It has been 3 years since GST, the biggest ever indirect tax reform in India, has been implemented. GST, with its dual nature of taxation, has subsumed all but few taxes and now, it may be argued that several procedural aspects of the GST law such as returns and refunds etc. are streamlining. However, the dust is yet to settle on several legal and interpretational issues, including the taxable event itself!
Taxability on Supply
As compared to the erstwhile indirect tax laws where the taxable event was based on provision of service or sale of goods or on the manufacture of goods, the point of taxation under the GST Act, 2017 is “Supply”. The incidence to pay tax on goods arise at the time of supply determined in accordance with the provisions of Section 12 & Section 13 of the CGST Act, 2017. Supply is the taxable event as far as GST law is concerned. For levying GST on a particular transaction, it has to first fall under the scope of Supply. Supply has been defined under the GST Act, 2017 under Section 7(1) which is produced below:
(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 (and);
(c) the activities specified in Schedule I made or agreed to be made without a consideration;
From the above definition, it is quite evident that the scope of supply is an inclusive one and is not a specific one making the scope of supply much more broad-based. So long as an activity is made for a consideration and is in the course of furtherance of business, it shall be a supply unless specifically excluded.
Further, one of the crucial features of GST is availing the benefit of Input tax Credit (ITC). GST is all about seamless flow of credits of taxes paid on input, input services & capital goods where the tax paid on procurements can be adjusted against the output liability payable thereby ensuring minimal or no blockage of funds. However, claiming of ITC under the GST Act, 2017 is subject to conditions and eligibility.
Claim of Input Tax Credits
It is specified that every registered person subject to such conditions and restrictions be entitled to claim the credit of input tax charged which are used or intended to be used in the course or furtherance of its business.
Further, ITC can be claimed on input, input services & capital goods subject to such restrictions specified under the law. Inputs, input services and capital goods are defined under the GST Act, 2017.
“Capital goods” are defined under Section 2(19) of the CGST Act, 2017 which means goods, the value of which is capitalized in the books of accounts of the person claiming the input tax credit and which are used or intended to be used in the course or furtherance of business.
“Input” is defined under section 2(59) of the CGST Act, 2017 which means any goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business.
“Input services” is defined under section 2(60) of the CGST Act, 2017 which means any service used or intended to be used by a supplier in the course or furtherance of business.
It is apparent from the above definitions that ITC can be claimed on input, input services and capital goods only when they are used or intended to be used in the course of furtherance of business. Even the scope of supply includes sale, barter, transfer, exchange, license, rental, lease or disposal by a person for a consideration in the course or furtherance of business.
Why is it important to understand “in the course or furtherance of business” under GST?
In order to fully appreciate the GST exposure that may arise from any proposed transaction, it is very crucial to analyze the phrase “in the course or furtherance of business” as it would be significant in not only ascertaining whether a transaction is liable to tax under the GST laws in the hands of the supplier but shall also be useful in ascertaining whether input tax credit would be allowed or rejected by the recipient of any supply.
How GST law defines business?
Before we pay heed to the words “in the course or furtherance” it is important to analyze the definition of business. “Business” is defined under Section 2(17) of the CGST Act, 2017 which is elucidated below:
“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 (a) above;
(c) Any activity or 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;
(h) Services provided by a race club by way of totalizator or a license to book maker in such club;
(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.
Similar to the definition of Supply, the term business also is an inclusive definition again making the definition broad-based and including in its ambit several activities.
Meaning of “in the course of furtherance of business”
With such an inclusive definition of the term supply as well as business, it is important to now understand the term “in the course or furtherance of”. Such an interpretation is extremely significant as the supplier’s liability to pay tax and the recipient’s ability of claiming input tax credit would be governed by how the GST authorities interpret this expression.
It is pertinent to however note that the expression “in the course or furtherance of” has nowhere been defined or elucidated under the GST Act, 2017. In the absence of clarification on the expression one may have to take recourse to the general principles of interpretation for understanding the same. Based on the plain reading of the expression it is generally construed that any activities undertaken by a person in connection with or having a proximate and close nexus to its business is in the course or furtherance of business.
Is monetary benefit a prerequisite for an activity to be in the course or furtherance of business?
Analyzing the definition of business under the GST laws, it includes any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit. Pecuniary benefit would be construed as monetary benefit or financial gain by a person. Therefore, under GST laws, it is pertinent to note that pecuniary benefit is not an essential element and the sole deciding factor to ascertain whether an activity can be construed as being “in the course or furtherance of business.” Even if the activity is undertaken without any monetary benefit, the same would fall under the scope of business. Whether the activity or transaction is against consideration or not is a separate matter.
What is ‘incidental’ or ‘ancillary’ to business?
Further, business, as defined above, also includes any activity or transaction in connection with or incidental or ancillary to any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity. For better understanding of the same clause (a) and (b) of business is analyzed jointly. Again the words “incidental or ancillary” have nowhere been elucidated under the GST Act, 2017. The question arises what can be construed as activities incidental or ancillary to business. Since the law is not clear, we have to understand the same from judicial precedents.
As decided in Royal Talkies, Hyderabad vs. Employees State Insurance Corporation [1978 (4) SCC 204] “A thing is incidental to another, if it merely pertain to something else as primary. Surely, such work should not be extraneous or contrary to the purpose of the establishment but need not be integral to it either.”
Further, where the main activity of company is not a business, can activity incidental or ancillary to such activity could be construed as “Business”. It would be appropriate to examine these terms based on the provisions under the erstwhile laws viz-a-viz present laws.
This is further discussed in lines of judicial precedence incase of state of Tamil Nadu vs. Board of Trustees of port of Madras [1999 114 STC 520 (SC)] and few other judgments which are discussed below.
Facts of the Case:
Relevant definitions under Tamil Nadu General Sales Tax Act, 1959
1) Section 2(d) “business” includes, –
(i) any trade, or commerce or manufacture or any adventure or (concur) concern in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to make gain or profit and whether or not any profit accrues from such trade, commerce, manufacture, adventure or concern; and
(ii) any transaction in connection with, or incidental or ancillary to, such trade, commerce, manufacture, adventure or concern;
2) Section 2(g) “dealer” means any person who carries on the business of buying, selling, supplying or distributing goods, directly or otherwise, whether for cash, or for deferred payment, or for commission, remuneration or other valuable consideration, and includes.
Observations by Supreme Court:
Following are the gist of other jurisprudence which held that the transaction undertaken by the companies would not amount to business.
a) Commissioner of Sales Tax vs. Sai Publication Fund
It was held that a trust which has been setup for spreading the message of Sai Baba of Shirdi cannot be termed as a “dealer” in respect of sale of goods such as books, pamphlets and other publications as the trust was neither a dealer in terms of definition of dealer or was not carrying trade or commerce etc.
b) Vishakhapatnam Port Trust vs CTO
It was held that supply of drinking water to ships stationed in waters of Visakhapatnam port area does not amount to business and is therefore not liable to sales tax.
From the above judgements, the judiciary makes it clear that not every activity undertaken can be said to be “business”. It was not the intent of law to levy tax on all sale of goods by a dealer. Only those sales that are effected by a person who is carrying on a “business” is liable to pay tax under the said Act.
Now the question arises, whether similar stands can be taken under GST regime based on the definition of term “business”?
To reiterate the definition of “Business” under the GST Act is also an inclusive one and includes several activities which are listed in Section 2(17) of the CGST Act, 2017. It would be relevant to note that clause (a) and (b) of the term business under GST Act has similar construction as the definition of business under erstwhile VAT laws. Therefore, the intention of the law in keeping similarly constructed clauses or provisions in the definition of business under the GST Act also needs to be considered. However, the scope of business under GST regime is wider as compared to business defined under Pre GST era.
It may be an aggressive stand to rely on the pre – GST judgements to ascertain tax incidence and whether an activity or transaction proposed to be carried out is “in the course or furtherance of business” qua the definition of “business” under GST laws. The GST authorities may take a stand that business as defined under erstwhile laws is different from that defined under CGST Act, 2017 and may contend that the scope of “business” under the CGST Act is much wider and extensive. The question of whether an activity is in the course or furtherance of business shall continue to be a grey area and one would have to track judicial precedents in the GST era. While the pre GST judgements could have persuasive effect in interpretation, they cannot be conclusive and be relied upon for purpose of interpretation under the GST laws. Recent advance rulings indicate that the intention of GST authorities appears to be to give a very wide meaning to the term “business” and that authorities are viewing business from a different lens than the pre GST era. Also, attention needs to be given to few Advance Rulings on the similar matter, the brief details of which are provided below:
a) CMS Info Systems Limited:
Supply of motor vehicles as scrap is to be treated as “Supply” in the course of furtherance of business.
b) Nagri Eye Research Foundation:
The trust is supplying medicines from its medical store at the lower rates without any pecuniary motive. As per the definition of the term “business”, it includes trade, commerce, manufacture etc. whether or not for a pecuniary benefit and therefore the same has to be considered as the activity of carrying business.
c) Shrimad Rajchandra Adhyatmik Satsang Sadhana Kendra:
The main object of the trust was to spread the knowledge of the Jain Dharma and advancement of teachings of Param Krupaludev Shrimad Rajchandra. To spread knowledge, publications, CD’s, DVD’s were sold. The consideration received was used for the main objects to the trust. It was held that the applicant was engaged in trade and commerce by way of selling goods and is very well covered under scope of business as defined under Section 2(17) of the CGST Act, 2017.
Finally, how do I interpret “business” under GST laws?
If the above advance rulings are looked at, it appears that the scope of “business” under the GST Act, 2017 is much wider and extensive that the VAT laws and therefore, several activities or transaction not covered under the scope of business under the erstwhile laws may get covered in the scope of business under GST Laws.
Further, one may take a view that Section 2(17) of the CGST Act, 2017 read with Section 7(1) of the CGST Act, 2017 are contrary in nature. Where supply includes all forms of supply of goods or services or both such ass sale, barter, transfer, exchange, license, rental, lease or disposal for a consideration in the course or furtherance of business, the definition of business is so wide that it covers all types of transaction. As clarified above, “in the course or furtherance of” is nowhere elucidated under GST laws; general interpretation needs to be undertaken which means any activities undertaken by a person in connection with or having a nexus to its business.
If the intention of the law was to cover all transactions under business then what was the need to include phrase “in the course or furtherance of” in the definition of supply. For instance, will an individual who undertakes painting just as a hobby, but ends up selling a painting worth Rs 35 Lakhs be considered as a person doing a business and thereby covered under the scope of supply as per the provisions of GST Laws?
Similarly, will an individual selling a vintage car for a consideration amounting to Rs 50 Lakhs will be covered under scope of business? The frequency, volume, continuity or regularity of transaction or activity is not material as even one transaction entered into will fall under the scope of business if it is in relation to trade, commerce, manufacture, profession etc. However, such clause was not prevailing under the erstwhile laws. Such provision needs to therefore be harmoniously interpreted and doctrine of harmonious construction may be followed to avoid any contradiction between the sections.
Interestingly, if you may recall, it was feared that purchase of old gold jewellery by jewelers from an unregistered consumer would be subject to GST @ 3% under Reverse Charge Mechanism (RCM). To alleviate the fears concerning taxability of the sale of old jewellery by a person to a jeweler, a press release dated 13th July 2017 was released to affirm that the sale of old gold by an individual is for a consideration, cannot be said to be in the course or furtherance of his business (as selling old gold jewellery is not the business of the said individual), and hence does not qualify to be a supply per se. Accordingly the sale of old jewellery by an individual to a jeweler will not attract the provisions of section 9(4) and jewelers will not be liable to pay tax under reverse charge mechanism on such purchases.it was informed that purchase of old gold jewellery by a jeweler from a consumer will be subject to GST @ 3% under reverse charge mechanism.
A view can be taken that the government wanted to bring all transactions entered into by a person under the ambit of business. Therefore, whether each transaction or activity may be covered under the scope of business depends upon the facts and circumstances of each transaction or activity. It is suggested to take a prudent and informed view on the same to avoid any litigation in future. Even the supplies made by a person which are not as the main activity may also get covered under the scope of business due to use of the phrase “in the course or furtherance of”. The GST authorities may cover the same under incidental or ancillary activities to the main activity. Therefore, the position taken under the erstwhile laws that if the main activity is not a business, then associated incidental or ancillary activities would also not be a business may not be accepted under the GST Laws.
Scope and Limitations:
The purpose of the above article is to provide my view on the concerned issues. The article contains my views on the subject matter based on facts and information. In the article, I have also made certain assumptions and based upon the same provided the implications considering the facts available presently. My analysis may differ based upon the actual facts. My views are based on current provisions of the Act and the rules and regulations made thereunder. My view may differ depending upon changes in facts, circumstances or legal provisions. Government or Judicial authorities may or may not subscribe to the views expressed herein; as the interpretation of law may differ. This article is written based on the substantive provisions of the law and the procedural aspects may need to be examined as they have not been addressed in the note.
Authored by: Siddharth Surana, Advisor – RSM India,
Co-authored by: Umang Shah (Manager – GST).