Taxable Supply

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Should be in the course of furtherance of Business

Business has been very comprehensively described in Section 2 of CGST Law as under:

(17) “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 sub-clause (a);

(c)      any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;

(d)      supply or acquisition of goods including capital goods 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;

(f)       admission, for a consideration, of persons to any premises;

(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)      services provided by a race club by way of totalisator or a licence to book maker in such club ; and

(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;

The main parts of the definition can be summarized as under:

Import of Services for a consideration

The entry speaks about any import of services when made for a consideration shall consutitute Supply.  The purpose whether personal or official has not been differentiated for the purpose of levy of GST.  For eg., a person downloads a videogame on mobile for playing and pays 100 USD for such download, then, unless exempted, the transaction qualifies as Supply.

Import of Goods not covered

It is important to note that the GST Council has included only import of services within the scope of this inclusion and not that of goods.  It is important to note that import of goods have not been specifically included in the scope of Supply and thus, we need to await further clarifications on the exigiblity of GST on  import of goods.  In the opinion of the author, Import of Goods shall remain taxable under Entry 83 of List I of Seventh Schedule of the Contitution and not under GST, however, duty levied as IGST on such import of Goods shall be creditable under GST.

Transactions without consideration as specified in Schedule I

Certain transaction has been prescribed by the Law as deemed Supplies.  A deeming fiction is evoked in such cases that even in absence of consideration, such transaction shall qualify as Supply.  The idea behind such transactions to be deemed to be Supply in absence of consideration is that such transactions are between related parties where they can control the pricing and thus, can execute transaction without prima facie consideration or there has been benefit in form of Input Tax credit has been availed by the Assessee and thus, the government in order to safeguard its interest in such cases have prescribed such transaction as Deemed supplies in Schedule I of the CGST Law.  The list of such tranasctions are as under:

The above transactions are explained as under:

  1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.
    This transaction is deemed primarily to require taxable person to return the benefit of Input tax Credit availed on an asset when he has disposed such asset without consideration and thus, without levy of GST. The two key terms used are ‘transfer’ and ‘dispoal’. We have already shared the meanings of the two terms in Para 2.4.1.1. above and thus are not repeating here for sake of brevity. Suppose Mr A has bought a printer for Rs 20,000 on which he has availed Input Tax Credit of Rs 3000 in FY 2017. He used it for two years in his business and then transferred such printer without any consideration to his employee. Mr A is required to consider such transfer of printer as his output Supply. It is important to note that only ‘transfer’ and ‘disposal’ transactions shall fall within the ambit of the above definition. Other kinds of supply viz., Sale, Barter, Exchange already has an element of consideration in kind and thus, would not fall within the scope of above deeming provision.
    Disposal of scrap of an asset shall not fall within the above provision
    In case an asset is destroyed and its scrap is disposed off, such transaction would also not fall within the ambit of deeming fiction and disposal of scrap cannot be equated with disposal of asset.
  2. Supply of goods or services between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business
    This category requires three conditions to be fulfilled:

    • There should be a Supply
    • Such supply should be between related persons or distinct persons
    • Such supply should be made in the course or furtherance of business

    The first condition of being a supply shall include all forms of supply and has been elaborated in Para 2.4.1.1. and the third condition of being made in course or furtherance of business is elaborated in Para 2.4.1.4. We shall now examine the term related person.
    Related person:

    Related person has been defined in Explanation to Seciton 15 as under:

    Explanation.—For the purposes of this Act,––

    1. persons shall be deemed to be “related persons” if––
      1. such persons are officers or directors of one another’s businesses;
      2. such persons are legally recognised partners in business;
      3. such persons are employer and employee;
      4. any person directly or indirectly owns, controls or holds twenty-five per cent or more of the outstanding voting stock or shares of both of them;
      5. one of them directly or indirectly controls the other;
      6. both of them are directly or indirectly controlled by a third person;
      7. together they directly or indirectly control a third person; or they are members of the same family;
    2. the term “person” also includes legal persons;
    3. persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.

    Thus, if there is a supply without consideration is made with any of the persons in the above specified cases, it would deemed to be a Supply transaction.

    Sole Selling agents are also related persons.

    It has also been specifically provided that persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.

  3. Supply of goods by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal
    These cases are those when the principal supplies goods to his agent and agent holds such goods on behalf of principal. Thus, all transaction whether within the same state or inter state between principal and agent shall be deemed to be supply even when no consideration is charged for such supply. Agent has been defined in Section 2(5) of CGST Act as under:
    “agent” means 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;
  4. Supply of goods by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal
    Any Supply of goods by the agent to the principal shall also be constituted as Supply. Agent usually received or holds goods on behalf of principal and thus, in cases where he has supplied goods of principal to principal, such supply shall constitute a supply for the purpose of GST Laws.
  5. Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business.
    In case no consideration is paid but certain services (not goods) are received from outside India from either a related party (as discussed in sub clause (b) above) or from his establishment outside India including Branch office / Head office etc.

Transactions deemed to be Supply of Goods or Services – Schedule II

While definition of Supply has prescribed certain transactions as deemed Supply, the definition now incorporates reference to Schedule II whereby it provides for certain transactions as being classified and deemed as either supply of goods or supply of services.

Deemed Supply of goods

The following transactions has been deemed to supply of goods:

  1. Transfer of any transfer of the title in goods is a supply of goods
    This is the most generic transaction whereby the title in goods is transferred by one person to another.  It is pertinent to note that in GST regime even the transfer of title amongst branches of the same person which are separately register.
  2. Transfer of assets at a future date
    This transaction involves transfer of any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods.  For eg., Mr A, under an agreement dated 1.4.2018, agrees to supply a Table to Mr B on 1.6.2018.  Thus, though there is a promise to supply, however, since the promise is to supply a good on a future date, such supply shall constitute supply of goods.
  3. Goods transferred at the instruction of person carrying on business
    This transaction envisage in its ambit transfer of business assets where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person.  For eg., a person running business is running business in Delhi has sent his machines to Pune and after use asks the person in whose premises the machines were used to dispose such machines for him and adjust the receipts towards their settlement.  In this case though the goods a re sold by person in Pune, yet the liability shall be of person who is in Delhi and as a supply of goods.
  4. Goods retained at the time of cessation of business
    Transfer of business assets where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person.  For eg, Mr A has 10 computers by which he was providing training services.  On 1.4.2018, he ceases his business and does not sell his assets and retains them with him.  Thus, since there is no supply of business assets at the time of cessation, this would not constitute supply as per other provisions of the law.  Hpwever, this deeming provision enables the law to deem such retention also as supply of goods. However, this rule has two exceptions, i.e. situations where such retention shall not be constituted as deemed supply.  The two excepts to this deeming provision are:

    • the business is transferred as a going concern to another person; or
    • the business is carried on by a personal representative who is deemed to be a taxable person.
  5. Supply of goods by association to its members
    This entry deems supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration as supply of goods. This entry overrides the concept of mutuality to enable levy of tax on transaction from association to its members as it has been time and again disputed by members that association is no different from them and any supply from association to members constitute supply to self. Thus, in order to overrise such contentions a eeming fiction has been invoked in the law.
    This sub clause aimed to remove the hindrance of taxing such transaction since such sale would not constitute sale from one person to another as identity of such body is derived from its members only and has no separate legal existence.

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