GST Supply Under CGST Act 2017 PDF

1.1 1 CHAPTER 7 SUPPLY UNDER GST The section numbers referred to in the Chapter pertain to the CGST Act, 2017, unless otherwise specified. Examples/illustrations/Questions and Answers given in the Chapter are based on the position of GST law existing as on 30.04.2023. LEARNING OUTCOMES After studying this Chapter, you will be able to –  comprehend the taxable event under GST  analyse the taxable event – Supply – its meaning and scope.     identify the transactions that will amount to supply even without any consideration. identify the transactions which will be neither the supply of goods nor the supply of services. classify the specified transactions either as supply of goods or as supply of services. explain the meaning of composite and mixed supplies and their taxability under GST. © The Institute of Chartered Accountants of India 1.2 1.2 GOODS AND SERVICES TAX This chapter explains in detail the concept of taxable event under GST. However, it is advisable to first go through the basic concepts of GST as introduced in India. The same is given at the end of the chapter as Annexure -1. The same is only for the understanding of the students and is not relevant from the examination point of view. 1. TAXABLE EVENT UNDER GST - SUPPLY A is any transaction or occurrence that results in a tax consequence. Before levying any tax, taxable event needs to be ascertained. It is the foundation stone of any taxation system; it determines the point at which tax would be levied. Under the earlier indirect tax regime, the framework of taxable event in various statutes was prone to catena of interpretations resulting in litigation since decades. The controversies largely related to issues like whether a particular process amounted to manufacture or not, whether the sale was pre-determined sale, whether a particular transaction was a sale of goods or rendering of services etc. The GST laws resolve these issues by laying down one comprehensive taxable event i.e. - Supply of goods or services or both. Various taxable events namely manufacture, sale, rendering of service, purchase, entry into a territory of State etc. that existed prior to introduction of GST have been done away with in favour of just. one event i.e. The GST Law, by levying tax on the ‘supply’ of goods and/or services, departs from the historically understood concepts of © The Institute of Chartered Accountants of India SUPPLY UNDER GST 1.3 1.3 ‘taxable event’ under the State VAT Laws, Excise Laws and Service Tax Law i.e. sale, manufacture and provision of services respectively. In the GST regime, the entire value of supply of goods and/or services is taxed in an integrated manner, unlike the earlier indirect taxes, which were charged independently either on the manufacture or sale of goods, or on the provision of services. 2. RELEVANT DEFINITIONS  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. [Section 2(52)].  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 any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged. Explanation: For the removal of doubts, it is hereby clarified that the expression “services” includes facilitating or arranging transactions in securities [Section 2(102)].  Principal: means a person on whose behalf an agent carries on the business of supply or receipt of goods or services or both [Section 2(88)].  Competent authority: means such authority as may be notified by the Government [Section 2(29].  Family: means, — (i) the spouse and children of the person, and (ii) the parents, grand-parents, brothers and sisters of the person if they are wholly or mainly dependent on the said person [Section 2(49)].  Government: means the Central Government [Section 2(53)].  Local authority: means — (a) a “Panchayat” as defined in clause (d) of article 243 of the Constitution. © The Institute of Chartered Accountants of India 1.4 1.4  GOODS AND SERVICES TAX (b) a “Municipality” as defined in clause (e) of article 243P of the Constitution. (c) a Municipal Committee, a Zilla Parishad, a District Board, and any other authority legally entitled to, or entrusted by the Central Government or any State Government with the control or management of a municipal or local fund. (d) a Cantonment Board as defined in section 3 of the Cantonments Act, 2006. (e) a Regional Council or a District Council constituted under the Sixth Schedule to the Constitution. (f) a Development Board constituted under article 371 and article 371J of the Constitution. (g) a Regional Council constituted Constitution [Section 2(69)]. under article 371A of the Consideration: in relation to the supply of goods or services or both includes:  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,  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. However, 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 © The Institute of Chartered Accountants of India SUPPLY UNDER GST 1.5 1.5 supplier applies such deposit as consideration for the said supply [Section 2(31)].  Business: includes – (a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;; (b) any activity or transaction in connection with or incidental or ancillary to (a) above; (c) any activity or transaction in the nature of (a) above, 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 (for a subscription or any other consideration) of the facilities or benefits to its members, as the case may be; (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;; (h) activities of a race club including by way of totalisator or a license to book maker or activities of a licensed book maker in such club (i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities [Section 2(17)].  Actionable claim: means a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the civil courts recognise as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent [Section 2(1) of CGST Act read with section 3 of the Transfer of Property Act, 1882]. © The Institute of Chartered Accountants of India 1.6 1.6 GOODS AND SERVICES TAX  Manufacture: means processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character and use and the term “manufacturer” shall be construed accordingly [Section 2(72)].  Money: means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value [Section 2(75)].  Taxable supply: means a supply of goods or services or both which is leviable to tax under this Act [Section 2(108)].  Taxable territory: means the territory to which the provisions of this Act apply [Section 2(109)].  Non-taxable territory: means the territory which is outside the taxable territory [Section 2(79)].  India: means the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, and the air space above its territory and territorial waters. [Section 2(56)].  Supplier: in relation to any goods or services or both, shall mean the person supplying the said goods or services or both and shall include an agent acting as such on behalf of such supplier in relation to the goods or services or both supplied [Section 2(105)]. © The Institute of Chartered Accountants of India 1.7 1.7 SUPPLY UNDER GST  Recipient: of supply of goods and/or services means(a) where a consideration is payable for the supply of goods or services or both, the person who is liable to pay that consideration, (b) where no consideration is payable for the supply of goods, the person to whom the goods are delivered or made available, or to whom possession or use of the goods is given or made available, and (c) where no consideration is payable for the supply of a service, the person to whom the service is rendered, and any reference to a person to whom a supply is made shall be construed as a reference to the recipient of the supply and shall include an agent acting as such on behalf of the recipient in relation to the goods or services or both supplied [Section 2(93)].  Person: includes [Section 2(84)]- An individual A Limited Liability Partnership A HUF A company A local authority Any corporation established by/under any Central, State or Provincial Act or Government company as defined in section 2(45) of Companies Act, 2013 A co-operative society registered under any law relating to cooperative societies A firm An association of persons or a body of individuals, whether incorporated or not, in India or outside India Any body corporate incorporated by or under the laws of a country outside India Society as defined under the Societies Registration Act, 1860 © The Institute of Chartered Accountants of India Trust Central Government/State Government Every artificial juridical person, not falling above 1.8 1.8 GOODS AND SERVICES TAX ✪ Definitions in which the expression “means” has been used are exhaustive definitions. Consequently, the scope of these definitions cannot be expanded. ✪ Definitions in which the expression “includes” has been used are inclusive and are not exhaustive definitions. Resultantly, the scope of these definitions is wide. Our discussion in this Study Material will principally be confined to the provisions of CGST and IGST laws as the specific State GST laws 1 are outside the scope of syllabus. 3. CONCEPT OF SUPPLY [SECTION 7 OF THE CGST ACT] The concept of ‘ is the key stone of the GST architecture. The provisions relating to the meaning and scope of supply are contained in Chapter III of the CGST Act read with various Schedules given under the said Act. Following sections and schedules shall be discussed in this chapter to understand the concept of supply: Section 7 Meaning and scope of supply Section 8 Taxability of composite and mixed supplies Schedule I Activities to be treated as supply even if made without Schedule II Activities or transactions to be treated as supply of goods or consideration as supply of services It may be noted that GST laws of all the States and Union Territories are largely based on the CGST Act, 2017. 1 © The Institute of Chartered Accountants of India SUPPLY UNDER GST Schedule III 1.9 1.9 Activities or transactions which shall be treated neither as supply of goods nor as supply of services. Provisions of section 7 containing the meaning and scope of supply are as follows: STATUTORY PROVISIONS Section 7 Meaning and Scope of Supply Sub-section Clause (1) Particulars Supply includes (a) 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 (aa) the activities or transactions, by a person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment/other valuable consideration. Explanation.––For the purposes of this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another. © The Institute of Chartered Accountants of India 1.10 1.10 (1A) GOODS AND SERVICES TAX (b) importation of services, for a consideration whether (c) the activities specified in Schedule I, made or agreed or not in the course or furtherance of business, and to be made without a consideration. 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) & (2), 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. ANALYSIS © The Institute of Chartered Accountants of India SUPPLY UNDER GST 1.11 1.11 The definition of ‘supply’ as contained in section 7 is an inclusive definition and does not define the term exhaustively. It defines the scope of supply in an inclusive manner. Clause (a) of sub-section (1) illustrates the forms of supply, but the list is not exhaustive. This is further substantiated by the use of words ‘such as’ in the definition. Provisions of scope of supply under CGST Act have also been made applicable to IGST Act vide section 20 of the IGST Act. The meaning and scope of supply in terms of section 7 can be understood in terms of following : 1. Supply should be of goods or services. 2. Supply should be made for a consideration. 3. Supply should be made in the course or furtherance of business. in the course or furtherance of business Parameters of supply of goods and services for consideration Supply should be © The Institute of Chartered Accountants of India 1.12 1.12 GOODS AND SERVICES TAX Aforesaid parameters describe the concept of supply. However, there are a few exceptions to 2nd and 3rd parameters [the requirement of supply being made for a consideration and in the course or furtherance of business] in the GST law. Few exceptions have been carved out where a transaction is deemed to be a supply even without consideration [contained in Schedule I – discussed later in this Chapter]. Similarly, the condition of supply to be made in the course or furtherance of business has been relaxed in case of import of services [Import of services for a consideration, whether or not in the course or furtherance of business, is treated as supply]. Further, there are also cases where a transaction is kept out of scope of supply despite the existence of the above parameters, i.e. there is a list of activities which are treated neither as a supply of goods nor as a supply of services [contained in Schedule III – discussed later in this Chapter]. In other words, they are outside the scope of GST. Besides, GST law has classified certain activities/transactions either as supply of goods or as supply of services in Schedule II [Discussed later in this Chapter]. Government is also empowered to notify transactions that are to be treated as a supply of goods and not as a supply of services, or as a supply of services and not as a supply of goods. In the subsequent paras, the above aspects of supply have been extensively discussed. The discussion has been broadly categorised into following: © The Institute of Chartered Accountants of India 1.13 1.13 SUPPLY UNDER GST Supply includes excludes Activities or Supply of transaction goods or between a services for consideration person, other than an in course or furtherance individual, and of business its members or constituents [Section for cash, 7(1)(a)] deferred payment or other valuable consideration [Section 7(1)(aa)] Supply should be of goods or services or both Forms of supply Supply Importation of services for without consideration consideration whether or [Section not in course 7(1)(c) or furtherance + Schedule I] of business [Section 7(1)(b)] Activities to be treated as supply of goods or supply of services [Section 7(1A) + Schedule II] Non supplies under GST [Section 7(2) + Schedule III] Supply includes specified forms of supply, should be for consideration and should be in course or furtherance of business Consideration © The Institute of Chartered Accountants of India In course or furtherance of business 1.14 1.14 GOODS AND SERVICES TAX SUPPLY OF GOODS OR SERVICES FOR CONSIDERATION IN COURSE OR FURTHERANCE OF BUSINESS SUPPLY SHOULD BE OF GOODS OR SERVICES OR BOTH The definition of supply begins with the term ‘ , thus making it clear that CGST Act intends to give an extensive meaning to the term ‘supply’. Section 7(1)(a) Supply includes all forms of supply of goods or services or both. Supply of anything other than goods or services like money, securities etc. does not attract GST. Goods Anything which is neither goods nor services Services The terms goods and services as defined under the CGST Act have been analysed by way of a diagram on next page. © The Institute of Chartered Accountants of India Securities NOT Supply Supply Money SUPPLY UNDER GST 1.15 1.15 Services Goods means means Every kind of movable property Anything other than goods excludes Money and securities includes includes ** ** **Please refer the definitions of ‘actionable claims’ and ‘money’ as provided in heading 2. – Relevant Definitions. © The Institute of Chartered Accountants of India 1.16 1.16 GOODS AND SERVICES TAX SUPPLY INCLUDES SPECIFIED FORMS OF SUPPLY, SHOULD BE FOR CONSIDERATION AND SHOULD BE IN COURSE OR FURTHERANCE OF BUSINESS The first part of section 7 [Clause (a) of sub-section (1)] includes 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 consideration in the course or furtherance of business. Forms of Supply A B Sale for consideration Transfer Barter Exchange Licence in the course or furtherance of business Rental Lease C Disposal It is important to note that supply includes ALL forms of supply within its purview, have been enlisted in the definition. though Further, supply as contemplated in this first part has two pre-requisites:   the supply should be for a consideration; and the supply should be in the course or furtherance of business. We shall first discuss the various forms of supply as illustrated in section 7(1)(a) in detail: A. FORMS OF SUPPLY Various forms of supply contemplated in section 7(1)(a) are sale, transfer, barter, exchange, licence, rental, lease or disposal. These forms of supply are only illustrative and not exhaustive. However, none of these terms have been defined under the Act. In order to understand their meaning, we have taken recourse to their dictionary meaning or otherwise and have explained them as follows: © The Institute of Chartered Accountants of India SUPPLY UNDER GST I. 1.17 1.17 Sale and Transfer: The dictionary meaning of term ‘sale’ is the act of selling; specifically: the transfer of ownership of and title to property from one person to another for a price 2. As per the Sale of Goods Act, 1930, a contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. Further, the term ‘transfer’ has been defined in the Black’s Law dictionary as to convey or remove from one place, person, etc., to another; pass or hand over from one to another; specifically, to make over the possession or control of. (1) A shopkeeper sells a pen for ` 100 to the buyer. After the sale, the pen belongs to the buyer and shopkeeper does not have any right on the pen. This is a transaction of sale. place. II. (2) A company transfers goods from its factory to the depot for sale purposes. This is ‘transfer’ of goods where the sale has not yet taken Barter and Exchange: The dictionary meaning of term ‘barter’ is to exchange goods or services for other goods or services instead of using money 3. Black’s Law dictionary defines the term ‘exchange’ as an act of giving or taking one thing for another. While barter deals with a transaction which only includes an exchange of goods/services, exchange may cover a situation where the goods are paid for partly in goods and partly in money. When there is a barter of goods or services, same activity constitutes supply as well as consideration. (3) When a new car worth ` 5,00,000 is purchased in exchange of an old car alongwith the monetary consideration of ` 4,00,000 paid for the said purchase. – Exchange transaction (4) A doctor got his hair cut from a barber and provides him medical consultancy in return. In this transaction, the doctor provided the medical consultancy services to the barber for which consideration was in the 2 3 www.merriam-webster.com www.macmillandictionary.com © The Institute of Chartered Accountants of India 1.18 1.18 GOODS AND SERVICES TAX form of hair cutting services provided by the barber. Similarly, the barber provided hair cutting services to the doctor for which consideration was in the form of medical consultancy services provided by the doctor. – Barter transaction III. Licence, lease, rental and disposal: The dictionary meaning of the term ‘licence’ is a permission granted by competent authority to engage in a business or occupation or in an activity otherwise unlawful 4. The dictionary meaning of ‘rental’ is an arrangement to rent something, or the amount of money that you pay to rent something 5 and that of ‘lease’ is to make a legal agreement by which money is paid in order to use land, a building, a vehicle, or a piece of equipment for an agreed period of time 6. Black’s law dictionary defines disposal as the sale, pledge, giving away, use, consumption or any other disposition of a thing. Under GST, such licenses, leases and rentals of goods with or without transfer of right to use are covered under the supply of service because there is no transfer of title in such supplies. Such transactions are specifically treated as supply of service in Schedule II of CGST Act [Schedule-II has been discussed in detail in the subsequent paras]. As discussed earlier, one of the parameters to qualify as a supply of goods and/or services is that a supply is made for a consideration. This parameter has been explicated in the following paras: B. CONSIDERATION The dictionary meaning of word ‘consideration’ is payment. Consideration need not always be in the form of money. It can be in money or in kind. It covers anything which might be possibly done, given or made in exchange for something else. Further, a consideration need not always flow from the recipient of the supply. It can also be made by a third person. However, any subsidy given by the Central Government or a State Government is not considered as consideration. www.merriam-webster.com www.dictionary.cambridge.org 6 www.dictionary.cambridge.org 4 5 © The Institute of Chartered Accountants of India SUPPLY UNDER GST 1.19 1.19 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. The term consideration is defined under section 2(31) [Refer heading ‘Relevant Definitions’]. The said definition has been depicted in the form of a diagram as follows: CONSIDERATION Payment money otherwise the supply Deposit to considered payment in or for be as ONLY when the supplier applies such deposit as consideration for the said supply Monetary value of any act or forbearance for the supply By recipient or any other person Excluding subsidy given by Central/ State Governments © The Institute of Chartered Accountants of India 1.20 1.20 GOODS AND SERVICES TAX Let us examine the existence of consideration in the following three scenarios: 1. Donations received by charitable institutions from individual donors, without quid pro quo (something for something) 2. Art works sent by artists to galleries for exhibition 3. ‘No Claim Bonus’ offered by an insurance company to the insured 1. Donations received by charitable institutions from individual donors, without quid pro quo 7 An important feature of consideration is quid pro quo [something for something]. Donations received by the charitable organisations are treated as consideration only if there exists, quid pro quo, i.e., there is an obligation on part of recipient of the donation or gift to do anything (supply a service). Generally, institutions such as religious institutions, charitable organisations, schools, hospitals, orphanages, old age homes etc. receive financial help or any other support in the form of donation or gift from the individual donors. In order to express the gratitude towards such help/support, the recipient institutions place a name plate or similar such acknowledgement in their premises. When the name of the donor is displayed in recipient institution’s premises, in such a manner, which can be said to be an expression of gratitude and public recognition of donor’s act of philanthropy and is not aimed at giving publicity to the donor in such manner that it would be an advertising or promotion of his business, then it can be said that there is no supply of service for the payment in the form of donation. In other words, there is no obligation (quid pro quo) on part of recipient of the donation or gift to do anything (i.e. supply a service). Therefore, there is no GST liability on such payment made. Some examples of cases where there would be no taxable supply are as follows:- 7 any obligation to do anything in return of the donation © The Institute of Chartered Accountants of India SUPPLY UNDER GST 1.21 1.21 (5) Bhushan donated a blackboard to Yoganisht Sansthan - a charitable yoga institution. Yoganisht Sansthan printed underneath the blackboard so donated - “Good wishes from Mr. Bhushan”. (6) Smt. Durga Devi donated some money to a temple in the memory of her late father. The Temple Trust constructed a room in the temple complex from such donation and wrote “Donated by Smt. Durga Devi in the memory of her father” on the door floor of the room. In above examples, it may be noticed that there is no reference or mention of any business activity of the donor which otherwise would have got advertised. Thus, GST is not leviable where the following three cumulative conditions are satisfied namely: Gift or donation is made to a charitable organization Payment has the character of gift or donation Purpose is philanthropic (i.e., it leads to no commercial gain) and not advertisement [Circular No. 116/35/2019 GST dated 11.10.2019] 2. Art works sent by artists to galleries for exhibition is not a supply as no consideration flows from the gallery to the artists Artists give their work of art to galleries where it is exhibited for supply. However, no consideration flows from the gallery to the artist when the art works are sent to the gallery for exhibition and therefore, the same is not a supply. It is only when a buyer selects a particular art work displayed at the gallery, that the actual supply takes place and applicable GST would be payable at the time of such supply [Circular No. 22/22/2017 GST dated 21.12.2017]. © The Institute of Chartered Accountants of India 1.22 1.22 3. GOODS AND SERVICES TAX No supply of service by the insured to the insurance company in lieu of ‘No Claim Bonus’ offered by said insurance company to him The issue which arose for consideration was whether the deduction on account of ‘No Claim Bonus’ (NCB) allowed by the insurance company from the insurance premium payable by the insured, can be considered as consideration for the supply provided by the insured to the insurance company, for agreeing to the obligation to refrain from the act of lodging insurance claim during the previous year(s). As per practice prevailing in the insurance sector, the insurance companies deduct ‘No Claim Bonus’ from the gross insurance premium amount, when no claim is made by the insured person during the previous insurance period(s). The customer/ insured procures insurance policy to indemnify himself from any loss/ injury as per the terms of the policy and is not under any contractual obligation not to claim insurance claim during any period covered under the policy, in lieu of NCB. It is, therefore, clarified that there is no supply provided by the insured to the insurance company in form of agreeing to the obligation to refrain from the act of lodging insurance claim during the previous year(s) and NCB cannot be considered as a consideration for any supply provided by the insured to the insurance company. [Circular No. 186/18/2022 GST dated 27.12.2022] Any transaction involving supply of goods and/or services without consideration is not a supply unless it is deemed to be a supply under law [in Schedule I of the CGST Act**]. **Provisions of Schedule I have been discussed in detail later in this chapter. © The Institute of Chartered Accountants of India SUPPLY UNDER GST 1.23 1.23 Another parameter to qualify as supply of goods and/or services is that a supply is made in course or furtherance of business. This parameter has been explained in the following paras: C. COURSE OR FURTHERANCE OF BUSINESS GST is essentially a tax only on commercial transactions. Hence, only those supplies that are in the course or furtherance of business qualify as supply under GST. Resultantly, any supplies made by an individual in his personal capacity do not come under the ambit of GST unless they fall within the definition of ‘business’. Meaning of supply made in the course or furtherance of business: Any activity undertaken in course/ for furtherance of business would constitute a supply. In order to understand the term ‘in the course or furtherance of business’, we need to first understand the term ‘business’. Business as defined under section 2(17), inter alia, includes any trade, commerce, manufacture, profession, vocation etc. whether or not undertaken for a monetary benefit. The definition of business has been summarised in the diagram below: Any trade/commerce, manufacture, profession etc. even if there is no monetary benefit Business includes Supply/acquisition of goods including capital goods & services Provision of facilities by club/ association etc. Admission for consideration Services as holder of office Activities of a race club including Any activity incidental/ ancillary to it Any activity of same nature even if no volume/continuity in connection with commencement / closure of business to its members for consideration to any premises accepted in course/ furtherance of trade, profession by way of totalisator or a license to book maker or activities of a licensed book maker in such club Any activity by Government /local authority as public authorities © The Institute of Chartered Accountants of India 1.24 1.24 GOODS AND SERVICES TAX Thus, business includes any activity/transaction which is incidental or ancillary to any trade, commerce, manufacture, profession, vocation, adventure, wager [bet] or any other similar activity. In addition, any activity undertaken by the Central Government or a State Government or any local authority in which they are engaged as public authority shall also be construed as business. For any trade, commerce, or any other similar activity to qualify as business, frequency, volume, continuity or regularity of such transaction is not a pre-requisite. Some of the examples of supply made/not made ‘in the course or furtherance of business’ are as follows: (7) Rishabh buys a car for his personal use and after a year sells it to a car dealer. Sale of car by Rishabh to car dealer is not a supply under CGST Act because said supply is not made by Rishabh in the course or furtherance of business 8. (8) Manikarnika sold her old gold bangles and earrings to ‘Aabhushan Jewellers’. Sale of old gold jewellery by an individual to a jeweller will not constitute supply as the same cannot be said to be in the course or furtherance of business of the individual 9 10. Since ‘business’ includes vocation, therefore supply of goods or service as a vocation is also a supply under GST. (9) Sundaram Acharya, a famous actor, paints some paintings and sells them. The consideration from such sale is to be donated to a Charitable Clarified vide GST FAQs issued by CBIC Clarified by CBIC vide press release dated 13.07.2017 and GST Flyer - ‘The meaning and scope of supply’ 10 The view taken in Examples 7 & 8 above is based on the view taken in the Departmental FAQs/ press release. There is another school of thought according to which since the definition of business includes trade, commerce, or any other similar activity, whether or not there is frequency, volume, continuity or regularity of such transaction, on literal interpretation, the transactions in the above examples can be considered to be made in the course or furtherance of business and thus, will constitute supply. The taxability of such transactions, however, will have to be examined under the provisions of section 9 [Discussed in detail in Chapter 2 – Charge of GST in this Module of the Study Material]. However, since this view may not always lead to logical conclusions, it is more prudent to take a purposive approach as followed in Departmental FAQs/press release given above. 8 9 © The Institute of Chartered Accountants of India SUPPLY UNDER GST 1.25 1.25 Trust – ‘Kind Human’. The sale of paintings by the actor qualifies as supply as it is made in course or furtherance of business. Facilities provided by the club/association to its members for consideration are provided in course or furtherance of business. (10) A Resident Welfare Association provides the service of depositing the electricity bills of the residents in lieu of some nominal charges. Provision of service by a club or association or society to its members is included in the definition of ‘business’. Admission of persons to any premises for a consideration is also included in business. (11) Services by way of admission to circus, cinema halls, amusement parks including theme parks, water parks, etc. are considered as supply as these are services by way of admission of persons to any premises for a consideration. Business includes activities of a race club including by way of totalisator or a license to book maker 11 or activities of a licensed book maker in such club. (12) Royal Turf Race Club is engaged in facilitating the wagering (betting) transactions on horses placed through totalisator 12. For providing the service of facilitating wagering transactions, Royal Turf Race Club gets commission which is deducted and retained by the club from the total bet value. Said services amount to supply as the activities of a race club are included in business. There is one exception to this ‘course or furtherance of business’ rule i.e., import of services for a consideration. Book maker is a person that accepts and pays off bets on sporting and other events at agreed-upon odds. 12 Totalisator is a device showing the number and amount of bets staked on a race, to facilitate the division of the total among those backing the winner. 11 © The Institute of Chartered Accountants of India 1.26 1.26 GOODS AND SERVICES TAX From the above discussion, it can be inferred that if an activity or transaction satisfies all the above parameters, as discussed in points A, B and C above, said activity or transaction qualifies as ‘Supply under GST’. After understanding the basic concept of supply, let us now examine taxability of few transactions: oration & production contractor gets a license/lease lease to explore/mine When an oil exploration the petroleum crude and/or natural gas from the Government, it enters into a Production Sharing Contract (PSC) with the Government. The relationship of the contractors with the Government is not that of partners but that of licensor/lessor and licensee/lessee. As per these PSCs, when a contractor discovers oil/gas, he is at first entitled to recover the contract cost [expenses incurred in exploration, development, production and payment of royalty] involved in the extraction of oil/gas from the total sale proceeds and thereafter, he is expected to share with the Government the profit from his venture [known as profit petroleum], as per the PSC. The value of petroleum which the contractor is entitled to take in a year for recovery of the contract costs is called the cost petroleum. Further, the total value of petroleum produced and saved from the contract area in a particular period, as reduced by cost petroleum, is called the profit petroleum. The Government’s share of profit petroleum which is the consideration paid by the contractor to the Central Government for the services of grant of license/lease to explore/mine petroleum crude and/natural gas is exempt from GST 13. The cost petroleum is not a consideration received by the contractor for the services provided to Government and thus not taxable per se. The reason for the same is that the contractors carry exploration and production of petroleum for themselves Refer Chapter 4 – Exemptions from GST in this Module of the Study Material for detailed discussion. 13 © The Institute of Chartered Accountants of India SUPPLY UNDER GST 1.27 1.27 and not as a service to Government. They had acquired the right to explore, exploit and sell petroleum in lieu of royalty and a share in profit petroleum [Circular No. 32/06/2018 GST dated 12.02.2018]. Banks and financial institutions provide a bouquet of financial services relating to lending or borrowing of money or investments in money and other related services. For such services, invariably a variety of instruments are used in the financial markets. In the following paras, we have examined whether transactions in such instruments qualify as supply? As seen earlier, the definitions of ‘goods’ and ‘services’ specifically exclude both money and securities. The definition of ‘money’ includes instruments like cheques, drafts, pay orders, promissory notes, letters of credit, etc. Therefore, activities that are only transactions in such instruments would be outside the definition of service. Money would also include transactions in Commercial Paper (‘CP’) and Certificate of Deposit (‘CD’) 14 (as they are in the nature of promissory notes), issuance of drafts or letters of credit, etc. While these transactions are outside the ambit of supply, the related activity for which a separate consideration is charged, is chargeable to GST if other elements of taxability are present. Commercial Paper (‘CP’) and Certificate of Deposit (‘CD’) are understood as unsecured money market instruments which may be issued in the form of a promissory note or in a dematerialized form through any of the depositories approved by and registered with SEBI. CPs are normally issued by highly rated companies, primary dealers and financial institutions at a discount to the face value. CDs can be issued by Scheduled Commercial Banks (excluding RRBs and Local Area Banks) and All – India Financial Institutions (FIs) permitted by RBI. 14 © The Institute of Chartered Accountants of India 1.28 1.28 GOODS AND SERVICES TAX The term ‘securities’ shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (SCRA) 15 [Section 2(101)]. In this regard, there may arise a doubt as to whether a ‘derivative’ is included within the meaning of ‘securities’ above and whether derivatives are liable to GST? Before that, let us understand what a derivative means in simple terms. Derivatives are financial contracts/instruments that derive their value from something else, like an underlying asset. They are kind of bets or agreements based on the price/performance of the underlying asset, rather than owning that asset directly. ‘Derivatives’ 16 are included in the definition of ‘securities’ under SCRA. As ‘derivatives’ fall in the definition of securities, they are neither goods nor services and hence, are not liable to GST. Two most common types of derivatives are futures contracts and forward contracts. In simple terms, forward and futures contracts are similar to making a promise to buy or sell something, like a commodity (e.g., oil, wheat), financial asset (e.g., stocks, bonds), or even a market index (e.g., S&P 500) at a specific price on a future date. It's an agreement/contract between two parties to buy or sell that something at a specific price on a specific date in the future. On the specified date in future, the In terms of section 2(h) of SCRA, “securities” includes— (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate; (ia) derivative; (ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes; (ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; (id) units or any other such instrument issued to the investors under any mutual fund scheme; (ii) Government securities; (iia) such other instruments as may be declared by the Central Government to be securities; and (iii) rights or interest in securities. 16 In terms of section 2(ac) of SCRA, “derivative” includes— (A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) a contract which derives its value from the prices, or index of prices, of underlying securities. The definition of ‘derivatives’ in SCRA is an inclusive definition. 15 © The Institute of Chartered Accountants of India SUPPLY UNDER GST 1.29 1.29 contract needs to be settled. These contracts can either be settled by way of actual physical delivery of the underlying asset or by way of net settlement of differential rate with no actual delivery. The primary difference between the futures and forward contract is that futures contracts are standardised derivative contracts, traded on organised exchanges and marked-to-market daily whereas forward contracts are customisable, over-the-counter derivative contracts, not traded on organised exchanges but negotiated between two parties, without any daily markto-market requirements. Since futures contracts are in the nature of derivatives, these qualify as ‘securities’ and thus, are not subject to GST. However, where the futures contracts have a delivery option and the settlement of contract takes place by way of actual delivery of underlying commodity/currency, then such futures contracts would be treated as normal supply of goods and liable to GST. Where the settlement takes place by way of actual delivery of underlying commodity/currency, then such forward contracts would be treated as normal supply of goods and liable to GST. Where the settlement takes place by way of net settlement of differential of the forward rate over the prevailing market rate on the settlement date, the same would be falling within the purview of ‘securities’ and thus, are not chargeable to GST. Sale, purchase, acquisition or assignment of a secured debt does not constitute a transaction in money; it is in the nature of a derivative and hence a security. Transactions in instruments like interest rate swaps, and foreign exchange swaps would be excluded from the definition of ‘supply’ since such instruments are derivatives, being securities, based on contracts of difference. © The Institute of Chartered Accountants of India 1.30 1.30 GOODS AND SERVICES TAX Services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount is exempt from the levy of GST. The same has been discussed in detail in Chapter 4 – Exemptions from GST in this Module of the Study Material. It is important to note that GST would be levied on service charges normally charged for various transactions in money including charges for making drafts, issuance charges for letter of credit, etc or service charges or service fees or documentation fees or broking charges or such like fees or charges charged on the derivatives/futures contracts/forward contracts, since the same would be a consideration for provision of service. Securities and Exchange Board of India (SEBI) has prescribed the Securities Lending Scheme, 1997 (hereafter referred to as SLS) for the purpose of facilitating lending and borrowing of securities. The security lending mechanism is depicted in the diagram below: Securities Approved Intermediary Lender Securities Borrower In the above diagram: (i) is a person who deposits the securities registered in his name or in the name of any other person duly authorised on his behalf with an approved intermediary for the purpose of lending under the scheme. © The Institute of Chartered Accountants of India SUPPLY UNDER GST (ii) (iii) 1.31 1.31 is a person who borrows the securities under the scheme through an approved intermediary. is a person duly registered by the SEBI under the SLS through whom the lender will deposit the securities for lending and the borrower will borrow the securities. Under this scheme, lender of securities lends securities through an approved intermediary to a borrower, under an agreement, temporarily for a specified period. The lenders earn lending fee for lending their securities to the borrowers. Securities are lent with a condition that the borrower will return equivalent securities of the same type or class at the end of the specified period along with the corporate benefits 17 accruing on the securities borrowed. The borrower of securities can further sell or buy these securities. In order to lend securities under SLS, lender enters into an agreement with the approved intermediary and for the purpose of borrowing of securities, the borrower enters into an agreement with the approved intermediary. Thus, there is no direct agreement between the lender and borrower for the lending or borrowing of securities and there is anonymity between them. The transaction takes place through an electronic screen-based order matching mechanism provided by the recognised stock exchange in India. As seen earlier in this chapter, securities are neither covered in the definition of goods nor covered in the definition of services. Therefore, a transaction in securities which involves disposal of securities is not a supply in GST and hence not taxable. The SLS doesn’t treat lending of securities as disposal of securities and charged therefore is not excluded from the definition of services. The from the borrowers of securities Apart from above, the activities of the intermediaries facilitating lending and borrowing of securities for [Circular No. 116/35/2019 GST dated 11.10.2019]. are also Corporate benefits include dividends (gross), rights, bonus, redemption benefits, interest, or any other right or benefit accruing on the securities lent. 17 © The Institute of Chartered Accountants of India 1.32 1.32 GOODS AND SERVICES TAX JV being an unincorporated temporary association constituted for the limited purpose of carrying out a specified project within a time frame. Whether a cash call is merely a transaction in money or in the nature of consideration for taxable service, would depend on the terms of the Joint Venture Agreement, which may vary from case to case. are raised by an operating member of the joint venture on other members in proportion to their participating interests in the joint venture (unincorporated) to meet the expenditure on the operations to be carried out as per the approved work programme and budget. Let us understand the taxability of cash calls with the help of following examples: (13) There are 4 members in the JV including the operating member and each one contributes ` 100 as part of their share. A total amount of ` 400 is collected. The operating member purchases machinery for ` 400 for the JV to be used in oil production. In above case, cash calls will not be subject to GST since the operating member is not carrying out an activity for another for consideration. Here, the money paid for purchase of machinery is merely in the nature of capital contribution and is therefore a transaction in money. (14) There are 4 members in the JV including the operating member and each one contributes ` 100 as part of their share. A total amount of ` 400 is collected. The operating member thereafter uses its own machinery and performs exploration and production activities on behalf of the JV. In above case, the operating member uses its own machinery and is therefore providing ‘service’ within the scope of ‘supply’ because here operating member is recovering the cost appropriated towards machinery & services from other JV members in their participating interest ratio 18. 18 Circular No. 35/9/2018 GST dated 05.03.2018 © The Institute of Chartered Accountants of India SUPPLY UNDER GST 1.33 1.33 In the subsequent paras, we have discussed the exceptions to the two parameters of supply, namely, (i) supply made for consideration, but not in course or furtherance of business and (ii) supply made without consideration. IMPORTATION OF SERVICES FOR CONSIDERATION WHETHER OR NOT IN COURSE OR FURTHERANCE OF BUSINESS The connotation of ‘supply’ gets expanded significantly through the second part of section 7 i.e. 7(1)(b) which brings within the ambit of ‘supply’, the importation of services for a consideration whether or not in the course or furtherance of business. This is the only exception to the condition of supply being made in course or furtherance of business. Section 7(1)(b) (15) Ramaiyaa, a proprietor, has received the architect services for his personal residence from an architect located in New York at an agreed consideration of $ 5,000. The import of services by Ramaiyaa is supply under section 7(1)(b) though it is not in course or furtherance of business. ACTIVITIES WITHOUT CONSIDERATION - DEEMED SUPPLY STATUTORY PROVISIONS Schedule-I Activities to be treated as supply even if made without consideration Para No. Particulars (1) Permanent transfer or disposal of business assets where input tax credit has been availed on such assets. (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. © The Institute of Chartered Accountants of India 1.34 1.34 GOODS AND SERVICES TAX 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. (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 person from a related person or from any of his other establishments outside India, in the course or furtherance of business. ANALYSIS As seen earlier, section 7(1)(c) provides that supply includes the activities specified in Schedule I, made or agreed to be made without a consideration. Thus, there are activities or transactions which are treated as supply, even if they are made without consideration. These are specifically mentioned in Schedule I appended to the CGST Act. The same has been discussed in the subsequent paras: Section 7(1)(c) read with Schedule I As per Schedule I, in the following four cases, activities made without consideration will be treated as supply under section 7: I. Permanent Transfer/Disposal of Business Assets [Para 1 of Schedule I]: Any kind of disposal or transfer of business assets made by an entity on permanent basis even though without consideration qualifies as supply. However, this provision shall apply only if input tax credit has been availed on such assets. Therefore, in order to qualify as supply under this para, following conditions need to be satisfied cumulatively: © The Institute of Chartered Accountants of India SUPPLY UNDER GST  There must be a disposal or transfer of  Transfer/disposal must be permanent, and  ITC must have been availed on such business 1.35 1.35 business assets**. assets. In view of the last condition stipulated above, permanent transfer/disposal of following business assets, without consideration, will not be covered within this para and thus will not be deemed as supply: (i) Business assets on which ITC is blocked/not available under GST 19. (ii) Business assets though eligible for ITC, ITC has not been availed by the registered person. It's important to note that under GST legislation, there is no specific definition for the term "business asset." Nevertheless, business assets are generally recognized as property or equipment acquired primarily for business purposes. These assets can be grouped into various categories, including current and non-current, short-term and long-term, operating and capitalized, as well as tangible and intangible assets. (16) Dhruv gives old laptops being used in his business to his friend free of cost. This will qualify as supply provided input tax credit has been availed by Dhruv on such laptops. (17) A dealer of air-conditioners permanently transfers the motor vehicle free of cost. ITC on said motor vehicle is blocked. The transaction will not constitute a supply as the condition of availment of ITC on the business asset transferred is not fulfilled. This para is wide enough to cover transfer of business assets from holding to subsidiary company for nil consideration. List of the goods and services in respect of which ITC is blocked has been elaborated in Chapter 7 – Input Tax Credit in Module 2 of this Study Material. 19 © The Institute of Chartered Accountants of India 1.36 1.36 II. GOODS AND SERVICES TAX Supply between related persons or distinct persons [Para 2 of Schedule I]: Supply of goods or services or both between ‘related persons’ or between ‘distinct persons’ as specified in section 25, will qualify as supply even if made without consideration provided the same is made in the course or furtherance of business. Let us understand the terms (i) and. Related persons: A person who is under influence of another person is called a related person like members of the same family or subsidiaries of a group company etc. Under GST law various categories of related persons have been specified. The term ‘related person’ has been defined in explanation to section 15. The said definition has been depicted by way of a diagram as follows: Persons including legal person are deemed as related persons if Such persons are officers/directors of one another’s business Such persons are legally recognised partners Such persons are employer & employee A third person controls/ owns/ holds (directly/ indirectly) ≥ 25% voting stock/shares of both of them One of them controls (directly/indirectly) the other A third person controls (directly/indirectly) both of them Such persons together control (directly/indirectly) a third person Such persons are members of the same family* One of them is the sole agent/sole distributor/sole concessionaire of the other *See the definition of ‘family’ as provided in heading 2. – Relevant Definitions. (18) Ms. Priya holds 30% shares of ABC Ltd. and 35% shares of XYZ Ltd. ABC Ltd. and XYZ Ltd. are related. © The Institute of Chartered Accountants of India SUPPLY UNDER GST 1.37 1.37 (19) Q Ltd. has a deciding role in corporate policy, operations management and quality control of R Ltd. It can be said that Q Ltd. controls R Ltd. Thus, Q Ltd. and R Ltd. are related. (ii) Distinct Persons specified under section 25: Before we go through the statutory provisions of ‘distinct persons’, let us first have an overview of the registration provisions for better understanding of the concept of distinct persons. Detailed and in-depth analysis of the registration provisions is contained in Chapter 8 – Registration in Module 2 of this Study Material. Under GST law, a supplier is required to obtain State-wise registration. He has to obtain registration in every State/UT from where he makes a taxable supply provided his aggregate turnover exceeds a specified threshold limit. Thus, he is not required to obtain registration from a State/UT from where he makes a non-taxable/exempt supply. Since registration under GST is PAN based, once a supplier is liable to register, he has to obtain registration in each of the States/UTs in which he operates [and makes a taxable supply] under the same PAN. Further, he is normally required to obtain single registration in a State/UT. However, where he has multiple places of business in a State/UT, he can get a single registration for said State/UT. He may also get separate registration for any place(s) of business in such State/UT. Now, let us understand the concept of distinct persons in simple terms: The establishments of a person with separate registrations whether within the same State/UT or in different States/UTs are considered as distinct persons. Where a person having one registered establishment in a State/UT has another establishment in a different State/UT [not necessarily registered], these establishments are considered as establishments of distinct persons. Statutory provisions relating to ‘distinct persons’ are contained in sub-sections (4) and (5) of section 25. They have been explained with examples as follows: © The Institute of Chartered Accountants of India 1.38 1.38 GOODS AND SERVICES TAX A person who has obtained/is required to obtain more than one registration, whether in one State/Union territory or more than one State/Union territory shall, in respect of each such registration, be treated as distinct persons [Section 25(4)]. (20) Mohan, a Chartered Accountant, has a registered head office in Delhi. He has also obtained registration in the State of West Bengal in respect of his newly opened branch office. Mohan’s registrations under GST under same PAN in West Bengal and Delhi shall be treated as distinct persons. Distinct persons Registered head office in Delhi Registered branch office in West Bengal Further, 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 [Section 25(5)]. Further, Explanation 1 to section 8 of the IGST Act stipulates that establishments of same entity shall be considered as establishments of distinct persons where a person has: (i) an establishment in India and any other establishment outside India; (ii) an establishment in a State or Union territory and any other establishment outside that State or Union territory; or (iii) an establishment in a State or Union territory and any other establishment within that State or Union territory. (21) Rishabh Enterprises, a registered supplier, owns a restaurant in Virar, Maharashtra. It has opened a liquor shop in Raipur, Uttarakhand for trading of alcoholic liquor for human consumption. © The Institute of Chartered Accountants of India 1.39 1.39 SUPPLY UNDER GST Since supply of alcoholic liquor for human consumption in Uttarakhand is a non-taxable supply, Rishabh Enterprises is not required to obtain registration with respect to the same in Uttarakhand. In this case, restaurant in Maharashtra and liquor shop [though unregistered] in Uttarakhand shall be treated as establishments of distinct persons. Supply by Maharashtra restaurant to Uttarakhand shop, in course or furtherance of business even without consideration will qualify as supply. Establishments of distinct persons Registered restaurant in Maharashtra Unregistered liquor shop in Uttarakhand (iii) Stock transfers or branch transfers qualify as supply : It is a common practice in business to transfer goods transferred amongst different units of same entity, for instance, distribution of samples manufactured in a factory to different branches or transfer of goods from factory to depot/showroom for sale therefrom, from one warehouse to another warehouse, from one branch to another branch where the demand of the goods is higher. Since the transfer is within the same business, the transferor unit would not charge any amount to the transferee unit. Similarly, it is also possible that one branch supplies services to another branch of the same entity without consideration. These transactions are termed as self-supplies. Under GST, these transactions though undertaken without consideration, will also qualify as supply, provided the transfer of goods or services is between: U (i) different locations (with separate GST registrations) of same legal entity as these are transactions between distinct persons, or (ii) establishments of distinct persons. (22) Raghubir Fabrics transfers 1000 shirts from his factory located in Lucknow to his retail showroom in Delhi so that the same can be sold from there. The factory and retail showroom of Raghubir Fabrics are registered in the States where they © The Institute of Chartered Accountants of India 1.40 1.40 GOODS AND SERVICES TAX are located. Although no consideration is charged, supply of goods from factory to retail showroom constitutes supply. Stock Transfer - Deemed Registered Lucknow factory Registered Delhi showroom However, transfer between two units of a legal entity under single registration (apparently within same State) will not be considered as supply. This can be understood with the help of the following example: (23) Raghubir Fabrics transfers 1000 shirts from his factory located in Lucknow to his retail showroom in Kanpur so that the same can be sold from there. It has taken one registration in the State of Uttar Pradesh declaring Lucknow factory as its principal place of business and Kanpur showroom as its additional place of business. Since no consideration is charged, supply of goods from factory to retail showroom in same State under single registration does not constitute supply. Stock Transfer – Not a Supply Lucknow factory Kanpur showroom Single registration in UP However, in the above example, if Raghubir Fabrics obtains separate registrations for Lucknow factory and Kanpur showroom, stock transfer between the Lucknow factory and Kanpur showroom will constitute supply. The concept arising from the above discussion is summarised in © The Institute of Chartered Accountants of India 1.41 1.41 SUPPLY UNDER GST below diagram (assuming a case where there are two places of business in a State): Whether the establishments have same PAN? YES Whether separate registrations have been obtained for two places of business within same State? YES Whether transfer between them will be considered as supply under GST? NO NO YES YES Moulds and dies owned by Original Equipment Manufacturers (OEM) that are sent free of cost (FOC) to a component manufacturer, in course or furtherance of business, do not constitute supply since they are not related persons or distinct persons and there is no consideration involved [Circular No. 47/21/2018 GST dated 08.06.2018]. (iv) Supply of goods or services or both between an employer and employee: In terms of the definition of related person given above, employer and employee are related persons. However, services provided by an employee to the employer in the course of or in relation to his employment are outside the scope of GST (treated as neither supply of goods nor as supply of services) as per Schedule III of the CGST Act (discussed subsequently in this chapter)]. Gifts by employer to employee Further, proviso to Para 2 of Schedule I provides that gifts upto ` 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. However, gifts of value more than ` 50,000 made without consideration are supply and are subject to GST, when made in the course or furtherance of business. © The Institute of Chartered Accountants of India 1.42 1.42 GOODS AND SERVICES TAX What constitutes a ‘gift’? The term ‘gift’ has not been defined in the GST law. In common parlance, gift is made without consideration, is voluntary in nature and is made occasionally. It cannot be demanded as a matter of right by the employee and the employee cannot move a court of law for obtaining a gift. Perquisites by employer to employee Since services by an employee to the employer in the course of or in relation to his employment are outside the scope of GST, supply by the employer to the employee in terms of contractual agreement entered into between the employer and the employee will not be subjected to GST. Any perquisites provided by the employer to its employees in terms of contractual agreement entered into between the employer and the employee are in lieu of the services provided by employee to the employer in relation to his employment. It follows therefrom that perquisites provided by the employer to the employee in terms of contractual agreement entered into between the employer and the employee will not be subjected to GST 20. Further, the input tax credit (ITC) scheme under GST does not allow ITC of membership of a club, health and fitness centre 21. Consequently, if such services are provided free of charge to all the employees by the employer then the same will not be subjected to GST. 20 Circular No. 172/04/2022 GST dated 06.07.2022 Complete list of the goods and services in respect of which ITC is blocked has been elaborated in Chapter 7 – Input Tax Credit in Module 2 of this Study Material. 21 © The Institute of Chartered Accountants of India 1.43 1.43 SUPPLY UNDER GST The same would hold true for free housing to the employees, when the same is provided in terms of the contract between the employer and employee and is part and parcel of the cost-to company (C2C) 23 III. Principal – Agent [Para 3 of Schedule I]: Supply of goods by a principal to his agent, without consideration, where the agent undertakes to supply such goods on behalf of the principal is considered as supply. Similarly, supply of goods by an agent to his principal, without consideration, where the agent undertakes to receive such goods on behalf of the principal is considered as supply. Points which merit consideration, in this regard, are as follows: Only Supply of goods between principal and agent is covered here. is also supply. Thus, the supply of services between the principal and the agent and vice versa would require “consideration” to be present so as to be considered as supply and thus, making it liable to GST. Let us first go through the meaning of terms ‘principal’ and ‘agent’. Section 2(5) defines agent as 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. Circular No. 172/04/2022 GST dated 06.07.2022 read with Ministry of Finance’s Press Release on 10.07.2017 22 It is possible to take an alternative view in this regard. This scenario, i.e. the employer providing services (free of charge) to the employee in lieu of the services provided by the employee to the employer in the course of employment, is an exchange transaction. In an exchange transaction, both the parties independently assess their transaction status. Thus, while service provided by employee to the employer being covered under Schedule III is not a supply, service provided by employer to employee may constitute a supply in terms of section 7(1)(c) read with para 2 of Schedule I since employer and employee are related persons as per explanation to section 15. Provisions of section 15 have been discussed in detail in Chapter 6 – Value of Supply in this Module of the Study Material. 23 © The Institute of Chartered Accountants of India 1.44 1.44 GOODS AND SERVICES TAX As we can deduce from this definition of agent that (a) the term ‘agent’ is defined in terms of the various activities being carried out by the person concerned in the principal-agent relationship and (b) the supply/receipt of goods/services has to be undertaken by the agent on behalf of the principal. Further, the term principal has been defined under section 2(88) as a person on whose behalf an agent carries on the business of supply or receipt of goods or services or both. In order to determine whether a particular principalagent relationship falls within the ambit of the Para 3 of Schedule I as discussed above or not, the DECIDING FACTOR is whether the invoice for the further supply of goods on behalf of the principal is being issued by the agent or not? 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.  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 Para 3 above.  However, 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 Para 3 above.  Similarly, where the goods being procured by the agent on behalf of Goods procured on behalf the principal are invoiced in the of principal are invoiced name of the agent then further in the agent’s name. provision of the said goods by the agent to the principal would be covered by Para 3 above [Circular No. 57/31/2018 GST dated 04.09.2018]. © The Institute of Chartered Accountants of India Invoice for further supply to customer be issued in the agent’s name. SUPPLY UNDER GST Where the invoice is issued by the agent to customer in the name of: Whether he will be an agent in terms of Para 3 of Schedule I? Principal No Agent Yes 1.45 1.45 The above clarification can be understood with the help of following scenario based examples: (24) Anmol appoints Bholu to procure certain goods from the market. Bholu identifies various suppliers who can provide the goods as desired by Anmol and asks the supplier (Golu) to send the goods and issue the invoice directly to Anmol. In this scenario, Bholu 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, Bholu is not an agent of Anmol for supply of goods in terms of Para 3 of Schedule I. (25) Manimani Bank, a banking company, appoints Mandaar (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 Manimani Bank. The invoice for the supply of the goods is issued by Manimani Bank 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, Mandaar is not an agent of Manimani Bank for the supply of goods in terms of Para 3 of Schedule I. (26) Gautam, an artist, appoints Gambhir (auctioneer) to auction his painting. Gambhir arranges for the auction and identifies the © The Institute of Chartered Accountants of India 1.46 1.46 GOODS AND SERVICES TAX 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 Gambhir on the behalf of Gautam but in his own name and the painting is delivered to the successful bidder. In this scenario, Gambhir is not merely providing auctioneering services, but is also supplying the painting on behalf of Gautam to the bidder, and has the authority to transfer the title of the painting on behalf of Gautam. This scenario is covered under Para 3 of Schedule I. (27) A 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 Para 3 of Schedule I. The disclosure or non-disclosure of the name of the principal is immaterial in such situations. (28) Ravi sells agricultural produce by utilizing the services of Kavi who is a commission agent as per the Agricultural Produce Marketing Committee Act (APMC Act) of the State. Kavi identifies the buyers and sells the agricultural produce on behalf of Ravi for which he charges a commission from Ravi. 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 Kavi to the buyer, then he is an agent covered under Para 3 of Schedule I 24. However, in cases where the invoice is It is important to note that services provided by the commission agent for sale or purchase of agricultural produce are exempt supply under GST. Said exemption has been discussed in detail in Chapter 4 Exemptions from GST in this Module of the Study Material. 24 © The Institute of Chartered Accountants of India SUPPLY UNDER GST 1.47 1.47 issued directly by Ravi to the buyer, the commission agent (Kavi) doesn’t fall under the category of agent covered under Para 3 Clarification of issues pertaining to Del-credere agent (DCA) A question was posed by the industry - whether supply between a principal and a Del-credere agent would also get covered under Schedule I. The Government clarified the doubt of the industry by way of following clarification: Before going through the clarification, let us first understand what is meant by a DCA? In commercial Del-credere trade parlance, a DCA is a selling agent who is engaged agent by a principal to assist in supply of goods or services by contacting potential buyers on behalf of the principal. 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. Circular No. 73/47/2018 GST dated 05.11.2018 has clarified the following issues in this regard: Sl. No. 1. Issue Clarification Whether a DCA As already clarified vide Circular No. falls under the 57/31/2018 GST (discussed above), whether or ambit of agent not the DCA will fall under the ambit of agent © The Institute of Chartered Accountants of India 1.48 1.48 GOODS AND SERVICES TAX under Para 3 of under Para 3 of Schedule I depends on the Schedule I? following possible scenarios: 2. Whether the temporary shortterm 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?  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. In such a scenario, following activities are taking place: 1. 2. 3. 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, 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 25. 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. 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) are exempt supply vide Entry 27 of Notification No. 12/2017 CT(R) dated 28.06.2017 [Discussed in detail in Chapter 4 – Exemptions from GST in this Module of the Study Material]. 25 © The Institute of Chartered Accountants of India SUPPLY UNDER GST 3. Where DCA is an agent under Para 3 of Schedule I 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? 1.49 1.49 In such a scenario following activities are taking place: 1. 2. 3. 4. 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, 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 emphasised 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 section 15(2)(d) 26. IV. Importation of services [Para 4 of Schedule I]: Import of services by a person from a related person or from his establishments located outside India, without consideration, in the course or furtherance of business shall be treated as “supply”. Section 15 has been discussed in detail in Chapter 6 – Value of Supply in this Module of the Study Material. 26 © The Institute of Chartered Accountants of India 1.50 1.50 GOODS AND SERVICES TAX (29) Jhumroo Associates received legal consultancy services from its head office located in Malaysia. The head office has rendered such consultancy services free of cost to its branch office. Since Jhumroo Associates and the head office are related persons, services received by Jhumroo Associates will qualify as supply even though the head office has not charged anything from it. (30) Chakmak, a proprietor registered in Delhi, has sought architect services from his son located in US, with respect to his newly constructed house in Delhi. Although services have been received by Chakmak without consideration from his son - a related person, yet it will not qualify as supply since the same has not been received in course or furtherance of business. Import of Services However, if in the above case, Chakmak receives architect services without consideration from his son with respect to his office in Delhi, the same shall be treated as supply because the same have been received in the course of business. with consideration without consideration In the course of furtherance of business or not Supply Related /distinct person in the course of furtherance of business Supply Other Cases Not a supply In the preceding paras, we have discussed the provisions of Schedule-I which enumerates the cases where an activity is treated as supply even though it is undertaken free of cost. In this backdrop, let us now examine whether the © The Institute of Chartered Accountants of India SUPPLY UNDER GST 1.51 1.51 items given free of cost in case of some of the sales promotion schemes qualify as supply or not. Clarification on Sales promotion schemes A number of sales promotion schemes are commonly employed by the businesses to increase sales volume or to encourage the use or trial of a product or service so that new customers get attracted towards their products. For instance, certain sections of trade and industry, such as, pharmaceutical companies often provide drug samples to their stockists, dealers, medical practitioners, etc., or sometimes, companies announce offers like ‘Buy One, Get One free’ - i.e. buy one soap and get one soap free or get one tooth brush free along with the purchase of tooth paste. As we have already seen that as per section 7(1)(a), the goods or services which are supplied free of cost (without any consideration) shall not be treated as “supply” except in case of activities mentioned in Schedule I of the CGST Act. In view of the same, few sales promotion schemes have been examined as under: Free samples and gifts: Samples which are supplied free of cost, without any consideration, do not qualify as “supply” under GST 27, except where the activity falls within the ambit of Schedule I. FREE SAMPLES ITC on inputs, input services and capital goods to the extent they are used in relation to the gifts/free samples shall be available to the supplier only where the activity of distribution of gifts/free samples falls within the scope of supply supply. The same has been discussed in detail in Chapter 7 – Input Tax Credit in Module 2 of this Study Material. 27 © The Institute of Chartered Accountants of India 1.52 1.52 GOODS AND SERVICES TAX Buy one get one free offer: It may appear at first glance that in case of offers like “Buy One, Get One Free”, one item is being “supplied free of cost” without any Buy one consideration. In fact, it is not an individual supply Get one of free goods, but a case of two or more individual free supplies where a single price is being charged for the entire supply. It can at best be treated as supplying two goods for the price of one. Taxability of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply and the rate of tax shall be determined accordingly – Concept of composite and mixed supply has been discussed subsequently in this chapter. [Circular 92/11/2019 GST dated 07.03.2019] There has always been an ambiguity as to whether activities/ transactions involving supply of goods/ services, by any person, other than an individual, to its members or vice-versa fall within the purview of supply or not. Clause (aa) to section 7(1) brings in the certainty that said activities/ transactions are covered within the scope of supply under GST and ensures the levy of GST on such activities/transactions. This has been discussed as under: ACTIVITIES/TRANSACTIONS BETWEEN A PERSON, OTHER THAN AN INDIVIDUAL, AND ITS MEMBERS/ CONSTITUENTS FOR CONSIDERATION The activities or transactions (involving supply of goods or services) between a person, other than an individual, (i.e. association, club, etc.) and its members or constituents, for cash, deferred payment or other valuable consideration are covered within the ambit of ‘supply’ as per section 7(1)(aa). Section 7(1)(aa) Further, explanation to clause (aa) to section 7(1) clarifies that for the purpose of this clause, such person (association, club, etc.) and its members or © The Institute of Chartered Accountants of India 1.53 1.53 SUPPLY UNDER GST constituents shall be deemed to be two separate persons and the supply of activities or transactions between them shall be deemed to take place from one such person to another. The explanation starts with a non-obstante clause and shall therefore, shall have an overriding effect over anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority. The aforesaid explanation prevents the application of doctrine of mutuality by such person(s) 28. (31) Resident Welfare Association (RWA) of Sanskriti Society supplies air-conditioners to its members at a concessional price. (32) A Resident Welfare Association collects maintenance charges from its members for services provided. Here, in both the aforesaid examples, it shall be deemed that the Resident Welfare Association (RWA) and its members are two separate persons and it shall be deemed that the supply has taken place from Resident Welfare Association (RWA) to its members. ACTIVITIES/TRANSACTIONS TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES Section 7(1A) classifies certain activities/ transactions constituting supply, either as supply of goods or supply of services. Schedule II of the CGST Act contains the list of activities or transactions which have been classified either as Section 7(1A) read with Schedule II supply of goods or supply of service. This helps in mitigating the ambiguities which existed in earlier laws. Section 7(1)(aa), in effect, overrules the judgment of the Hon’ble Supreme Court in State of West Bengal v. Calcutta Club Limited wherein it was held that the transactions between a Club and its members cannot be taxed owing to the doctrine of mutuality, i.e., a person cannot make a profit from himself. 28 © The Institute of Chartered Accountants of India 1.54 1.54 (33) GOODS AND SERVICES TAX Under earlier tax regime, the restaurants used to charge both service tax and VAT on the value of food served. This is so because both sale of goods and provision of service were involved and therefore taxable event under both the Statutes i.e. respective VAT law and service tax law got triggered. Under GST, the supply by a restaurant is treated as composite supply [concept of composite supply is discussed subsequently in this chapter] since supply of food and service is naturally bundled in ordinary course of business. Further, para 6(b) of Schedule II [refer table below] specifically provides that such composite supply shall be treated as supply of service. Hence, the entire value of invoice shall be treated as value of service and leviable to GST accordingly. The matters listed out in Schedule II are primarily those which had been entangled in litigation in the earlier regime owing to their complex nature and susceptibility to double taxation. These are as follows:Para No. 1. Activity/ Transaction Transfer Type Any transfer of title in goods. (34) Shivaji sells readymade garments to its customers. Nature of Supply Supply Goods Any transfer of right in goods/ Supply undivided share in goods without Services transfer of title thereof. of of (35) Genius Equipments Ltd. gives a machinery on rent to Suhaasi Manufacturers. Any transfer of title in goods under Supply an agreement which stipulates that Goods property in goods shall pass at a © The Institute of Chartered Accountants of India of 1.55 1.55 SUPPLY UNDER GST future date upon payment of full consideration as agreed. (36) Dhruva Capitals supplied goods on hire purchase basis to customers. (37) Optima Manufacturers supplies toys to retailers on ‘sale or return basis’. 2. Land and Any lease, tenancy, easement, Building licence to occupy land 29. Supply Services of Any lease or letting out of building Supply including a commercial, industrial Services or residential complex for business or commerce, wholly or partly. of Treatment or Any treatment or process which is Supply Process applied to another person’s goods Services of (38) Lease agreement for land. (39) A shop let out in a busy market area. 3. (40) Damani Dying House dyes the clothes given by Shubham Textiles Ltd. on job work basis. 4. 29 Goods forming part of business Supply assets are transferred or disposed Goods of by/under directions of person Also refer Circular No.44/18/2018 CGST dated 02.05.2018 discussed subsequently. © The Institute of Chartered Accountants of India of 1.56 1.56 Transfer Business Assets GOODS AND SERVICES TAX of carrying on the business so as no longer to form part of those assets. Goods held/used for business are Supply put to private use or are made Services available to any person for use for any purpose other than business, by/ under directions of person carrying on the business. of (41) A person manufacturing and selling wooden furniture takes one chair manufactured by him for use at his house. Goods forming part of assets of any business carried on by a person who ceases to be a taxable person, 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. (42) Arun, a trader, is Supply winding up his business. Goods Any goods left in stock shall be deemed to be supplied by him. © The Institute of Chartered Accountants of India of SUPPLY UNDER GST 1.57 1.57 Exceptions: 5.  Business is transferred as a going concern to another person 30.  Business is carried on by a personal representative who is deemed to be a taxable person. (a) Renting of immovable property (43) Renting of a commercial complex. (44) religious place. Renting of precincts of a (45) Renting of property to an educational institution. (46) Permitting use of immoveable property Supply for placing vending/dispensing machines. Services (b) Construction of complex, building, civil structure, etc. of 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 after its first occupation, whichever is earlier. Services by way of transfer of a going concern, as a whole or an independent part thereof are exempt supply under GST [Discussed in detail in Chapter 4 – Exemptions from GST in this Module of the Study Material]. 30 © The Institute of Chartered Accountants of India 1.58 1.58 GOODS AND SERVICES TAX (47) Rathi Builders has constructed individual residential units for agreed consideration of ` 1.2 crore per unit. ` 90 lakh per unit were received before issuance of completion certificate by the competent authority and its first occupation, and balance after completion. The term construction includes additions, alterations, replacements, or remodeling of any existing civil structure. The expression competent authority means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of nonrequirement of such certificate from such authority, from any of the following, namely:— (i) an architect registered with the Council of Supply Architecture constituted under the Services Architects Act, 1972; or (ii) a chartered engineer registered with the Institution of Engineers (India); or (iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority. (c) Temporary transfer or permitting use or enjoyment of any intellectual property right (48) Temporary transfer of patent. (d) Development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of IT software © The Institute of Chartered Accountants of India of SUPPLY UNDER GST 1.59 1.59 (49) Suvidha Solutions develops an accounting software for a business firm. (e) Agreeing to obligation to refrain from an act, or to tolerate an act or situation, or to do an act. (50) Cable operator - Sakharam has entered into an agreement with Cable operator - Aatmaram that Sakharam will not provide cable connections in the specified areas where Aatmaram is providing the connections. Non-compete agreements constitute supply of service. Please refer the detailed discussion on this para Supply Services of Schedule-II given at the end of the Table. of (f) Transfer of right to use any goods for any purpose (whether or not for specified period) for cash, deferred payment or other valuable consideration. (51) Machinery given on hire. 6. Following composite supplies :-  Works contract Works contract: means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is Supply involved in the execution of such contract Services [Section 2(119)]. © The Institute of Chartered Accountants of India of 1.60 1.60  GOODS AND SERVICES TAX 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. CBIC has clarified the taxability of tenancy rights, Joint Venture (JV) and Priority Sector Lending Certificates (PSLCs) as under: 1. Taxability of ‘tenancy rights’ under GST CBIC has clarified the taxability of ‘tenancy rights’ under GST as under: Pagadi system, i.e. transfer of tenancy rights against tenancy premium, is prevalent in some States. In Pagadi system, the tenant acquires tenancy rights in the property against payment of tenancy premium (pagadi). The landlord may be owner of the property, but the possession of the same lies with the tenant. The tenant pays periodic rent to the landlord as long as he occupies the property. The tenant also usually has the option to sell the tenancy right of the said property and in such a case has to share a percentage of the proceeds with owner of land, as laid down in their tenancy agreement. Alternatively, the landlord pays to tenant the prevailing tenancy premium to get the property vacated. It has been clarified that the activity of transfer of tenancy right against consideration [i.e. tenancy premium] is squarely covered under supply of service liable to GST. It is a form of lease or renting of property and such activity is specifically declared to be a service in Para 2 of Schedule II as discussed in table above i.e. any lease, tenancy, easement, licence to occupy land is a supply of services. Although stamp duty and registration charges have been levied on such transfer of tenancy rights, it shall be still subject to GST. Merely because a transaction/supply involves execution of documents which may require registration and payment of registration fee and stamp duty, would not preclude them from the ‘scope of supply’ and from payment of GST. © The Institute of Chartered Accountants of India SUPPLY UNDER GST 1.61 1.61 The transfer of tenancy rights cannot be treated as sale of land/ building in para 5 of Schedule III. Thus, it is not a negative list activity [this concept is discussed under next heading] and consequently, a consideration for the said activity shall attract levy of GST. To sum up, the activity of transfer of ‘tenancy rights’ is squarely covered under the scope of supply and taxable per-se. Transfer of tenancy rights to a new tenant against consideration in the form of tenancy premium is taxable. However, renting of residential dwelling for use as a residence to an unregistered person or to a registered sole proprietor taking the residential dwelling on rent on his own account in his personal capacity for use as his residence is exempt [Entry 12 of Notification No. 12/2017 CT (R) dated 28.06.2017 – Discussed in Chapter 4 – Exemptions from GST in this Module of the Study Material]. Hence, grant of tenancy rights in a residential dwelling for use as residential dwelling against tenancy premium or periodic rent or both (to above mentioned persons) is exempt. As regards services provided by outgoing tenant by way of surrendering the tenancy rights against consideration in the form of a portion of tenancy premium is liable to GST 31. 2. Priority Sector Lending Cer

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