Transaction in Money vs Money as Consideration under GST

Summary: The article explains the distinction under GST between money as the subject matter of a transaction and money as consideration for a supply of goods or services. Section 2(52) of the CGST Act excludes money and securities from the definition of goods, while Section 2(102) excludes money and securities from services, subject to specified activities relating to the use or conversion of money where separate consideration is charged. Thus, merely transferring, lending, repaying or otherwise dealing with money does not itself constitute a taxable supply. In contrast, where goods or services are supplied and money is received in return, the money represents consideration and the underlying supply may attract GST. The article illustrates the distinction through hand loans, professional services, bank loans, interest, processing and documentation charges, foreign-exchange transactions, repayment of debts, machinery purchases and architectural services. In the case of lending, the principal amount is money advanced and repaid, whereas interest represents consideration for the lending service; interest on eligible deposits, loans or advances is exempt under Serial No. 27 of Notification No. 12/2017-Central Tax (Rate), while separate banking fees and charges may be taxable. Similarly, the currencies exchanged in foreign-exchange transactions are not themselves the taxable supply, whereas the service of conversion for separate consideration is covered by GST. The central question is therefore what has actually been supplied in return for the payment and in what capacity the money has moved or been transferred.

Introduction

The treatment of money under the Goods and Services Tax law often gives rise to an interesting question on when does a transaction involving money remain a mere ‘a transaction in money’, and when does money become consideration for a supply of goods or services. It may be noted that GST law under the definitions of ‘goods’ and ‘services’ excludes ‘money’ whereas erstwhile Section 65B(44) of the Finance Act,1994 while defining the word “service” excluded the ‘a transaction in money’ from the scope of service definition. Thus the word ‘money’ used in GST law is understood as “a transaction in money” for the purpose of understanding.

Distinction Between Transaction in Money and Money as Consideration

2. The distinction is important because GST is basically a tax on the supply of goods or services for a consideration as defined under Section 2(31) of the CGST Act,2017. Money, by itself, is outside the charging mechanism because it is neither goods nor services. However, the mere fact that money is involved in a transaction does not make the entire transaction non-taxable. In commercial life, money is used both as the subject matter of a transaction and as the consideration for another transaction. The GST consequences in the two situations are materially different from one another. A proper understanding of the statutory definitions of goods, services and money is therefore necessary before determining when GST is payable.

Money Excluded from Goods and Services

3. Section 2(52) of the Central Goods and Services Tax Act, 2017 defines “goods” to mean every kind of movable property, but clearly excludes money and securities. The definition however, includes actionable claims, growing crops, grass and certain things attached to or forming part of land where they are agreed to be severed before supply or under a contract. Similarly, section 2(102) defines “services” broadly as anything other than goods, money and securities, while specifically including certain activities relating to the use of money or its conversion from one form, currency or denomination to another where a separate consideration is charged. Thus, the statutory scheme itself makes an unambiguous distinction. The money is not goods and is also not services. Therefore, where the subject matter of a transaction is merely money and there is no independent supply of goods or services involved, the movement or transfer of money from one person to another do not attract GST. The word ‘money’ is defined under Section 2(75) of the CGST Act,2017.

Money as Consideration for Goods or Services

4. The distinction becomes clearer when we examine the expression “a transaction in money” as against “money as consideration”. A transaction in money is one in which money itself is the subject matter being transferred, paid, received, lent, repaid or otherwise dealt with. On the other hand, when a person supplies goods or services and receives money in return, the money is not the subject matter of the taxable supply, but it is the consideration for that supply. For example, if a customer purchases goods worth Rs 1 lakh from a supplier and pays Rs 1 lakh in cash or through banking channels, the payment of Rs 1 lakh is not a separate taxable transaction in money. The taxable event is the supply of goods, and the Rs1 lakh represents consideration for that supply. The fact that the consideration happens to be money does not take the underlying supply outside GST.

Hand Loan and Professional Services

5. Let us understand with an example involving a professional service. Suppose a firm takes a hand loan of Rs 1 lakh from one of its partners and later uses that money to pay a lawyer for professional services. The receipt of Rs1 lakh by the firm from the partner, with the transfer or lending of money itself, is not a supply of goods or services merely because money has changed hands. However, in the second leg of transaction, when the firm later pays Rs 1 lakh to the lawyer, a different transaction takes place. The lawyer is supplying legal services to the firm and the Rs1 lakh paid by the firm is consideration for those services. The legal service is therefore the relevant supply for GST purposes. It may be noted that GST on the advocate’s service is payable by the recipient under the reverse-charge mechanism on business entity crossing threshold limit of Rs 20 lakhs during the last financial year. The fact that the firm sourced the Rs 1 lakh through a bank loan does not alter the GST treatment of the lawyer’s service.

Bank Loans, Principal and Interest

6. The same principle can be applied to a bank loan. If a bank lends Rs 1 lakh to a firm, the principal amount of Rs1 lakh represents money advanced to the borrower and its repayment is not, by itself, consideration for a separate supply of goods or services. The lending activity, however, is a service under the GST law, and the amount received by the lender who is bank in this case, as interest is consideration for that lending service. Importantly, this does not mean that GST is payable on the principal amount of Rs 1 lakh. The GST exemption under Notificatiobn 12/2017-CTR covers services by way of extending deposits, loans or advances where the consideration is represented by interest or discount, subject to the exclusion relating to interest involved in credit-card services. Thus, the principal amount and the interest have to be conceptually separated. The principal is the money advanced and repaid, whereas interest represents consideration for the lending service.

Interest and Separate Banking Charges

7. This distinction also explains why interest should not simply be described as another “transaction in money”. Interest is itself an amount of money, but its legal character under GST is different. It represents consideration for the use of money. Section 2(102) itself recognises activities relating to the use of money as falling within the concept of services in specified circumstances. Notification No. 12/2017-Central Tax (Rate) dt 28.6.2017 as amended, through serial number 27, exempts services by way of extending deposits, loans or advances insofar as the consideration is represented by interest or discount, with the specified exception for credit-card interest. Therefore, in the case of a bank loan, the principal is not subject to GST, and the interest is exempt under the exemption as per entry 27 of the Notification No.12/2017-CTR as amended. If a Bank charges a separate processing fee, documentation fee, service charge or similar amount, such fee/charge would represent consideration for a separate taxable service and cannot automatically be treated as exempt interest. Such fees/charges billed for providing banking services are liable to GST at 18%. That means, the service fees and other charges associated with lending can be taxable even though interest is exempt.

Foreign-Exchange Transactions

8. Another example can be taken from the foreign-exchange business. Suppose a person exchanges Rs 1 lakh worth of Indian currency into US dollars. The currencies themselves are money and, as such, are excluded from the definitions of goods and services. However, if a money changer charges a separate fee or service consideration for carrying out the conversion, the service of facilitating or undertaking the conversion would attract GST because the definition of services expressly includes activities relating to the conversion of money from one form, currency or denomination to another where separate consideration is charged. Rule 32(2) of CGST Rules,2017 prescribes a mechanism for determining the value of foreign-currency exchange services. Thus, the currency exchanged itself, is not the taxable supply but the service of conversion by the Banks and the RBI approved currency exchangers for a consideration, is liable to GST.

Repayment of Debt

9. Let us take one more example involving the repayment of a debt. Assume that Company A owes Rs 10 lakh to Company B under an earlier transaction and subsequently repays the principal amount through its bank account. The transfer of Rs 10 lakh in repayment of the debt does not constitute a fresh supply of goods or services merely because funds have moved from one bank account to another. The money is being used to discharge an existing monetary obligation. However, if an amount is separately charged for a service connected with the transaction of repayment, like the bank may charge a processing fee to transfer the debt amount of Rs 10 lakh to Company B, then such fee is a consideration for banking service attracting GST.

Payments for Goods and Services

10. The distinction is particularly important because otherwise every payment made in a business transaction could incorrectly be described as a “transaction in money”. Suppose a company purchases machinery for Rs 80 lakh and pays the supplier through NEFT. The company has certainly transferred money, but that does not make the payment itself a transaction outside GST. The underlying transaction is the supply of machinery, which is goods under section 2(52), and Rs 80 lakh is the consideration for that supply of machinery. Likewise, if a company pays Rs 2,00,000 to an architect for professional services, the transfer of Rs 2,00,000 is not the taxable event but the architectural service is the supply of service attracting GST and the Rs 2,00,000 is its consideration.

11. In other words, what is being supplied in return for the payment of money should be the question?. If the answer is goods or services, GST has to be examined on that supply. If the money itself is merely being transferred, repaid or dealt with without a corresponding supply of goods or services, the movement/transfer of money does not become taxable as it would amount to transaction in money.

Activities Involving the Use or Conversion of Money

12. The Government has deliberately created an exception for certain activities involving the use or conversion of money. For example, banking and financial businesses may involve deposits, loans, advances, foreign-exchange conversion, payment processing and other activities. The underlying money may not be goods or services, but the service associated with using, arranging, converting or facilitating money can constitute a supply. This is why the GST law treats the principal amount of a loan differently from interest, and a currency exchanged differently from the service of currency conversion.

Consideration and Supply under GST

13. The definition of goods and services under Section 2 of the CGST Act,2017 prevents money from being treated as goods or services while simultaneously ensuring that genuine supply of goods or services connected with money are not automatically excluded from the GST net in view of the clear definition of the words ‘consideration’ under Section 2(31) read with the definition of supply under Section 7 of the CGST Act,2017 and ‘money’ under Section 2(75) of the CGST Act,2017.

Conclusion

14. Finally, the expression” money” or “transaction in money” should not be used loosely to describe every commercial payment involving money. Money has two distinct roles in commercial transactions. It can be the subject matter of the transaction, or it can be the consideration for a supply. Section 2(52) excludes money from goods and section 2(102) excludes money from services, thereby establishing the basic principle that money itself is outside the scope of GST as goods or services. At the same time, the law recognises that activities involving the use or conversion of money is treated as consideration received for supply of goods and services attracting applicable GST under the GST provisions. The correct question would not be to ask merely whether money has changed hands, but to identify what the parties have actually supplied to each other and in what capacity the money has moved/transferred. This distinction between a money or transaction in money and money as consideration provides the key to correctly determining the GST implications of financial and commercial transactions.

*****

Author: K. Raji Reddy, IRS, Assistant Commissioner of Customs and Central Tax, (Retired)

(Views expressed are personal views of the author. Mail id [email protected].