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1. INTRODUCTION:

Taxable event under any law is the foremost thing to understand. It provides the basis of charge and enables to determine whether a particular activity prone to tax or not. The taxable event under the existing regime is event based. Under the GST regime it would be supply.

The first version of Draft GST model law was released in June 14, 2016. On Nov. 26, 2016 the CBEC has released the revised version of Draft GST model law after considering the suggestions of the stakeholders. It has also released the draft law for Compensating the States. This writing provides the detailed analysis and its impact considering the changes in the definition of supply.

2. COMPARISON OF TERM SUPPLY

Before analysing the specific changes, it is really important to compare the definition with the earlier Draft GST model law.

Earlier

New

1. Supply includes

a. All forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,

b. importation of service whether or not for a consideration and whether or not in the course or furtherance of business, and

c. a supply specified in schedule I, made or agreed to be made without consideration

2. Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or to be treated as a supply of goods or a supply of services.

2A Where a person acting as an agent who, for an agreed commission or brokerage, either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply.

3. Subject to sub-section (2), the central or a State Govt. may upon recommendation of the council, specify, by notification, the transactions that are to be treated as -

I. A supply of goods and not as a supply of services; or

II. A supply of services and not as a supply of goods; or

III. Neither a supply of goods nor a supply of services

4. Notwithstanding anything contained in sub-section (1), the supply of any branded service by an aggregator, as defined in section 43B, under as brand name or trade name owned by him shall be deemed to be a supply of the said service by the said aggregator.

1. Supply includes

a. All forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,

b. importation of service for a consideration whether or not in the course or furtherance of business,

c. a supply specified in schedule I, made or agreed to be made without consideration.

2. Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or to be treated as a supply of goods or a supply of services.

3. Notwithstanding anything contained in sub-section (1),

a) Activities or transactions specified in schedule III; or

b) Activities or transactions undertaken by Central Government, a State Government or any local authority in which they are engaged as public authorities as specified in schedule IV,

Shall be treated neither as a supply of goods nor a supply of services.

4. Subject to sub-section (2) and sub-section (3), the Central or State Government may, upon recommendation 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; or

c) Neither a supply of goods nor a supply of services.

5. The tax liability of on a composite or a mixed supply shall be determined in the following manner-

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;

b) a mixed supply comprising two or more supplies shall be treated as supply of that particular supply which attracts the highest rate of tax.


3. CHANGES IN THE TERM SUPPLY: A BRIEF

The following are the changes made in the definition of supply:

a. Importation of service must be for consideration except if services are procured from the related person or from one of his own establishment

b. Transaction between principal and agent shifted to Schedule I from the definition of Supply: Apart from commission/brokerage received from the principal, transfer of goods between principal and agent would also liable to GST

c. Schedule I has been revamped

d. Insertion of new Schedule III (Activities which neither treated as supply of goods or nor treated as supply of services)

e. Specified activities, mentioned in Schedule IV, provided by Cent. Govt., State Govt. and local authorities has been shifted to the definition of supply from the section of taxable person.

f. Concept of mixed supply or composite supply has been inserted

g. Concept of aggregator has been omitted

To understand the impact of the change let us make the comparative analysis of each clause in detail.

4. IMPORTATION OF SERVICE MUST BE FOR CONSIDERATION:

GST is the destination based taxation. Therefore, Importation of services would be liable to GST. The Importation of goods would be dealt under the Custom Act, in line with the existing practice. The meaning and scope of the term supply has been defined under section 3 of the Draft Model Law. The draft law treats importation of service as supply. It can be argued that, how can importation of service, which is input service in nature, becomes our supply. For this we need to keep in mind that scope of supply has been drafted in inclusive manner and importation of service is treated as supply, though, it is input in nature.

4.1 COMPARATIVE ANALYSIS

The comparison between the clauses is as under:

Earlier

New

"Importation of service, whether or not for a consideration and whether or not in course or furtherance of business".

"Importation of services, for a consideration whether or not in the course or furtherance of business."


The earlier draft law provides that importation of service would be liable to GST irrespective of the fact whether it was for personal purpose or not. Further, no matter whether it was for consideration or not. Therefore if an individual receive a service from his/her friend, staying abroad, for which no consideration has been paid, the tax would require to be paid. It could be a gauche situation where there was no element of consideration but tax could be levied.

The revised draft law mandates that for importation of service there must be an element of consideration to constitute the supply. Further Schedule I dealing with the "Matter to be treated as supply even if made without consideration" provides that "importation of service by a taxable person from a related person or from any of his other establishment outside India, in the course or furtherance of business" would be treated as supply. Therefore now importation of service without consideration would be tax only if service imported from related person or assessee's own branch/HO.

Let us understand taxability through different scenarios:

S.No.

Import Purpose

Consideration

Taxable

Reasoning

1.

Business/official

Yes

Taxable

Importation of service for consideration

2.

Business (neither from related person nor from any of his establishment)

No

Not taxable

Importation without consideration. Further not falling under Schedule I

3.

Business (from related person or from any of his establishment)

No

Taxable

Importation without consideration. But falling under Schedule I

4.

Personal

Yes

Taxable

Importation for consideration whether or not in the course or furtherance of business

5.

Personal

No

Not Taxable

Importation without consideration. Further not falling under Schedule I


4.2 IMPACT COMMENT:

The change in the draft law is a laudable change. The condition relating to consideration provides immense relief to the industry. The following are two key take away from this change:

a) That importation for personal purpose without consideration would not be taxed.

b) That importation for business purpose without consideration would be taxed only if imported from related person or from any of his other establishment.

5. TRANSACTION BETWEEN PRINCIPAL AND AGENT

There are two transactions between the principal and agent.

a) Firstly, the movement of goods between the principal and the agent; and
b) Secondly, the agency agreement transaction for which an agreed commission or brokerage is charged by the agent from the principal.

5.1 COMPARATIVE ANALYSIS

The comparison between the clauses is as under:

Earlier

New

It was defined under the definition of Supply.

It is included in Schedule I "Matters to be treated as supply without consideration".

3 (2A) Where a person acting as an agent who, for an agreed commission or brokerage, either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply.

S.No 3 of Schedule I

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 supply goods on behalf of the principal.


Earlier there was confusion that only commission/brokerage portion would be tax between principal and agent and the transfer of goods between principal and agent would not be taxable. There were differences in opinion, which I believe is now cleared.

The first transaction, no doubt, is in the nature of supply of service by agent to principal. The second transaction would also be liable to GST, each time the goods send by principal to his agent or vice versa, irrespective whether there was consideration or not.

5.2 IMPACT ANALYSIS

There is no as such impact, but I believe that there is no room for confusion now. The following would be the result of shifting these to schedule I:

a. Transaction of commission/brokerage would be liable to GST;
b. Transaction of transfer of goods, from principal to agent or vise versa, would also be liable to GST.

6. SCHELDULE I: HAS BEEN REVAMPED:

To constitute the supply the element of consideration is essential. If the transaction is entered with no consideration it would be called as supply, only if it is covered under schedule I of the Draft model Law.

The entire schedule I has been revamped and the changes are made after considering the suggestions of the stakeholders.

6.1 COMPARTIVE ANALYSIS:

The comparison among the clauses is as under:

Earlier

New

Matter to be treated as supply without consideration

Matters to be treated as supply even if made without consideration

1) Permanent transfer or disposal of business assets.

2) Temporary application of business assets to a private or non-business use.

3) Services put to a private or non-business use.

4) Asset retained after deregistration.

5) Supply of goods and/or services by a taxable person to another taxable person or non-taxable person in the course or furtherance of business.

Provided that the supply of goods by a registered taxable person to a job-worker in terms of section 43A shall not be treated as supply of goods.

1) Permanent transfer/disposal of business assets where input tax credit has been availed on such assets.

2) Supply of goods or services between related persons, or between distinct persons as specified in section 10, when made in the course or furtherance of business

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 supply such goods on behalf of the principal.

4) Importation 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.


Let us discuss the changes point by point and try to analyze why the change has been made.

6.2 CHANGES IN THE HEADING

The heading of the schedule I has been changed. Earlier it says "Matters to be treated as supply without consideration and now it worded as matters to be treated as supply even if made without consideration. The comparison removes the ambiguity and treats that specified transactions as supply and not supply without consideration.

6.2.1 HOW IT WOULD MAKE DIFFRENCE?

It would make interpretational difference. Therefore to remove any ambiguity heading has been redrafted.

6.3 PERMANENT TRANSFER OR DISPOSAL OF BUSINESS ASSETS

Earlier

New

Permanent transfer or disposal of business assets.

Permanent transfer/disposal of business assets where input tax credit has been availed on such assets.


The new draft has put a specific condition that credit must have been availed. It now clear that no GST would require to be paid unless assessee has availed the credit.

6.3.1 DO I NEED TO PAY ANY GST IF NO CREDIT HAD BEEN AVALIED?

No GST, if no credit has been availed by the assessee.

6.3.2 DO I NEED TO MAKE ANY REVERSAL, IN CASE OF PERMANENT TRANSFER, OF INPUT CREDIT (SIMILAR TO RULE 3 (5) OF CENVAT CREDIT RULES 2004) OR TO PAY TAX ON THE VALUE DETERMINED IN ACCORDNACE WITH VALUATION RULES?

Under the New draft law credit would require to be reversed (Section 18(10) of New GST model Law). The reversal cannot be less than the value determined as per valuation rules. There is bit room for confusion. If valuation rules provide specific treatment for the taxability of this transaction, then it may lead to double taxation. We need to wait for the valuation rules, to get more clarity.

Note: Valuation rules earlier were the part of draft law. However, in the new law it has not been provided.

Note: To avoid tiresome lengthy reading the writing has been drafted in two phases. In this writing we considered points sequentially and same procedure will be followed in next phase. The author can also be reached at akhilsunil1@gmail.com.


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Category GST, Other Articles by - Sunil Kumar 



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