CA Nagendra Hegde (L) & vetted by CA Vasant K. Bhat (R)
1. The levy of GST is on supply of goods and/or services which is dealt with by Section 8 of the revised model GST law. Section 3 of the said law provides for ‘meaning and scope’of supply. In this article, we would be discussing on the relevance of two terms namely meaning and scope, similarities, conflicts and overriding nature of both the terms.
The meaning and scope of supply in Sec 3 has five limbs, namely:
i. Inclusive definition of supply,
ii. Schedule specifying whether it is supply of goods or supply of service with respect to matter included therein,
iii. Exclusions from the scope of supply,
iv. Power of the Govt. to notify the transaction as supply of goods or supply of service or not a supply, and
v. Taxability of composite supply and mixed supply
2. Meaning of Supply
The sub-section 1 of section 3 provides the meaning of supply in an inclusive manner, specifically covers importation of service for a consideration and refers to Schedule 1 which contains transactions without consideration to be treated as supply. The said provision is as under:
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 service for a consideration and whether in the course or furtherance of business or not.
c) a supply specified in Schedule I, made or agreed to be made without a consideration
3. In the above definition, various forms of supply such as sale, transfer … etc are merely illustrative in nature. Intention of the law maker could be to cover much more than what is illustrated in the said clause. However, transactions of personal in nature, not related to business would not be a supply except in case of imports.
4. All the activities set out in Schedule I to be treated as supply even without consideration. The matters to be treated as supply without consideration are as follows:
> Permanent transfer/disposal of business assets (where ITC has been availed),
e.g., Transfer of company laptop to employee after certain years of use.
> Supply between related persons/units of same entity
e.g., Supply made to unit 1 of ABC Ltd., in Mumbai to Unit 2 of ABC Ltd., in Hyderabad.
> Transactions between a principal & his agent.
> Importation of services from a related person or from any of his other establishments outside India, in the course or furtherance of business.
e.g.: Administrative/management support services from parent company located outside India.
5. Exclusions from the definition of supply:
Though the definition is broad enough to cover most of the commercial transactions carried out by any taxable person, following activities be still be kept out of meaning & scope of supply:
> Any transfer, barter, exchange, license, rental, lease or disposals etc made without consideration unless covered in Schedule I as discussed above.
e.g.: Free samples issued by manufacturers to unrelated parties/customers.
> Any transfer, barter, exchange, license, rental, lease or disposals etc made not in the course or furtherance of business – say in personal capacity.
e.g.: i) Donation of cloths, books, furniture etc to NGOs. – Without consideration
ii) Sale of personal vehicle, furniture, etc – with consideration.
> Import of services whether or not in the course of business but without consideration.
e.g.: Free download of songs, books, journals (online data base access and retrieval services) from internet where service provider is located outside India. (Service provider and receiver should not be related persons).
> Activities covered in Schedule III and IV such as services by employees to employers in relation to employment, services by court and tribunals, services by MPs, MLAs, specified services by government etc are considered as neither supply of goods nor supply of services.
> In addition to above, Central and State governments reserve right to declare certain transaction as neither supply of goods nor supply of services as may it deem fit.
6. Conflicts between meaning and scope of supply
The scope is generally understood as the extended meaning of any given term. In other words, the scope defines the area of reachability of the meaning provided to any specific term.
Whether the scope of any term go beyond the given meaning of the term? May not be. The intention of scope in any given condition could be in the nature of explanation and clarification and it may not have the overriding effect over the meaning provided to such term.
7. If the above contention is taken, on plain reading of Sec 3 of the model GST law, we could make out that the first limb (inclusion part) provides the meaning for the term supply and the rest part of the section provides for the scope.
In the instant case, the meaning of supply is restricted to first limb of Sec 3 and all the provisions provided in subsequent limbs of the said section shall hold good as scope of supply.
8. The following are the conflicts arising between the meaning of supply and scope of supply where in the scope has been overriding the meaning provided therein.
a. Transfer/disposal of business assets without consideration – where no input tax credit has been availed.
As per First entry in Schedule I, permanent transfer/disposal of business assets shall be deemed to be a supply even when it made without consideration. However, if the input tax credit is not availed earlier on such assets, then such transfer/disposal shall not be considered as supply when it made without consideration.
Entry 4 (a) of the Schedule II provides that where business assets are permanently transferred or disposed of with or without consideration, such transfer/disposal would be deemed to be a supply of goods.
However, this entry does not exclude the transfers/disposal of business assets on which ITC has not been availed by the assesse earlier.
e.g.: Disposal of old printer, AC, chairs, other furniture, etc., without consideration, on which ITC was not availed earlier shall not fit into the meaning of supply in first limb of Sec 3 whereas, entry 4 of the Schedule II propose to include such transactions within the framework of the term supply.
b. When goods held for business put into private use – without consideration.
The schedule II provides deeming fiction as to what are all to be considered as supply of goods and what are all to be considered as supply of service. In other words, Schedule II itself cannot determine an activity as supply. Once any activity fits into the meaning of supply, then schedule II provide guidelines to classify such supply as supply of goods/services.
Temporary transfer of business assets/goods to any person (other than related person) for the non-business use is basically not cover within the ambit of supply when there is no consideration involved. However, Schedule II [Entry 4(b)] specifically sets out such transfer as supply of service. This contradicts with the meaning of supply provided in Sec 3(1) of the model GST law. Once an activity is not a ‘supply’ itself, can a schedule deem that transaction to be a ‘supply of service’ is the question.
c. Cessation of taxable person
Schedule II further provides that, where a taxable person ceases to be taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him subject to certain exception. This is not in line with the meaning of supply provided in Sec 3(1).
Fundamentally, there is no activity/transaction has taken place when a person ceases to be a taxable person. In addition, there would be no consideration and hence, it cannot fall within the meaning of the term supply.
When there is no activity resulting to supply, a deeming fiction stating such event as supply of goods by such taxable person may not be appropriate. Schedule II again in this case appears to be overriding the meaning of supply provided in Sec 3(1).
d. Composite Supply Vs Works contract
In case of ‘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 and the rate of GST along with valuation, place of supply and time of supply etc, shall be determined accordingly as if applicable to such principal supply.
Further, Schedule II provides that works contract including transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract shall be deemed to be the supply of services and the provisions of GST such as rate, valuation, time of supply etc would be applicable accordingly.
Now let us take an example of sale and installation of huge plant and machineries or Lift etc., wherein the principle supply is sale of machinery/lift and ancillary supply being the installation activity. Therefore, as per Sec 3(5), it shall be considered as supply of goods being the principal activity.
However, transaction of sale and installation of machineries/lifts shall also fit into the definition of works contract and accordingly be deemed to be a supply of a service.
9. The issues discussed so far are illustrative in nature and in-depth study and analysis of Model GST law could pop out more similar issues which needs attention of the law maker. Highly anticipated GST is yet to be rolled out and there could be reasonable amount of changes in the final draft/law. Industry and professions have actively involved in representing various issues and have been drawing the kind attention of the concerned ministries and officials. Hope the final law would be more clear and assesse friendly for better compliance and also for administrative convenience.
The views expressed herein this articles are the personal views of the paper writers and are not conclusive in nature.
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