Section 7 of CGST Act, 2017: SCOPE OF SUPPLY
The law has provided an inclusive meaning to the word 'supply' which implies that the specific transactions which are listed in the said Section are only illustrative.
(1) For the purposes of this Act, the expression 'supply' includes
All forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.
SALE: Sales is lawful, permanent and absolute transfer of ownership of property in goods for money consideration under valid contract such that no rights are left behind with the transferor.
Here Title of goods are moving.
TRANSFER: Transfer means to pass over, convey, relinquishment of right, abandonment of a claim lawfully. Hence in simple term transfer means Lawful convey of property from one person to another person.
Here right in goods are moving not Title.
BARTER: Barter means 'Things or Commodity' given in return of another. In other words no value is fixed. In simple term barter means consideration is in the form of goods or service or both (not in money) for sale or transfer. Therefore, barter will cover two supplies and not one. Each of these supply would need to be examined for its respective taxability.
Here exchange of movable property.
EXCHANGE: Exchange is similar to the barter where consideration is not in form of money but in form of Immovable property. Similar to barter exchange also involve two supplies.
Here exchange of Immovable property.
It can be noted that law has been excluded the Immovable property from the definition of the supply but exchange of Immovable property for sale or transfer considered as supply.
LEASE: Lease means transfer of possession along with right to use immovable property for consideration in the form of non-recurring premium only or along with recurring rent. Main essence of lease is delivery of possession with user right, hence lease is also used in the context of movable property.
Here supplier of lease does not have possession hence not enjoyed the right to use but retain right to repossess property subject to normal wear and tear after term of lease.
Lease can be used in case of movable property.
RENTAL: Rental is lease in respect of movable property. Since recurring payment in lease (of Immovable property) is called rental, transfer of possession with user rights for recurring payment of consideration is interchangeably applied for movable and immovable property.
Rental can be used in case of Immovable property.
LICENSE: License is similar to lease but difference is that possession of movable or Immovable property does not transfer but permission to enter and use the property is allowed. Supplier of license retains possession of the property during the term of license without right to use. (E.g. Software license or Use Copyright or Franchisee)
Here possession is not transfer but only allow to enter or use the property.
DISPOSAL: Disposal means distribution, transferring to new hands, extinguishment of control over, forfeit or pass over control to another but in respect of goods that are'unfit for sale'.
Here no requirement of another person in case of disposal i.e. Discard or Destroyed.
Supply should be in the course or furtherance of business: For a transaction to qualify as 'supply', it is essential that the same is 'in the course' or 'furtherance of business'. This implies that it is only such of those supplies of goods and / or services by a business entity would be liable to tax, so long as it is 'in the course' or 'furtherance of business'. Supplies that are not in the course of business or in furtherance of business will not qualify as 'supply' for the purpose of levy of tax, except in case of import of service for consideration, where the service is treated as a supply even if it is not made in the course or furtherance of business
Consideration: As per 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
(aa) Activities or transactions involving supply of goods or Service by any person, Other than an individual, to its member or constituent or vice-versa, for cash, deferred payment, or other valuable consideration. (Inserted wide Finance Bill 2021.)
Import of services for a consideration whether or not in the course or furtherance of business AND
The word 'supply' includes import of a service, made for a consideration (as defined in Section 2(31)) and whether or not in the course or furtherance of business. This implies that import of services even for personal consumption would qualify as 'supply' and therefore, would be liable to tax. This would not be subject to the threshold limit for registration, as tax would be payable in case of import of services on reverse charge basis, requiring the importer of service to compulsorily obtain registration in terms of Section 24(iii) of the Act. Although import for personal purposes is included in the definition of supply, entry 10(a) to Notification No. 9/2017-Int (Rate), dated 28.6.2017 exempts import of services under entire Chapter 99 from payment of GST. However, the GST law has ensured that persons who are not engaged in any business activities will not be required to obtain registration and pay tax under reverse charge mechanism, and in turn, requires the supplier of services located outside India, to obtain registration for the OIDAR (online information and database access and retrieval) services only.
(c) The activities specified in Schedule I, made or agreed to be made without a consideration.
(1A) where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either 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), (1A) 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.
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
Analysis:- Out of 8 terms of Supply only'Transfer' &'Disposal' are qualify as a supply under this category and others are excluded as a reason the terms'Sales','Barter','Exchange' involves element of consideration and the terms'Lease','Rental','Licence' does not involve business assets.
Ordinarily, there can be no permanent transfer in case of goods sent for job work. The aspect of sending goods on job work is not a supply, has been clarified vide Circular No.38/12/2018 dated 26.03.2018. However, where a
Registered person has purchased any moulds, tools, etc. and has sent the same to the job worker, there is a good chance that the goods are never returned, given that the time limits specified in Section 143 for good sent for job work does not apply to moulds, tools and other specified goods.
In the above context, business asset need not always be goods, it can as well be service that could be permanently transferred which could attract the above provisions Eg: - unexpired right in a business franchise permanently transferred to another person.
While the word 'transfer' in this entry suggests that there should be another person who would receive the business assets, there is no requirement of another person in the case of 'disposal'. Therefore, if a business asset on which credit is claimed has been discarded, the transaction shall be regarded as a supply.
Business assets procured for the purpose of serving the requirements of 'Corporate Social Responsibility', being a statutorily imposed obligation' may be contended to be a procurement made in the course or furtherance of business, and an attempt can be made to avail input tax credit. The issue would however remain contentious and there are no precedents. However, there would be no escape from the levy of tax on the transaction, if the asset is permanently transferred. The treatment would be no different even in the case of a donation.
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
Analysis: The supplies covered under this paragraph are deemed supplies covered which is based on a relationship between the supplier and recipient.
Now understand meaning of 'Related Person' &'Distinct Person'
As per Section 15 of CGST Act, 2017 Persons shall be deemed to be 'related persons' if,
(i) Such persons are officers or directors of one another's businesses.
(ii) Such persons are legally recognized partners in business.
(iii) Such persons are employer and employee.
(iv) 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.
(v) One of them directly or indirectly controls the other.
(vi) Both of them are directly or indirectly controlled by a third person.
(vii) Together they directly or indirectly control a third person.
(viii) They are members of the same family.
As per Section 25(4) and 25(5) of CGST Act, 2017 'Distinct Person' means
A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.
Where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment, has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act.
Transactions with distinct persons are normally without consideration since they are part of the same entity located in different geographies, unless the accounting system is so sophisticated or so devised, that it treats the locations
In each State as a separate / independent entity even for book-keeping purposes and effects payments in monetary terms. Let us take instances of transactions between distinct persons that are not traceable in the books of account, but requires attention from the perspective of this paragraph in the Schedule.
- Stock transfers e.g., transfer of sub-assemblies, semi-finished goods or finished goods.
- Transfer of new or used capital goods/fixed assets – including movement of laptops when employees are transferred from one location to another.
- Bill-to ship-to transactions wherein the vendor issues the invoice to the corporate office and ships the goods to the branch office.
- Centralized management function like Board of Directors, Finance, Accounts, HR, Legal, procurement functions and other corporate functions at one location say corporate office and the entity having multiple registrations in various States results in supply of management services by the Corporate Office to distinct persons.
- A transaction of sale of goods from one registration and providing after sales support or warranty services/replacement services by another registration of the same entity.
- Contract awarded by a customer to an entity at the corporate office from where the centralized billing to the customer is made but the execution of the contract is carried out through various registrations of the same entity located in other / multiple States.
- Permitting employees to make use of the office assets for personal use-say usage of motor vehicles, laptops, printers, scanners, etc.
It appears that this paragraph, has an overriding effect on the first paragraph of the Schedule relating to transfer or disposal. In other words, in case a business asset is permanently transferred to a distinct person, the transaction although out of scope of paragraph 1, would be treated as a supply in terms of this paragraph. The provisions would equally apply even in the case of assets procured in the pre-GST regime.
As per the definition of'Related Person' an employer and employee will be deemed to be'related persons'. Accordingly, supplies by employer to employees would be liable to tax, if made in the course or furtherance of business, even though these supplies are made without consideration, except:-
- Gifts by an employer to an employee of value up to Rs 50,000.
- Cash gifts of any value, given that the 'transaction in money' is not a subject matter of supply as the same receives treatment as a taxable salary in the hands of the employee.
- Services by employee to the employer in the course of or in relation to his employment-treated as neither a supply of goods nor a supply of services.
- Another question which arises that is on what value will the GST liability be calculated in case the gift amount exceeds Rs.50,000/-. Although it is not expressly mentioned in the GST Act. But a reasonable construction can be drawn that GST shall be levied on the whole amount in case the gift amount exceeds Rs. 50,000/-.
- The credit restriction on membership of a club, health and fitness center [under Section 17(5)(b)(ii)] would not apply where the employer provides the facilities to its employees, whether or not for a consideration, given that such a supply without consideration, would also be deemed to be an outward supply under this paragraph of the Schedule.
- Where gifts are liable to tax under this Schedule, it would be fair and proper to treat such gifts as taxable outward supplies, and therefore, credit thereon may not be required to be restricted under Section 17(5) (h).
- It may also be noted that a gift need not always be in terms of goods. A service can also constitute a gift, such as gift vouchers for a beauty treatment.
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.
Analysis: First we will Understand Definition of 'Agent' & 'Principal'.
Section 2(5) of the 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.
Section 2(88) of the Act 'Principal' means a person on whose behalf an agent carries on the business of supply or receipt of goods or services or both.
There are Two Type of Agent One is 'Normal Agent' and another is 'Del-Credere Agent' (DCA).
The factor that differentiates a DCA from other agents is that the DCA guarantees the payment to the supplier. In such scenarios where the buyer fails to make payment to the principal by the due date, DCA makes the payment to the principal on behalf of the buyer (effectively providing an insurance against default by the buyer), and for this reason the commission paid to the DCA may be relatively higher than that paid to a normal agent. In order to guarantee timely payment to the supplier, the DCA can resort to various methods including extending short-term transaction-based loans to the buyer or paying the supplier himself and recovering the amount from the buyer with some interest at a later date. This loan is to be repaid by the buyer along with an interest to the DCA at a rate mutually agreed between DCA and buyer. Concerns have been expressed regarding the valuation of supplies from Principal to recipient where the payment for such supply is being discharged by the recipient through the loan provided by DCA or by the DCA himself.
Where an Agent receives goods directly from the Principal, or if the Principal's vendor directly dispatches goods to the location of the agent, the Principal shall be required to treat the movement as an outward supply of goods by virtue of this clause.
Two Circular issued by government to clarify the supply between principal & Agent.
- Circular No. 57/31/2018-GST Dt. 4th 2018.
- Circular No. 73/47/2018-GST Dt. 5th 2018.
Analysis of Circulars:
The key ingredient for determining relationship under GST would be whether the invoice for the further supply of goods on behalf of the principal is being issued by the agent or not. Where the invoice for further supply is being issued by the agent in his name then, any provision of goods from the principal to the agent would fall within the fold of the said entry. However, it may be noted that in cases where 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 I of the CGST Act. Similarly, where the goods being procured by the agent on behalf of the principal are invoiced in the name of the agent then further provision of the said goods by the agent to the principal would be covered by the said entry. In other words, the crucial point is whether or not the agent has the authority to pass or receive the title of the goods on behalf of the principal.
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.
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.
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.
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.
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.
Whether a DCA falls under the ambit of agent under Para 3 of Schedule I of the CGST Act?
- In case where the invoice for supply of goods is issued by the supplier to the customer, either himself or through DCA, the DCA does not fall under the ambit of agent.
- In case where the invoice for supply of goods is issued by the DCA in his own name, the DCA would fall under the ambit of agent.
Whether the temporary short-term transaction based loan extended by the DCA to the recipient (buyer), for which interest is charged by the DCA, is to be included in the value of goods being supplied by the supplier (principal) where DCA is not an agent under Para 3 of Schedule I of the CGST Act?
In such a scenario following activities are taking place:-
- Supply of goods from supplier (principal) to recipient.
- Supply of agency services from DCA to the supplier or the recipient or both
- Supply of extension of loan services by the DCA to the recipient.
It is clarified that in cases where the DCA is not an agent under Para 3 of Schedule I of the CGST Act, the temporary short-term transaction based loan being provided by DCA to the buyer is a supply of service by the DCA to the recipient on Principal to Principal basis and is an independent supply.
Therefore, the interest being charged by the DCA would not form part of the value of supply of goods supplied (to the buyer) by the supplier. It may be noted that vide notification No. 12/2017-Central Tax (Rate) dated 28th
June, 2017 (S. No. 27), services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services) has been exempted.
Where DCA is an agent under Para 3 of Schedule I of the CGST Act and makes payment to the principal on behalf of the buyer and charges interest to the buyer for delayed payment along with the value of goods being supplied, whether the interest will form a part of the value of supply of goods also or not?
In such a scenario following activities are taking place:-
- Supply of goods by the supplier (principal) to the DCA.
- Further supply of goods by the DCA to the recipient.
- Supply of agency services by the DCA to the supplier or the recipient or both.
- Extension of credit by the DCA to the recipient.
It is clarified that in cases where the DCA is an agent under Para 3 of Schedule I of the CGST Act, the temporary short-term transaction based credit being provided by DCA to the buyer no longer retains its character of an independent supply and is subsumed in the supply of the goods by the DCA to the recipient. It is emphasized that the activity of extension of credit by the DCA to the recipient would not be considered as a separate supply as it is in the context of the supply of goods made by the DCA to the recipient.
It is further clarified that the value of the interest charged for such credit would be required to be included in the value of supply of goods by DCA to the recipient as per clause (d) of sub-section (2) of section 15 of the CGST Act.
As per Notification No. 15/2018- Central Tax (Rate) dated 26.07.2018 services supplied by Direct Selling Agents (Other than Body Corporate, Partnership or LLP) to Bank or NBFC shall be covered under Reverse Charge.
4. 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
For instance, say A Ltd is a holding company in USA and B Ltd a subsidiary in India. Many business operations are centralized in the USA such as accounting, ERP and other software, servers for the backup, legal function, etc. For the purpose of this clause, the back-end support provided by the holding company to the subsidiary company in India shall be regarded as a supply, whether or not there is a cross charge, even if the same is not recognised in the books, or any contracts, since it is categorized as an import of service by a person from a related person without consideration, in the course of business.