GST seems to be reality now. Many well run, anxious business entities are looking for the impact study to analyze how GST would impact their business in terms of pricing policies, procurement, sales, procedural compliances, cash flow and its internal control system and software.
In order to understand the impact of GST, it is important to understand the common factors between current indirect tax system and the proposed GST Law. With an intention to spread light on how GST differs from current law, we plan to write a series of articles on various topics addressing the similarities and issues between existing and proposed tax regime.
Business is the birth point for all taxes. Hence in our first article we discuss on the term business and its impact under both tax regime.
The term ‘Business’
In common man’s view, business is a person's regular occupation, profession, or trade. In other words, any commercial activity could be called as business. Hence activities that are occasional and personal in nature cannot be treated as business.
The term ‘business’ has not been defined either in Central Excise or in Service Tax law, the word business had no much relevance for levying excise duty or service tax as the taxable event being ‘manufacture of excisable goods’ and ‘provision of taxable service’ respectively.
However local VAT laws have defined the meaning of the term business in certain state VAT acts. For example, Sec 2 (4) of the Maharashtra Value Added Tax Act defines Business to include:
a) any service;
b) any trade, commerce or manufacture;
c) any adventure or concern in the nature of service, trade, commerce or manufacture;
Whether or not the engagement in such service, trade, commerce, manufacture, adventure or concern is with a motive to make gain or profit and whether or not any gain or profit accrues from such service, trade, commerce, manufacture, adventure or concern.
The definition of Business is similarly worded in CST Act as well.
Further, Maharashtra government went on to declare specified activities as deemed business. Activities of raising of man-made forest, rearing of seedlings or plants, sale or purchase of capital assets, transactions in connection with the commencement or closure of business, etc. are deemed as business for the purpose of Maharashtra VAT.
Following points emerge from the definition of business:
i. Profit motive is immaterial
ii. Business normally implies something done on regular basis. However since business includes adventure, occasional transactions may also be covered.
iii. Incidental or ancillary activities are also covered. For ex: sale of used cars, sale of scraps, sale of old machinery, sale of old furniture etc. is taxable though normally dealer may not be in the business of selling cars, furniture or machinery.
The scope of business is very wide as we could see in the above definitions. The clarity on the term business is very essential as it influences new registrations, surrenders and take overs. For example, in MVAT, No dealer shall, while being liable to pay tax under the Act, be engaged in the business as a dealer, unless he possesses a valid certificate of registration.
The term business has crucial role to play in GST. Meaning of Business is relevant with respect to the following:
• Understanding the term Supply
• Determination of place of business
• Liability in case of transfer of business
• Defining an agent
• Defining inputs, input services and capital goods – input tax
• Location of supplier and receiver of service
• Job work provisions
• Registration, returns and payments
• Documentation, accounts and records
• Conduct of an Audit by tax authorities
• Inspection search and seizure
• Determining Place of supply, Time of supply and valuation
In short, GST cannot be understood without understanding the term business.
Section 2(17) of the proposed GST Act defines business to include:
a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for pecuniary benefit.
b) any transaction in connection with or incidental or ancillary to the above,
c) and whether or not there is volume, frequency, continuity or regularity of such transaction,
d) supply or acquisition of goods including capital assets and services in connection with commencement or closure of business,
e) provision by a club, association, society, or any such body of the facilities or benefits to its members for a consideration,
f) admission, for a consideration, of persons to any premises and
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.
As we could see from the above definition provided in GST law, the term business is widened further from the existing definitions provided in CST and Local VAT Laws. What else can be there! Education, charity, agriculture? The wider the term business, wider is the tax liability.
Important decisions under State VAT and CST law:
• Tamil Nadu Vs Board of Trustees 1999 AIR SCW 1262: Carrying of business requires something more than merely selling of buying etc. It depends on volume, frequency, continuity and regularity of transactions. Under GST this would not be applicable.
• CST Vs Sai Publication Funds 2002 AIR SCW 1482: If main activity is not business, the sales made in connection with or incidental to main activity would not be business. Sale of publications by Sai Baba trust is not business.
• Tirumala Tirupati Devasthanam Vs State of Madras (1972) 29 STC 266 (HC): Devasthanam is not indulging commercial activity. Under GST commercial activity is not required at all.
• IIT Vs State of UP (1976) 38 STC 428 (HC): IIT is not a dealer as its principal activity is academic and not commercial. Under GST any activity of supply (deemed supply included) unless expressly excluded would be covered.
• DCCT Vs South India textile Research Assn (1978) 41 STC 197 (HC): When an organization is formed solely and exclusively for carrying on research and sale of resulting products and waste is not business. No difference between commodity and service.
• Kwality Biscuits Vs State of Karnataka (2012) 53 VST 66 (HC): Sale of trademarks and brand name is not in the course of business. Under GST would be a service.
• Scholars Home Senior Secondary School Vs State of Uttarakhand (2011) 42 VST 530 (HC): School providing food in hostel to students is not business. Under GST would be a service unless exempted.
• Coromandal Fertilizers Vs State of AP (1999) 112 STC 1 (HC): Sale of business is not business. However this decision may not be relevant in GST regime as the definition of business set out specifically to cover closure of business.
Whether an activity is a business or not decides the entire tax structure of a person. This is true even in GST regime also. Though the definition provided in GST is very wide enough to cover each and every day to day transaction, the levy would still be on supply. Hence understanding of terms Supply and Business goes hand in hand. We would discuss the issues in supply relevant to current tax regime in our next article.
By: CA Nagendra Hegde & CA Vasant K. Bhat