Biggest reform under GST – Taxable event

Taxable event is very crucial matter in every tax law. In order to attract tax liability, there must be occurrence of Taxable event. Presently, we have different taxable events for different indirect taxes in India. Details are as below:

• Excise duty: Levied on manufacturing of goods
• Service tax: Levied on provisioning of services
• VAT: Levied on transfer / sale of property of goods. Etc.

However, Taxable event in the GST would be SUPPLY of goods and/or service which we are going to witness will not only reform the whole of indirect taxes but also will reform the way of doing business in India.

As per Article 366(1A) of Constitution of India Goods and Services Tax means a tax on supply of goods or services or both except taxes on supply of alcoholic liquor for human consumption. It is worth noting here that the word used is supply and not sales, hence consideration is not required for supply.

Definition of supply:

The term supply has been defined in an inclusive manner under clause 3 of the revised Model GST Law.

The definition goes as follows:

(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,

b) importation of services, for a consideration whether or not in the course or furtherance of business, and

c) a supply specified in Schedule I, made or agreed to be made without a consideration.

(2) Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as a supply of goods or a supply of services.

(3) Notwithstanding anything contained in sub-section (1),

a) activities or transactions specified in schedule III; or

b) activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities as specified in Schedule IV, shall be treated neither as a supply of goods nor a supply of services.

(4) Subject to sub-section (2) and sub-section (3), 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.

(5) The tax liability on a composite or a mixed supply shall be determined in the following manner-

a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply;

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.

Inclusive definition of supply:

From the above clause 3, it is clear that the term supply has not been defined exhaustively rather it has been defined in an inclusive manner. It must be remembered that when the word “includes” is used in the definition, the legislature does not intend to restrict the definition.

Thus the term supply would include within its ambit not only the matters covered under clause 3 but also other matters which may be included by natural import.

Supply includes all forms of supply of goods and/or services 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. The important thing to be noted here is the use of word consideration and in the course or furtherance of business.

However, certain matters have also been termed as supply even without consideration as mentioned under schedule I of the revised model GST law. Such transactions are:

a) Permanent transfer/disposal of business assets where input tax credit has been availed on such assets.

b) Supply of goods or services between related persons, or between distinct persons as specified in section 10, when made in the course or furtherance of business.

c) Supply of goods –

a. by principal to his agent where agent undertake to supply such goods on behalf of the principal, or

b. by an agent to his principal where agent undertake to receive such goods on behalf of principal.

Import of service:

Supply also includes specifically the import of service for a consideration whether or not in the course or furtherance of business. However, Import of services by a taxable person from related person or from any of his other establishments outside India, in the course or furtherance of business has been made taxable even without consideration.

Supply of goods vs Supply of services:

Further certain matters have been separately explained to be treated as supply of goods and certain to be supply of services under schedule II of the Model GST Law. This has been done considering the past litigations on the issue of double taxation like in works contract, restaurants/catering, intangible goods, transfer of right to use goods etc.

Matters to be treated as supply of goods:

a) Any transfer of title in goods

b) Any transfer of title in goods under an agreement which stipulates that property in the goods will pass at a future date upon payment of full consideration as agreed (hire purchase)

c) Transfer of goods forming part of assets on the directions of a person carrying on business, in such a way so as not to form part of business assets with or without consideration

d) Goods forming part of business assets on ceasing to be a taxable person (except cases when business is transferred as going concern to another person or business is carried on by a personal re presentative who is deemed to be a taxable person)

e) Supply of goods by any unincorporated association to a member thereof for cash, deferred payment or other valuable consideration (Concept of mutuality seem to be covered as well).

Matters to be treated as supply of services:

a) Any transfer of goods or of right in goods or undivided share in goods without transfer of title (transfer of right to use goods is a service)

b) Any lease, tenancy, easement, licence to occupy land, lease or letting out of building including commercial, industrial or residential complex (renting of immovable property is supply of service)

c) Job work on other’s goods

d) Business goods put to private use or making available to any person for non-commercial purpose

e) Renting of immovable property

f) Construction of a commercial 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 before its first occupation, whichever is earlier

g) Transfer of IPRs

h) Development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software;

i) Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;

j) works contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

k) 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;

l) 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.(restaurant/catering service).

There are certain activities which shall be neither service of goods nor supply of services, such transactions are mentioned under schedule III.

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.

3) Services by a foreign diplomatic mission located in India.

4) Services of funeral, burial, crematorium or mortuary including transportation of the deceased.

Similarly certain activities undertaken by Central or State Government or any local authority as specified in schedule IV shall be neither supply of services nor of goods. Schedule IV provides exhaustive list of activities such as issuance of passport, visa, driving licence, birth and death certificates etc.

Apart from above, clause 3(4) provides that the central or state government may on recommendation of GST 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.

Taxability of Mixed and composite supplies:

Revised Model GST Law has also provided under clause 3(5) provisions for taxability of composite and mixed supplies as follows:

a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply. Example Supply of food during the course of transportation of passengers by air services shall be treated as supply of transportation of passengers by air.

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.