Understanding supply in GST with case studies
The taxable event in GST is Intra / Inter-state Supply of either goods / services. Let us first look at the definition of Supply as per Section 7 of Central Goods and Services Tax Act, 2017 (12 of 2017)
Supply includes -
(a) all forms of supply of goods or services or both 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) import of services, for a consideration 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 a consideration.
(d) 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.
"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" means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by another mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;
SCHEDULE I - MATTERS TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION
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 25, when made in the course or furtherance of business.
Exception: Gifts not exceeding Rs. 50,000 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.
Persons shall be deemed to be "related persons" if -
- such persons are officers or directors of one another's businesses;
- such persons are legally recognized partners in business;
- such persons are employer and employee;
- any person directly or indirectly owns, controls or holds 25% 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;
SCHEDULE II - MATTERS TO BE TREATED AS SUPPLY OF GOODS OR SERVICES
(a) Any transfer of the title in goods is a supply of goods.
(b) Any transfer of goods or 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 will 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, license 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 being 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 (TAGC) to another person; or
(ii) the business is carried on by a personal representative who is deemed to be a taxable person.
5. The following shall be treated as "supply of service"
(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 before its first occupation, whichever is earlier.
(c) temporary transfer or permitting the use or enjoyment of any intellectual property right;
(d) development, design, programming, customization, 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;
(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.
6. The following shall be treated as supply of goods
(a) 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 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
Question 1: Mr. Happy (an unregistered person) plans to pursue his higher education in UK. He receives career consultancy services from a UK based consultant for Rs. 1, 20,000. Does it qualify as a supply?
Answer: Yes. Importation of services for a consideration whether or not in the course or furtherance of business is covered under supply.Hence, in the above case it will be treated as supply. The UK based consultant would be required to register as Non Resident Taxable Person and shall discharge GST liability.
Question 2: Happy Ltd provides management services without charge to Joy Ltd. Happy Ltd has a 30% shareholding in Joy Ltd. Does it qualify as a supply?
Answer: Supply of goods or services between related persons is treated as supply even if it is without consideration (Schedule 1). However, as per the definition of related person, 2 persons shall be treated as related only if "one of them directly or indirectly controls the other". As the word control is not specified in the Act, we can say that in common parlance one entity needs to hold more than 51% in another to exercise control. Hence, it will not qualify as supply.
Question 3: A hand phone dealer sells a Blackberry for Rs. 20,800 inclusive of GST. He gives a Blackberry to his long-time customer for free. Is it Supply?
Answer: As per Schedule 1 Clause (1) - Permanent transfer/disposal of business assets where input tax credit has been availed on such assets is treated as supply even if it is without consideration. As per Section 17(5)(h),ITC shall not be available on "goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples". A combined reading of Clause (1) of Schedule 1 and Section 17(5)(h) means free supplies would not qualify as supply as ITC is not availed.
Question 4: Happy Ltd owns a van which is used to transport its workers to customers’ premises. During one weekend, the van was used by its CFO for his relatives for a family outing. Is it a supply?
Answer: Supply of goods or services by employer to employee when made in the course or furtherance of business shall be treated as Supply even if made without consideration. However, if the value of gifts is not exceeding Rs. 50,000 in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.
Question 5: Happy Ltd is a man power supply agency. They have supplied man power for cleaning a lake after the Ganesh immersion without charging any consideration. Is it a supply?
Answer: A supply without consideration does not fall within the purview of supply unless made to a related person or is covered in any of the clause of Schedule 1.
Question 6: Archean Constructions Ltd (A registered taxable person) receives architectural design supplied by a foreign architect to design a residential house to be built in Hyderabad for a consideration of Rs. 50,00,000
Answer: Importation of services for a consideration whether or not in the course or furtherance of business is covered under supply. In the above case it will be treated as supply.
Taxable services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory are covered under 100% reverse charge. Therefore, Archean Constructions Ltd shall discharge GST liability on reverse charge.
Question 7: The business assets of a taxable person are taken over by another taxable person due to death or retirement of the transferor
Answer: 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.
The above condition does not apply in case the assets of business are transferred as a going concern (TAGC).
Question 8: Transfer/Exchange of shares of a company on account of amalgamation/demerger/acquisition/restructuring without change in the legal entity
Answer: AA transaction in securities is neither supply of goods nor services. Securities are excluded from the definition of both goods as well as services.
Question 9: Mudhra Ltd, an NBFC transfers bad loans (unsecured) to Vsupport Capital Advisors Ltd.
Answer: Actionable claims are covered in definition of goods. However, Schedule III excludes actionable claims other than lottery, gambling and betting from the scope of supply. Transfer of unsecured loans, therefore, would not amount to supply.