indirect tax on lottery has always been a matter of debate. In case of Sunrise associates vs Govt of NCT of delhi and others supreme court held that lottery is an actionable claim. As per the definition of Goods under GST, actionable claims are considered as Goods. As per schedule III, clause VI actionable claims other than lottery, betting and gambling are nether supply of goods nor supply of services. Hence we can say that sale of lottery tickets are taxed under GST as sale of goods. Presently the applicable GST rate on sale of lottery tickets is 28 %.
My total turnover in a financial year is Rs. 535000/-. I have taken GST registration for opening a bank account. I have been informed that I do not need to pay GST as my turnover is below Rs. 20,00,000/-. Is this a correct interpretation?
Author’s opinion
It is important to note that taxability under GST is linked with registration. As per section 9 of CGST Act and section 5 of IGST Act (charging sections), GST is require to be paid by a taxable person.
As per section 2 (107) of the CGST Act, “taxable person” means a person who is registered or liable to be registered under section 22 or section 24.
It is important to understand here that taxability is linked with registration. This means if a person is registered he is always considered as a taxable person. Once you are registered or liable for registration GST can be levied. In short, once registration is taken a person is always a taxable person irrespective of the amount of his Aggregate Turnover.
I am a dealer of furniture and registered under GST. I have sold one sofa set to one of the dealer of chairs. He did not make payment in cash but gave some chairs instead. Out of we two, who is require to pay GST on this barter transaction?
Author’s opinion
Except for activities or transactions listed in schedule I, supply requires consideration. Consideration has been defined under section 2(31) of the CGST which is as under-
“consideration” in relation to the supply of goods or services or both includes––
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:
Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;
For a layman, consideration means –“Something in Return”. Consideration has a very wide interpretation. Consideration can be monetary or it can be non-monetary also. Monetary consideration can be paid by cash, cheque, demand draft etc. Non-monetary consideration is paid in the form of goods or services. To find out value of such consideration we need to apply section 15 of the CGST Act.
In case of non-monetary consideration, there arises a question of what is supply and what is consideration for supply. For example, Mr A sells furniture to Mr. B who in return gives television to Mr.A. Here, is there a supply of furniture or supply of television? Readers need to understand that here there is no single supply. Mr A has supplied furniture whereas Mr B has supplied television. In another sense, this is a barter transaction. For Mr A, supply is of furniture and consideration is television. Whereas for Mr B, supply is of television and consideration is furniture. Valuation shall be done under section 15 and rules made thereunder
A company engaged in a business of real estate gave cars to its employees as bonus. Employees are not required to pay anything on receipt of the car. Company has been asked to pay GST on this cars given to employees stating that as employer and employee are related person it needs to pay GST as per schedule I.
Author’s opinion
For activities or transactions listed under schedule I, the requirement of presence of consideration is dispensed with. Hence if a transaction or activity is listed under schedule I then it shall be called supply even if it is made without consideration.
As per entry 2 of schedule I, Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:
Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.
Employees and employer are considered as related persons. Proviso to this clause states that gifts not exceeding fifty thousand rupees in value in a financial year by employer to employee shall not be treated as supply. It is important to read clause I of Schedule III which says that services by employee to the employer in the course of or in relation to his employment is neither supply of goods nor supply of service.
From the above paragraph an important question arises as to Gift from Employer to employee is a consideration for supply of service by employee to employer or it is a separate supply by employer to employee? If we treat gift received by employee as a consideration for his supply of services made to his employer it will fall under clause I of schedule III and hence not liable to tax. However if we treat Gift from employer to employee as a separate supply then Gift exceeding Rs. 50000 in a financial year will become taxable supply as employer and employee are related persons. Further the term “Gift” has not been defined in the Act. Now a days employees receive many non-monetary benefits from employer, hence answering this question becomes extremely important especially in the absence of definition of the word “Gift”. Because if any reward received by employee from employer is treated as “ Gift” then employer is required to pay GST on such rewards given to employee. Hence it is advisable to mention all considerations to be received by employee from employer in the terms of employment, otherwise it may be treated as “Gift” and may attract GST.
What is the tax effect of any item of machinery or inventory is removed from business without charging any consideration? Further there are also schemes like “Buy one get one Free”. What will be the GST implication for such schemes?
Author’s opinion
As per clause I of schedule I, Permanent transfer or disposal of business assets where input tax credit has been availed on such assets shall be considered as supply even if made without consideration.
Here the key term is “Business Asset”. However, the term business asset has not been defined under GST Act. Hence, we need to understand this term in normal parlance. Business Asset can mean any asset which is used in business. It can be tangible asset like inventory or machinery. Or it can be intangible also like software or licence fees. Hence the term business asset has a wide meaning. Hence even if a business asset is permanently transferred or disposed of without charging any consideration then it shall be covered within the definition of “Supply” provided that Input tax credit has been taken on the business asset.
It is important to note here that this entry shall be triggered only on those business assets on which ITC has been taken. For example, Mr. A purchased a car for Rs. 9,00,000 and as Input Tax Credit on motor vehicle is not available under section 17(5) he did not avail the credit. Later on, he disposed off this car without charging any consideration. In this situation disposal of car will not be covered under Schedule-1 as ITC was not availed on the given business asset.
Mr. B purchased goods on which he availed ITC. After few days he gave these goods to Mr. C as free samples. In this situation even if goods are given as free samples GST is required to be paid.
This entry extends our discussion to larger area of section 17 (5) (blocked credit), section 18 (6) (removal of capital goods), section 15 (valuation) and related circular no 92/2019. When a business asset is transferred without consideration. Let us take an example of free samples. As per section 17 (5) (h) of CGST Act, ITC on goods lost, stolen, destroyed, written off or disposed of by way of gift or fee sample is blocked. (This has been discussed in detail in the chapter on Input Tax Credit). Hence if a sample is given free then the supplier has two options. Either he reverses the ITC taken on such sample under section 17 (5) (h) or he needs to pay GST on supply of the free sample under entry I of schedule I. It is important to note that once ITC is reversed then entry I of schedule I shall not be attracted. Reversal of ITC shall mean non availment of ITC for entry I of schedule I.
Circular 92/2019 has also clarified another similar issue in case of certain sales promotion schemes. There are schemes like Buy One Get One Free where supplier provides additional item free on purchase of certain products. For example, toothbrush is supplied free with toothpaste. In such schemes actually, nothing is provided free of charge. Price of the item supplied free is already included in the price of main item. Hence, in this situation neither section 17 (5) (h) shall be attracted nor entry I of schedule I shall be attracted.
There also is a concern about the value on which GST needs to be paid when business asset is permanently transferred or disposed of. If the business asset is other than capital goods then we need to make valuation as per Rule 27 under section 15 (4). As per this Rule, value of the asset transferred shall be the open market value of the goods or services or both and if open market value is not available, value of supply of goods or services or both of like kind and quality.
As per explanation to the said rule,
“open market value” of a supply of goods or services or both means the full value in money, excluding the integrated tax, central tax, State tax, Union territory tax and the cess payable by a person in a transaction, where the supplier and the recipient of the supply are not related and the price is the sole consideration, to obtain such supply at the same time when the supply being valued is made;
“supply of goods or services or both of like kind and quality” means any other supply of goods or services or both made under similar circumstances that, in respect of the characteristics, quality, quantity, functional components, materials, and the reputation of the goods or services or both first mentioned, is the same as, or closely or substantially resembles, that supply of goods or services or both.
Let us say, Item A is supplied free of cost by Mr. X as free sample to Mr. Y. Here, value of item A shall be the price charged by Mr. X from other customers at the same or near time when it is supplied to Mr. Y. If Mr. X has not sold item A to anyone and hence valuation is not possible as per this method then value of item similar to item A (let us say item B) shall be taken as value of item A for charging GST. Further the rule says if this method is also not possible then Rule 30 or Rule 31 shall be followed in that order. (This is discussed in detail in chapter of valuation).
In case of transfer of capital goods, there is a little debatable issue that I have considered appropriate to discuss here. As per section 18 (6), In case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed ( five percentage points for every quarter or part thereof from the date of issue of the invoice for such goods- Rule 40-2 ) or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher:
Provided that where refractory bricks, moulds and dies, jigs and fixtures are supplied as scrap, the taxable person may pay tax on the transaction value of such goods determined under section 15.
Question arises here as to when capital goods are supplied without consideration tax shall be paid by following section 18 (6) or the valuation shall be done as per valuation rules 27. Readers can observe from wordings of section 18 (6) that transaction value needs to be considered under section 15. Transaction value means price charged from the recipient of supply. In case the capital goods are removed without charging consideration then there is no question of any transaction value being present. Transaction value cannot be equated with assessable value as per valuation rules. Hence, as per author’s view, section 18 (6) comes in to play only when there is presence of transaction value. In case the capital goods are removed without consideration then valuation must be done as per valuation rules and applicability of section 18 (6) cannot be permitted.