With the Finance Minister resolute on introducing GST on 1st July 2017, businesses are left with no choice but to get ready for the most awaited tax reform. And despite everybody, be it the large corporates, small businesses, accounting professionals or individual taxpayers had been preparing for this mega event, there is still much left to unearth due to continuous updates flowing in from the policy makers.
With barely a week to go for the Goods & Services Tax being introduced in the country, there is still a fair amount of noise in the market. Companies, big and small have been in frenzy off late trying to prepare for this big change, but there are several areas where confusion exists.
We have therefore pulled together 10 facts about ‘Supply’ in GST which will be the deciding factor in your invoicing and ultimately taxation.
1. Supply is a ‘taxable event’
As per section 9 of the CGST Act, CGST and SGST will be levied on all intra-state ‘supplies’ on the value of the goods and/or services. Whereas, as per section 5 of IGST Act, inter-State ‘supply’ attracts IGST. It can be observed that the taxable event under GST regime is ‘supply’.
In the current indirect tax regime, the state imposes ‘Value Added Tax’ on ‘intra-state sales’ and retains Central Sales Tax (CST) on inter-state sales. Further, the centre imposes excise duty on ‘manufacture’ and service tax on ‘provision of service’.
In the GST regime, GST will apply only on ‘supply’ and not on other events.
2. Supply is defined in inclusive manner
In section 7 of the CGST Act, the term ‘supply’ has been defined in an inclusive manner (like definition of ‘manufacture’ in excise). For easy reference, let’s look at the chart below:
3. Supply to include all forms of supply
As per section 7 (1) (a), supply includes all forms of supply of goods or services or both such as:
Made or agreed to be made for a consideration by a person in the course or furtherance of business.
Thus, any activity of sale, transfer etc. qualifies as supply if it involves consideration.
4. Meaning of consideration?
The term ‘consideration’ is defined in section 2 (31) to include 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 excludes any subsidy given by the Central Government or a State Government. Even monetary value of any act or forbearance, is includable in consideration.
Also, consideration can flow from recipient or from any other person.
As regards ‘deposits’, it is 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.
Given this kind of provision, GST regime may witness litigation on whether amount given by customer is ‘deposit’ or ‘advance’.
5. Meaning of ‘in the course or furtherance of business’
The term ‘business’ is defined in section 2 (17) to include any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a monetary benefit or an activity incidental or ancillary, whether or not with volume, frequency etc. Thus, even a single activity may qualify as ‘business’
The term ‘business’ is preceded by ‘in the course or furtherance of’; however, no meaning is ascribed in the Act for this phrase.
6. Role of import of services in the definition of ‘supply’?
Supply includes ‘import of services’ for a consideration whether or not in the course or furtherance of business.
In this regard, the term ‘import of services’ is defined in section 2 (11) of the IGST Act to mean 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
Further, as per section 7 (4) of the IGST Act, supply of services imported into the territory of India shall be treated as a supply of services in the course of inter-state trade or commerce. Thus, effectively, if a transaction qualifies as ‘import of services’, IGST will be payable on it.
Surprisingly, ‘import of services’ which is a subject of IGST Act is covered in the definition of ‘supply’ in the CGST Act. One of the reasons for this could be that the definition of the term ‘supply’ in the IGST Act places reliance on the CGST Act only.
Further, only the import of ‘services’ is covered and not import of ‘goods’ and the reason for this could be that as per section 5 of IGST Act, import of goods attract IGST levy in accordance with Customs Act, 1962 and Customs Tariff Act, 1975.
7. Are supplies without consideration liable to GST?
As per section 7 (1) (c) of the CGST Act, activities specified in Schedule I, made or agreed to be made without consideration will also qualify as ‘supply’.
Schedule I comprises of the following:
 Section 2 (21) of IGST Act ?’supply?’ shall have the same meaning as assigned to it in section 7 of the Central Goods and Services Tax Act.
It may be noted that Schedule I specifically covers transactions, even if made without consideration, as ‘supply’.
One of the most relevant entries aforesaid will be sr. no. 2 of Schedule I which covers supply of goods or services between related persons, or between distinct persons.
Who is a ‘distinct person’?
As per Section 25 (4) of the CGST Act, a person who has obtained or is required to obtain more than one registration, whether in one or more states or Union territories, shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.
Thus, in case a Company has a manufacturing facility say in Pune (Maharashtra) and a depot in Ahmedabad (Gujarat) then the company will be required to obtain registrations in both these states: Maharashtra and Gujarat. These registrations in Maharashtra and Gujarat will be treated as distinct persons.
Effectively, a transaction, say a branch transfer or stock transfer, between these two will attract GST. The GST levied by the supplier location will be available as credit to the recipient location. For valuation of such stock transfer, we need to refer separately to valuation rules.
8. Differentiating between ‘goods’ and ‘services’?
GST is payable on supply of goods or services or both. In this regard, taxpayers will have to classify whether a transaction is that of ‘goods’ or ‘services’ as:
- Rate of GST for goods and services is different
- Time of Supply for goods (section 12) and services (section 13) is different
- Place of supply for goods and services is different
Author’s Note: It may be noted that throughout the Act, the term ‘both’ is used to tax goods and services when supplied together as a bundle. However, there is no specific provision for time of supply, place of supply etc. for ‘both’. Thus, in cases where goods and services are supplied together as a bundle, these transactions will have to be classified as either ‘goods’ or ‘services’.
9. How to differentiate between ‘goods’ and ‘services’?
For understanding whether a transaction qualifies as related to goods or services, one has to refer to:
- The definition of goods and services provided in sections 2 (52) and 2 (102) respectively
- Schedule II of the CGST Act
What is ‘goods’?
Section 2 (52) of the CGST Act defines ‘goods’ to mean 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.
Thus, every kind of movable property other than money and securities including actionable claims will qualify as ‘goods’.
What is ‘service’?
Section 2 (102) of the CGST Act defines ‘services’ to mean 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.
The term service is defined in the exclusion of ‘goods’ and thus anything which is not goods can qualify as ‘services’. Given that the term ‘service’ is defined in a wide manner to cover ‘anything other than goods’, even ‘interest’ charged by banks on loan may get covered under the ambit of the term service.
Which activities, as per schedule II, will qualify as goods or services?
Schedule II classifies eighteen transactions as either goods or services.
The most prominent of such activities is sr. no. 3 and 6 (a) of Schedule II which are said to be ‘services’.
- Sr. no. 3 covers treatment or process applied on another person’s goods whereas,
- Sr. no. 6 (a) covers works contract in respect of immovable property [as defined in section 2 (119)].
10. How to tax composite supplies or mixed supplies?
Section 8 of the CGST Act suggests that the tax liability on a composite or a mixed supply shall be determined in the following manner:
- A composite supply comprising of two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and
- A mixed supply comprising of two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.
These provisions can be explained by this chart:
As per Schedule III of CGST Act, all actionable claims, other than lottery, betting and gambling are neither goods nor services. Thus, effectively, GST will apply on only three actionable claims i.e. lottery, betting and gambling.
Governments across the world do not levy GST on interest given the fact that there is always a debate on whether interest is the time value of money or a consideration for lending money. Thus, the GST may not be applicable on interest and in days to come this aspect could be clarified by the Government.
Taxation of composite supply
‘Composite supply’ is defined in section 2 (30) to mean 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.
Section 2 (30) also provides an illustration as under:
‘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.’
Further, section 2 (90) of the CGST Act defines ‘principal supply’ to mean 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. Thus, in cases where two or more taxable supplies of goods or services or both, are naturally bundled and supplied, then, it shall be treated as a supply of such principal supply. In case both supplies are predominant, say 50% each, then how this provision will apply is not yet known.
Further, in case of a conflict, say between Schedule II (which deems an activity as goods or services) and composite supply, it needs to be seen which provision will be applicable. For e.g. in case of coating on steel rod, if the paint comprises of 60% and services 40% then will the transaction qualify as supply of goods (as per composite supply provision) or supply of services (as per sr. no. 3 of Schedule II).
Taxation of mixed supplies
Mixed supplies is defined in section 2 (74) of the CGST Act to mean 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.
Section 2 (74) also provides an illustration as under:
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.
It may be noted that between composite and mixed supplies, the primacy appears to be given to composite supply and only if it does not constitute a composite supply, will the activity qualify as ‘mixed supply’.
Thus, it can be well understood that ‘supply’ is the most crucial aspect in GST and all the provisions of GST revolve around it. Hope this article clears all questions around the concept.
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