Section: 7 & 8 of GST Act
1. Meaning of Taxable Event
Taxable event is that event, happening of which attracts liability to tax. Taxable event is a very important event in any law as the levy and collection of tax is based on the happening of the taxable event. Although, the taxable event happens to be at a particular point of time, the levy and collection of such tax may be postponed for administrative convenience, to a later date.
2. Taxable Event in The Present Indirect Tax System
Under the present tax system there are different taxable event for different types of taxes such as for Excise duty it is manufacturing of goods, for service tax it is provision of service and for VAT/CST it is sale of goods etc. Various taxable events are summarized below:
|TAX/DUTY||RELEVANT SECTION||TAXABLE EVENT|
|EXCISE DUTY||Section 3 of the Central Excise Act, 1944||Manufacture or production
of goods in India
|SERVICE TAX||Section 66B of the Finance Act,1994||Service provided or agreed to be provided by one person to another in the taxable territory|
|CUSTOM DUTY||Section 12 of the Customs Act,1962||Goods imported into, or exported from, India|
|CST||Section 6 of Central Sales Tax Act,1956||Sale of goods in the course of Inter-State trade|
|VAT||State VAT laws||Sale of goods in the course of Intra-State trade|
3. Taxable Event Under GST Regime
“Goods and Services Tax” means “any tax on supply of goods or services or both except tax on supply of alcoholic liquor for human consumption [Article 366 (12A) of the Constitutional (101st Amendment) Act, 2016]”.
Thus under the GST regime concept of tax on manufacturing (Excise Duty), tax on provision of service (Service Tax), tax on sale of goods (VAT/CST) etc. will be abolished. Only taxable event under GST will be supply of Goods and Services. Therefore supply will hold the greatest significance and shall be an important event in determining the taxability of all transaction whether commercial or otherwise under the GST regime.
4. Power To Levy GST
Article 246A of the Constitution, as brought by the Constitutional (101st Amendment) Act, 2016, confers concurrent power to both the parliament and state to make laws with respect to GST. However clause 2 of Article 246A read with Article 269A provides exclusive power to parliament to legislate with respect to interstate trade or commerce.
5. Meaning and Scope of Supply
Section 7 of the GST Act contains meaning and scope of supply. Supply is the most critical term under the GST regime, which should be the centre point to determine levy and collection of GST. Despite being such a critical point in the GST regime, GST Act has chosen to define the “supply” in an inclusive manner, without defining the term “Supply”.
It is to be noted that the word used is “Supply” and not “Sale”. Thus, any supply including stock transfer, branch transfer will also attract GST.
Scope of supply – Section 7 of GST Act
Nature of Supply
|1. Supply Includes
|a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business, [Section 7(1)(a)]
b) import of services, for a consideration whether or not in the course or furtherance of business, and [Section 7(1)(b)]c) activities specified in Schedule I, made or agreed to be made without a consideration. [Section 7(1)(c)]d) activities to be treated as supply of goods or supply of services as specified in ScheduleII.[Section 7(1)(d)]
|2. Activities neither to be treated as supply of goods nor a supply of services
|Activities as specified in Schedule III [Section 7(2)(a)]
Such activities or transactions undertaken by the Central Government, a State Government or any local authority, as may be notified by the Government on the recommendation of the council. [Section 7(2)(b)].
|3.Power of Central Government or State Government to notify transactions
|Subject to sub-section (1) and sub-section (2), the Central or a State Government may, upon recommendation 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; or
(c) neither a supply of goods nor a supply of services.
|4. Tax liability on Composite Supply and Mixed Supply
|(a) A composite supply means supply made by taxable person to a recipient comprising two or more supplies, of goods or services or any combination thereof ,which are naturally bundled and supplied in conjunction with each other in the ordinary course of business ,one of which is a principal supply (supplies naturally bundled)
(b) A mixed supply comprising two or more supplies shall be treated as supply of that particular supply which attracts the highest rate of tax. (Supplies not naturally bundled).
Example on Composite Supply and Mixed Supply
Example-1: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is the principal supply.
The entire supply will be treated as supply of principal and the rate of tax of principal will apply for other items.
In case of purchase of ticket in Rajdhani Train where the cost of ticket includes the services for Transportation of passengers, cost of foods and supply of bed rolls. All these services are bundled together and here the principal supply will be transportation of passengers.
A luxury Hotel in Delhi provides a 3 Nights package with the breakfast and one day Delhi sightseeing.
Let us suppose a supply of package consisting of canned foods, sweets, chocolates, cakes, dry fruits, and fruit juice when supplied for a single price.
Here it is further assumed that canned food is taxable @ 12%, sweets at zero rate, chocolates @ 18%, cakes 18%, dry fruits 18%, and fruit juice @ 28%.
Here the Highest rate will be charged @ 28 % on entire value of supply.
If these items are supplied separately then it will not be a mixed supply.
Let us take another example :
A combo pack for Rs 10,000 is supplied which consist of a Tie, Pen, Calculator, Wallet, Watch .
The Tie is taxable say @ 10%, Pen @ 8%,Caculator 12% ,Wallet 18% and Watch @ 28%.
Here the combo pack will be considered as Mixed supply and will be taxable at highest rate which is 28% .
6. Meaning of various terms in relation to “Supply”
|(i)||Sale||Transferring the property in goods from one to another, upon valuable consideration.|
|(ii)||Transfer||Any transfer of goods or right in goods or of undivided share in goods without transfer of title thereof.|
|(iii)||Barter||To exchange one commodity for another without use of money.|
|(iv)||Exchange||To swap, to part with, give or transfer for an equivalent with the use of money.|
|(v)||Licence||Permission granted by competent authority to exercise certain privileges without such authorization the activity would have constituted as an illegal act.|
|(vi)||Rental||Periodical payment for the use of another property.|
|(vii)||Lease||Contractual agreement by which one party conveys an estate in property to another party, for a limited period, subject to various conditions, in exchange for something of value, but still remain ownership.|
|(viii)||Disposal||To pass or into the control of someone else; to alienate, bestow, or part with.|
7. Import of Service
Imposition of GST is of the nature of Basic Custom Duty (BCD) which is levied on importation of goods irrespective of nature of use of these goods, whether for personal consumption or commercial use. Now importation of service whether for personal purpose or business purpose would be subject to GST. Such services would be liable to GST under Reverse Charge Mechanism (RCM).
Condition for Import of Service-
a) Supplier of service is located outside India,
b) Recipient of service is located in India and
c) Place of supply of service is in India.
|Example-6: Suppose Mr.A pays fees for on-line coaching obtained from a teacher located in USA for coaching of Engineering course for his son. Even if receipt of this service is not for business or furtherance of business, A would be liable to pay GST under RCM, subject to threshold limit.|
8. Various schedules related to supply
Supply made without consideration
|Matter||Example to relating matter|
|1.||Permanent transfer/disposal of business assets where input tax credit has been availed on such assets.||· A company is donating its used computer, tables etc. to a school or charitable organization or giving to the employees without consideration.
· Capital goods / plant and machinery transferred to another unit located in another state.
|2.||Supply of goods or services between related persons
orBetween distinct persons [as defined in Sec. 25 of GST Act], when made in the course or furtherance of business.Provided that gift not exceeding Rs. 50,000 in value in a financial year by employer to employee shall not be treated as supply of goods or services or both .
Generally no amount is charged for providing this guarantee but such transaction will be considered as supply.
Employer and employee is covered in the definition of related person. Thus, any supply of goods or services by employer to employee even free of cost would have been covered under the scope of supply . But when the GST bill was passed in the Lok sabha on 29.03.2017 , this clause was inserted to provide exemption of gift up Rs 50000 by the employer to employee in a FY .
|3.||Supply of goods—
a) by a principal[as defined in Sec. 2(88)] to his agent[as defined in Sec. 2(5)] 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.
|X Company, having godown in Mumbai transfer the goods to clearing and forwarding agent located in MP, who only receives the goods on behalf of X company. This section makes deeming provision that such activity of transfer shall be considered as supply and accordingly GST will be payable.|
|4.||Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business.||If a registered Person Mr. A (India) import consultancy service from a related person Mr. B (USA) in the course or furtherance of business then it shall be deemed to be supply of service under this clause and hence taxable under the GST.|
Whether activity is supply of goods or service
|Matters to be treated as supply of goods|
|1.||Transfer of the title in goods||Sale of goods by one taxable person to another.|
|2.||Transfer of title in goods under an agreement which stipulates that property in goods will pass at a future date upon payment of full consideration||Hire Purchase Agreement|
|3.||Transfer/disposal of business assets, with or without consideration, under the directions of the person carrying on the business||§ Sale of office computer.
§ Free samples
|4.||Goods forming part of the assets on ceasing to be a taxable person.||§ Person closing down his taxable business
§ Dissolution of partnership firm
|5.||Supply of goods by an unincorporated association/body of persons (BOP) to its member||§ Goods sold by a body of persons to its member for cash or on deferred payment.
§ Supply of food, gaming tools, books etc. by any club to its members.
|Matters to be treated as supply of service|
|1.||Transfer of right to use goods without transfer of title in goods||§ Machinery given on rent for specified period along with operator.
§ Rent a Cab.
|2.||Lease, tenancy, easement, licence to occupy land||Lease agreement to give land on lease for specified period.|
|3.||Lease or letting out of the building including a commercial, industrial or residential complex for business or commerce||Rent Agreements.|
|4.||Job work on others goods||Specified activities whether amount to manufacture or not.|
|5.||Making available business goods for personal use whether or not for consideration||§ Use of company vehicle for arranging picnic for employee.
§ Company guest house given to an employee for his personal function.
|6.||Renting of Immovable Property||Renting of factory|
|7.||Construction of a complex, building, civil structure or a part thereof||Construction of commercial or residential complex except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or before its first occupation, whichever is earlier.|
|8.||Temporary transfer or permitting the use or enjoyment of any intellectual property right||Franchise|
|9.||Development, design, programming, customisation, adaptation, up gradation, enhancement, implementation of information technology software||Programming or development of IT Software will now be a service only. (i.e. ERP).|
|10.||Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act||§ Damages for in-efficient services
§ Penalty imposed for late completion of agreed contract.
§ Notice pay
|11.||Works contract as defined in section 2(119) including transfer of property in goods involved in the execution of a works contract||§ Entire works contract will be treated as supply of service.
§ Construction services.
|12.||Transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration||As discussed in Sl No. 1 of supply of service|
|13.||Supply of goods, being food or any other article for human consumption or any drink (except alcoholic drink.)||§ Restaurant Services
§ Catering services
Activities or transactions which shall be treated neither as supply of goods nor services
|1. Services by an employee to the employer in the course of or in relation to his employment.
2. Services by any Court or Tribunal established under any law for the time being in force.
a. The functions performed by the Members of Parliament, Members of State Legislature, Members of Panchayats, Members of Municipalities and Members of other local authorities;
b. The duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or
c. The duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or a State Government or local authority and who is not deemed as an employee before the commencement of this clause.
4. Sale of land and subject to clause (b) of paragraph 5 of schedule II ,sale of building .
5. Actionable claims, other than lottery, betting and gambling.
6. Services of funeral, burial, crematorium or mortuary including transportation of the deceased.
Explanation : for the purpose of paragraph 2 , the term “court “ includes District Court ,High Court, Supreme Court
COMMENTS – Services at 1, 2 ,4 and 5 are similar to the “Exclusion in the definition of Service” as defined in section 65B(44) of Finance Act,1994 and services at 6 is taken from Negative List of services as defined in section 66D of Finance Act, 1994.
9. Meaning of various terms used in this Chapter
1. Government : means Central Govrnment ( section 2(53) of Gst Act
2. Consideration has been defined in Section 2(31) of GST Act. The main features of the said definition are as under:
(i) It can be monetary or non-monetary.
(ii) It can be given to/by third person.
(iii) It should be lawful.
(iv) Forbearance/abstinence can be consideration.
(v) Compromise or composition is consideration.
(vi) It should be certain.
(vii) It excludes deposit (refundable or non-refundable) that is not treated by supplier as consideration for supply.
‘Business’ as defined in section 2(17) of the GST Act 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) services provided by a race club by way of totalisator or a licence to book maker in such club;
The word ‘trade’ means exchange of goods for goods or goods for money or any business carried on with a view for profit.
If transactions under trade are repeated on a large scale, it is called commerce.
In ordinary parlance, trade and commerce carry with them the idea of purchase and sale with a view to make profit. If a person buys goods with a view to sell them for profit, it is an ordinary case of trade. If the transactions are on a large scale it is called commerce. Nobody can define the volume, which would convert a trade into commerce.
Profession is an occupation requiring intellectual skill. E.g. Doctor, Lawyer etc.
It is normally understood as the process by which the input and output are considered as two separate commercial commodity.
8. Any other similar activity
If any activity is not considered as trade, commerce, manufacture, profession or vocation, the same will be covered under ‘any other similar activity’.
9. Motive of profit is not important for business
Clauses (a) and (b) of the definition of “Business” provides that such trade, commerce or profession, manufacture, adventure will be considered as business whether or not is effected with motive to make gain or profit. Thus even if the words trade, commerce or profession is carried out without profit motive, yet it will be considered as business.
There are many societies created for particular purpose which normally carries out business activity on no profit no loss basis. They recover the cost of purchase.
Example-7, say ‘X’ society is registered for the purpose of purchasing and selling to its members, food grains and other items. They regularly buy food grains and other items outside the limit of city and sell the same to their members within the city on no profit no loss basis. The society will be considered as carrying on business even doing activity without profit motive.
10. Society, Club or Association
Clause (e) of definition of “Business” provides that provision of facilities or benefits to its members by Club, Association, Society, or any such body shall be considered as business. The Club or Association provides different kind of facility or benefit to the members. Many clubs have opened shops where food grains /vegetables/ fruits are sold to the members. Sale of these goods is only to the members and not to any other person. As per the definition, the said activity shall be considered as business. Normally such club or association operate on concept of mutuality. They purchase the goods and sell same normally to their members. Thus even if the Club or association operate on principle of mutuality, they will be considered as carrying on business.
11. Meaning of “in the course or furtherance of business”
As per section 7(1)(a) of GST act, supply of goods or services shall be made in the course or furtherance of business. Every person carries out certain activities regularly for running trade or commerce.
XYZ Ltd. is engaged in the business of transmission of power across the country. Transmission of power is carried out through the networks of transmission lines and sub-stations constructed by XYZ Ltd. It has a market share of 50% of transmission network in India. The construction of transmission network and transmission of power is “in the normal course of business” of the company.
Now, the company wants to expand its business/market share from 50% to 80% in the next 2 to 3 year. This can be accomplished by various methods like carrying out research and development activities or acquiring another company which is in similar line of business. Now for the expansion program, the company has appointed consultants to bring the proposal from other existing company, so as to acquire the business of other company who are in the same line of business. After scrutinising the proposal brought up by consultants nothing could be finalized but the activity carried out by consultants is considered as “furtherance of business”.
12. Similar Provisions related to “furtherance of business” exist under Income-tax Act also
Section 37(1) of the Income Tax Act, 1961 which reads as follows:
“Any expenditure (not being expenditure of nature described in section 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid down or expended wholly and exclusively for the purpose of business or profession shall be allowed in computing the income chargeable under the head income from profit and gains of business or profession”.
It is evident that such expenditure which is incurred wholly and exclusively for the purpose of business or profession shall be allowed as deduction in computing income chargeable under head ‘profits and gains of business or profession’.
The expression ‘wholly and exclusive’ in section 37(1) does not mean ‘necessarily’. Such expenditure may be incurred voluntarily and without any necessity, and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction therefor under section 37(1) even though there was no compelling necessity to incur such expenditure – Bralco Metal Industries Pvt. Ltd. v.CIT,  206 ITR 477 (Bom).