The Goods and Services Tax Act, 2017 as a concept is a destination-oriented tax law. It brought about major reforms in the Indirect Tax regime and it seeks to align the same with internationally accepted principles. The various concepts which are defined and used in the Acts i.e., both the CGST Act and IGST Act, have become relevant tools for its interpretation. Some of the important definitions under CGST Act are explained below as they find their use in practice.
Article explains about definition under GST of Taxable Territory, Supply, Business, Goods, Services, Continuous supply of Goods & Services, CGST vis a vis IGST, Reverse Charge, Works Contract, Capital Goods and Consideration.
The Act extends to the whole of India, as per sec.1 of CGST Act. The definition of taxable territory under sec.2(109) is relevant as it refers to the territory to which the provisions of this Act shall apply, namely the whole of India. However, for the purpose of taxability since the law is a destination-based law, the ‘place of supply’ becomes relevant. Before one understands in detail what is meant by place of supply, one should understand what ‘Supply’ means.
The chargeable event in GST is ‘Supply.’ The next important definition would be the definition which is not given under sec.2 but which is referred to in sec.7 of the CGST Act, relating to the ‘Supply’. As per sec.7 of CGST Act the expression ‘Supply’ is an inclusive definition. It includes:
1. All forms of Supply of goods or services or both 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;
2. import of services for a consideration whether or not in the course or furtherance of business; and
3. the activities specified in Schedule I, made or agreed to be made without a consideration.
From the above definition it is clear that as long as the goods or services are disposed off or agreed to be disposed off, they would be taxable under this section. The usage of the term ‘business or in furtherance of business’ it invites our attention to the definition of ‘business’ under CGST, 2017. (The scope of supply and its related definitions are explained in Part II of this Article)
The definition of ‘Business’ as given under sec.2(17) becomes relevant as follows:
‘business’ includes- (a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit; (b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a); (c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction; (d) supply or acquisition of goods including capital goods 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; (f) admission, for a consideration, of persons to any premises; (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; (h) activities of a race club including by way of totalizator or a license to book maker or activities of a licensed book maker in such club; and (i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.
The above definition of ‘business’, is a comprehensive definition purporting to cover all activities involving all transactions undertaken by any person including those undertaken by the Central Government, State Government or any local authority. Therefore, the definition of ‘business’, is the crux of the definition of ‘supply’.
This understanding can be better explained with reference to an example. On reading of the ‘business’ as above, it may be seen that if an individual when he is not in the ‘business’, supplies certain goods he may not come under the scope of GST. For instance, if an individual sells his own second hand car, to another person, although there may be a sale, along with consideration, however the same is not in the course of or furtherance of business for the individual thus this transaction cannot be brought under GST for the purpose of levy of tax.
The definition of Goods and Services are two major definitions of the GST Act. As against the definition of Goods, Services is defined in another sub-section. The definition of ‘goods’ under sec.2(52) refers to every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.
The interesting point to note is that while the ‘goods’ have been brought for the purpose of levy including actionable claim, under Schedule III of the CGST Act Entry No.6, only actionable claims relating to lottery, betting, and gambling are brought under the scope of GST and the rest of the actionable claims are held to be related to activities or transactions, which cannot be treated as either supply of goods nor a supply of services. Likewise moving to the next important definition under the CGST Act, is the definition of services.
Under sec.2(102) ‘Services’ means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
It may be seen both the definition of goods and services excludes money and security. Interestingly under the definition of services, there is an explanation, introduced w.e.f. 01.02.2019 which will cover any services, facilitating or arranging transaction in securities which means that all transactions involving facilitation or arrangement in securities would come under the scope of services. Therefore, on reading the main definition, it cannot be concluded that the definition of services excludes entire transaction in securities.
The definitions of Continuous supply of goods and Continuous supply of services under sec. 2(32) and sec.2(33) are important which are extracted below:
‘Continuous supply of goods’ means a supply of goods which is provided, or agreed to be provided, continuously or on recurrent basis, under a contract, whether or not by means of a wire, cable, pipeline or other conduit, and for which the supplier invoices the recipient on a regular or periodic basis and includes supply of such goods as the Government may, subject to such conditions, as it may, by notification, specify;
‘Continuous supply of services’ means a supply of services which is provided, or agreed to be provided, continuously or on recurrent basis, under a contract, for a period exceeding three months with periodic payment obligations and includes supply of such services as the Government may, subject to such conditions, as it may, by notification, specify;
It may be seen from the above definition that the continuous supply of goods and services refer to the services provided or agreed to be provided continuously or on recurrent basis, under a contract, for a period exceeding three months with periodic payment. These definitions would cover also services involving construction activities by a builder, where the builder is entitled to raise taxable invoices on completion of the particular stage of the service, when he can recover milestone payments.
While dealing with supply, the question arises as to whether the various definitions as given under the CGST Act would be relevant for IGST Act also. The answer can be understood by referring the provisions.
Under sec.2 (21) of the IGST Act, supply is referred to have the same meaning as assigned to it in sec.7 of the CGST Act. Under sec.2(24) of the IGST Act it is clearly indicated that words and expressions used and not defined in the IGST Act but defined in the CGST Act and the UTGST Act will have the same meaning as assigned to them in those acts. Therefore, while interpreting the provisions of IGST Act in absence of any definitions under the said Act, the words and expressions as defined under CGST Act may be taken into consideration.
Under sec.2(98) the CGST Act refers to Reverse Charge as follows:
‘reverse charge’ means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or subsection (4) of section 5 of the Integrated Goods and Services Tax Act.
This definition is important while determining the liability to tax on the part of the recipient subject to the notification issued for payment of tax under reverse charge. Without any ambiguity it covers specific provisions of the Act. Under Sec.9(3) of CGST Act and 5(3) of IGST Act, Reverse Charge Mechanism (RCM) is brought into the tax net by enabling the government to issue notifications specifying the category of goods and services and the category of recipient on whom such liability is fixed for the purpose of payment of tax. Insofar as Sec 9(4) CGST Act and 5(4) IGST Act, the government is required to issue appropriate notifications to enable the recipient to pay the tax when purchases are effected from an unregistered seller.
Sec.2(119) of CGST Act defines works contract as follows:
‘works contract’ means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract.
It may be seen from the definition, that there is a departure in the application of works contract under CGST Act from the Finance Act 1994. While the Finance Act 1994 covered not only services related to immovable property, it also covered services related to movable property such as repairs, rectification testing etc. of various goods. In the CGST Act, the definition of works contract is confined only to a contract related to immovable property wherein the transfer of property to goods is involved in the execution of such contract.
Under sec.2(19) capital goods has been referred to as goods, the value of which is capitalized in the books of account of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business. This definition becomes more relevant in the context of input tax credit.
The definition of supply as per sec.7 of CGST Act refers to consideration as an ingredient to constitute a supply as received by the supplier. The definition of consideration under sec.2(31) plays an essential role in the determination of supply and is reproduced below:
‘consideration’ in relation to the 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 a 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;
From the above definition, it is seen that any receipt of payment should have nexus with adjustment towards consideration for the said supply. The proviso to this definition excludes from the scope of consideration, any deposit received as payment from the said supply unless the supplier applies such deposit as consideration for the said supply. In other words, any deposit which is refundable as such received by the supplier and which is not adjusted towards payment for the supply is not a ‘consideration.’ Thereby any deposit received by a supplier, for any supply which is refunded as such to the recipient, at a later date, without adjusting it towards any payment of such supply then such a deposit cannot be considered as consideration for the supply.
On reading of the definitions of supply and consideration a question may arise as to whether all supplies where there is no considerations would get excluded from the scope of GST? The answer is ‘NO’. Schedule I to the CGST Act specifically covers activities or transactions to be treated as supply even if made without consideration. This schedule is reproduced below:
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.
As against Schedule I, Schedule III to the Act specifically excludes from the scope of supply of goods or service, certain activities or transactions even when they are consideration, this schedule is again reproduced below:
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.
3. (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.
4. Services of funeral, burial, crematorium or mortuary including transportation of the deceased.
5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.
6. Actionable claims, other than lottery, betting and gambling.
7. Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India.
8. (a) Supply of warehoused goods to any person before clearance for home consumption; (b) Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption.
Explanation 1: For the purposes of paragraph 2, the term ‘court’ includes District Court, High Court and Supreme Court.
Explanation 2: For the purposes of paragraph 8, the expression ‘warehoused goods’ shall have the same meaning as assigned to it in the Customs Act, 1962
Whenever any transaction is to be considered for the purpose of ‘levy’, these two schedules must be kept in mind.
Interpretation in common parlance is understood as the art of finding out the true sense of the statute by giving the words of the statute its ordinary and natural meaning. A Statute being the ‘Will’ of the legislature must be interpreted in consonance with the spirit of the legislature using the ‘Rules of interpretation.’ To avoid ambiguity, a ‘definition’ section forms part of most statues, which defines major terms used in the Statute (i.e., the definition section). Sec.2 of the CGST Act, 2017 provides for a ‘definition section’ which is a guiding force and a major aid of interpretation for practitioners and citizens alike. GST being a taxing stature, it is essential and rudimentary to understand and interpret the same in lines in which the act provides for it.