To start with an amendment made in Para 4 of Schedule II by Finance Act, 2020, let’s start discussing with Section 7 of CGST Act (Scope of Supply) .
Schedule II of CGST Act, 2017 specifies Activities or Transactions to be treated as Supply of Goods or Services.
Section 7 of CGST Act 2017– Scope of ‘Supply’
(1) For the purposes of this Act, the expression “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;
(b) import of services for a consideration whether or not in the course or furtherance of business;
(c) the activities specified in Schedule I, made or agreed to be made without a consideration
Hence, Scope of supply is defined to include
Sec 7(1)(a)- 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. Thus, to constitute a supply two factors are important:
1. Any transaction involving supply of goods or services must be done in the course or furtherance of business i.e. a person carrying on activities for the running of business or any activities carried out by a person for developing his own business.
2. Any transaction involving supply of goods or services must be done for a consideration.
Section 2 (31) of the CGST Act, “Consideration” means in relation to supply of goods or services or both includes –
(a) 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.
(b) 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 State Government.
Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.
Following are not considered as Consideration:
(1) Grant of pocket money
(2) Gift or reward (which has not been given in terms of reciprocity)
(3) Amount paid on alimony for divorce
(4) Subsidy given by the Government to benefit the farmers
(5) Deposit amount received as refund
(6) Any instrument or equipment send to manufacturers factory for repair within India on returnable basis because it’s not supply
(7) Spare parts freely replace during warranty period
(8) Amount paid as fine or penalty for violation of statutory provisions.
Sec 7(1)(b)- Import of services for a consideration whether or not in the course or furtherance of business. It is to be noted that scope of supply includes services imported even for personal purposes. Taxability under GST needs to be checked in continuing sections.
For Example-
John & Co an architecture consultancy firm of USA provided his services to Ram & Associates, a Chartered Accountants firm of India for designing it’s office at Mumbai for a consideration of Rs. 10,00,000/- and also to design the home of Mr Ram, the Managing Partner of Ram & Associates for a consideration of Rs 2,00,000 respectively.
As per Sec 7(1)(b) of CGST Act: Supply includes Import of Services for a consideration whether or not in the course or furtherance of business.
In this case John& Co provides design consultancy to both Ram Associates and also to its Managing Partner Mr Ram.
Service to Ram & Associates was for furtherance of business as the design was made for the office but service to Mr Ram for designing his home was not for the furtherance of business but rather individual personal use. But still both these conditions satisfy the conditions of Sec 7(1)(b) and hence are supply of service.
Sec 7(1)(c)– Activities specified in Schedule I that are to be treated as supply of goods or services even if made without consideration which are as follows:
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
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.
(1A) 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.
Thus, Schedule II to section will only classify transactions/ activities either as a supply or supply of services provided, they fulfil the condition of supply as per Sec 7(1)(a).
(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) and (2), the 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.
Schedule II- Schedule II defines the transactions or activities that are be treated either as a Supply of Goods or Supply of Services.
Para 4 of Schedule II is as under: (Before Amendment)
Transfer of business assets
(a) 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;
(b) where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services;
(c) 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, unless—
(i) the business is transferred as a going concern to another person; or
(ii) the business is carried on by a personal representative who is deemed to be a taxable person
Amendment made by Finance Act, 2020–
In Schedule II to the Central Goods and Services Tax Act, in paragraph 4, the words “whether or not for a consideration,” at both the places where they occur, shall be omitted and shall be deemed to have been omitted with effect from the 1st day of July, 2017.
Hence, in sub clause (a) & (b) of Para 4 of Schedule, the words “ whether or not for a consideration” shall be omitted as under:
(a) 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;
(b) where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services;
Analysis of Amendment-
In the existing provision in sub clause (a) & (b) of Para 4 of Schedule II, the use of the term “whether or not for a consideration” was created an ambiguity. Since Schedule I covers the transactions which are to be treated as supply of goods or services even if made without consideration. Schedule II is merely a classification Schedule and does not determine whether a transactions is a supply or not.
Hence unless the transaction in question is not covered by Schedule I, Schedule II by way of the above referred paragraph 4 cannot deem it as a supply if it is made without a consideration.
Para 1 of Schedule I covers “Permanent transfer or disposal of business assets, on which ITC has been availed “shall be treated as supply even if made without consideration. However, Schedule I does not cover transfer of other business assets on which ITC has not been taken as per Sec 17(5) of CGST Act, 2017 e.g. Motor car subject to some exception even if it is made without consideration shall not be treated as supply.
Therefore, the said anomaly is sought to be corrected by way of a retrospective amendment effective from 01.07.2017 to the effect that the aspect of presence/absence of consideration will be dealt by Schedule I only and Schedule II will only classify transactions/ activities either as a supply or supply of services provided, they fulfil the condition of supply as per Sec 7(1)(a).
Section 7(1A) also states that 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.
Hence, disposal of goods (for which ITC has not been claimed) forming part of the assets to an unrelated party without any consideration (e.g. scrap articles) shall not suffer any tax as the same is not covered by Schedule I and as per the proposed amendment paragraph 4 of schedule II won’t consider the aspect of absence/presence of consideration but will merely classify a supply if found to have been made.
Eg –
XYZ Enterprise, a sole proprietor, is in the business of selling furniture. Its owner took a set of furniture to furnish his house’s Delhi temporarily for 3 months. The personal use of the furniture by the owner, without a consideration, is not taxable.
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