The biggest change due to GST regime is the point when GST will be applicable i.e. Supply.
First thing to understand before going forward to understand is that GST is a Destination based or consumption based regime of tax against the current Origin based regime. In present VAT regime the goods are first taxed in the state of manufacture and after that at every point from where the sale is initiated. However in GST the goods will be taxed in the state in which the sale transaction concludes.
What is “Supply”???
This definition is given under section 3 of Model GST law, which starts as “Supply includes”. There is no specific definition attached to the word supply, which is the very base of the whole regime. This definition has been made an inclusive one with a deliberate intention from the Lawmakers that they can include anything under this with or without deeming fiction.
Now as per definition following is supply as per clause (a) to section 3(1) of Model GST Law:-
a. It should have following ingredients to constitute supply:-
b. It should be made or agreed to be made for consideration.
c. It should be made in the course or furtherance of business.
It may be in any form of supply – Sale, transfer, barter, exchange, license, rental, lease or disposal.
To understand the term supply we need to understand a few terms of which definition are as follows:-
a. Consideration:- Section 2(28) of Model GST Law states:-
(28) “consideration” in relation to the supply of goods and/or services to any person, 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 and/or services, whether by the said person or by any other person;
(b) the monetary value of any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of goods and/or services, whether by the said person or by any other person:
Provided that a deposit, whether refundable or not, given in respect of the supply of goods and/or services shall not be considered as payment made for the supply unless the supplier applies the deposit as consideration for the supply;
The above definition signifies that any consideration be it cash or kind; be it by recipient or any other person shall constitute valid consideration. It will create a few issues which we will discuss in the final section.
Word “forbearance” is also included here. However the same is part of current Service tax law under declared service but there was no specific provision for the same in various State VAT Laws.
(17) “business” includes –
(a) any trade, commerce, manufacture, profession, vocation or any other similar activity, whether or not it is for a pecuniary benefit;
(b) any transaction in connection with or incidental or ancillary to (a) above;
(c) any 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;
The term business has been extended vastly. Principle of mutuality has also been denied its existence which was a common feature till now in all the taxation laws. Trade bodies and so called ”Not for Profit” organisations are brought under the net of Business. Further, now business to be taken even when there is no continuity and even single transactions would also be constituted business.
Now there is Clause (b) to section 3(1) which applies in case of import of service transactions. Its application is as follows:-
a. It applies to import of services
b. With or without consideration
c. Whether or not for Business
That means import of service transactions will be treated as supplies even if they are for personal use and without consideration.
Clause (c) of section 3(1) deals with cases which will be deemed supply even without consideration. These cases are enumerated in schedule I.
Sec 3(2) specifies Schedule II which deals with cases in which a deeming fiction has been applied by law. Some cases are deemed supply of goods while others are deemed supply of services.
Above clauses will be explained separately in next article.
Principal Agent case: Sec 3(2A) specifies that any transaction of goods and/or services between agent and principal shall be deemed to be supply. This means that earlier the Agents were not liable to tax under the VAT laws if principal makes the payment of VAT, Now that immunity is not available to the agents. Now there will be complete set of taxations for Principal and Agent relationships.
Aggregator of Branded services : In case of aggregators of branded services, aggregators shall be deemed to be supplying such service. These provision was already applicable in current Service tax under Reverse Charge Mechanism. However this will break the chain of Input tax credit. (eg, OLA, UBER, PRACTO etc.)
Issues related to definition of supply, consideration and business
There are few issues in these concepts under this Model GST Law which we will take one by one.
1. Inclusive Definition of supply :
There is no specific definition of supply. Section 3 starts with “Supply Includes” This will give revenue authorities immense power to challenge any transaction that they come across and treating the transaction as supply.
2. Agreement of supply/ advance cases :
Agreement to make supply shall also be considered supply. Thus the intent of lawmakers at present is to make all advances to be brought into the ambit of supply.
3. Import of personal services :
All imports of services are included in supply including personal imports. The monetary consideration is also not required. An example:- If we register at freelancer.com and it provides 1st 5 bids everymonth free of cost then such free bids are import of services without consideration. This free of cost importation of service is deemed supply under clause (b) to sec 3(1).
4. Principal to agent transfer :
Transaction of transfer of goods and/or services between agent and principal is supply now. When the Principal sends the goods to the agent the same shall be supply and Principal shall pay GST on such goods/services raising a GST invoice. This is going to change the whole business structure in big industries where Big corporates appoint distributors on agency basis and book their sale only when it is finally sold by the agent. Now the suppliers will be required to pay GST at the time of supply to agent itself.
5. Definition of business:
a) One time transactions :
One time transactions are also business activities.
b) Principle of Mutuality denied:
Since long taxation statutes have given principle of mutuality a due recognition and not taxed activities of clubs, societies, Samajs and associations which were for the benefits of members only. Now GST is going to treat the same as business. This is going to cause huge issues as their are large organisations working only for the benefit of their members. Now there different activities are going to be taxed under GST net.
c) Services supplied as holder of office :
Directorship services were however earlier taxable under service tax law still the holder of office of any trade body or other business association will fall under GST net.
6. Definition of Consideration :
a) Any person : It says “in relation to the supply of goods and/or services to any person” . This covers anybody including oneself. Thus by this definition they are trying to cover the transactions within the entity i.e. transfers to self (Stock transfers). This is going to change the way the businesses are being done currently. Stock transfers are to be included in supply for the purpose of GST under this net.
b) Forbearance is part of definition :
Now value of any forbearance by any person is consideration and that will be deemed to be supply accordingly.
However the lawmakers tried to made a good law for GST but in their haste they forgot to tune it fine. Still it is just a Model Law and the GST Council will sit upon it, discuss in length and breadth and will finalise what will become CSGT, SGST, IGST Act.
There are more issues and discussions in the Concept of Supply related to supply without consideration and deemed supply transactions (Schedule I and Schedule II), which we will discuss in the next article.
Do you think CBDT should extend Tax Audit Report and relevant ITR Due Date? Please Comment, Vote, Retweet and Like.— Tax Guru (@taxguru_in) September 18, 2018