Levy and Supply under Central Goods and Services Tax Act, 2017 (CGST Act, 2017) – Analysis

Introduction:

In this article, provisions relating to Levy and Supply under GST as given under the CGST Act, 2017 (“CGST Act”) are discussed.

Levy under GST:

Section 9 of the CGST Act (Charging Section) provides for the provisions of Levy and Collection of GST.

(1) CGST would be

• Levied on all intra-State “supplies” of goods and/or services (except on the supply of alcoholic liquor) on the value determined u/s 15 at such rates not exceeding 20%.
• Collected in such manner as may be prescribed.
• Shall be paid by “Taxable Person”.

♣ CGST & SGST is levied on intra-State supplies (supply within the state) ♣ IGST sum of CGST & SGST is levied on inter-State supplies and is separately covered by IGST Act. ♣ Capping of maximum CGST rate on intra-State supplies is done at 20%. ♣ Alcoholic liquor for human consumption is outside the scope of GST; hence it would continue to fall under the ambit of State excise laws.

(2) Tax on supply of petroleum crude, high speed diesel, motor spirit (commonly known as petrol) shall be levied with effect from such date as may be notified by the Government.

(3) Government may notify categories of supply of goods and/or services on which tax will be paid by the recipient of goods or services or both under “Reverse Charge Mechanism”.

(4) Tax on supply of taxable goods and/or services made by an “unregistered supplier” to a registered person will be paid by the recipient on Reverse Charge basis.

Under Reverse Charge Mechanism (RCM), Government collects taxes directly from the customer instead of supplier collecting taxes and paying it to the Government. In case of supplies by unregistered person, RCM would be applicable irrespective of nature of goods and/or services supplied. In existing indirect tax regime, RCM is extended only to services, but under GST it extends to both goods and/or services. However it may be noted that in case of goods under the existing VAT regime, purchase tax (concept similar to RCM) is applicable in certain states only. Government has notified the list of goods and services covered under RCM vide Notification No.4/2017-Central Tax (Rate) for Goods and Notification No. 13/2017- Central Tax (Rate) for Services

From the above levy provisions following questions needs to be answered

• Concept of Supply? {Section 7 read with Schedules of the CGST Act}
• Definition of Goods and Services?
• Concept of Taxable Person?{Section 2(107) read with Section 22 &2 4 of the CGST Act}

Supply under GST:

Supply is the “taxable event under GST regime” like manufacture of goods under Central Excise, rendering of services under Service Tax Law and sale of goods under VAT Laws. 

Meaning and Scope of Supply [Section 7 of CGST Act]:

Supply includes

♣ 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 course of or furtherance of “business”.

Above definition is comprehensive and covers all business transactions within its ambit because the word “includes” makes it an inclusive definition and expands the meaning. Sale is not defined under GST Act but reference can be made to VAT Laws. Concept of Barter and Exchange can be overlapping, thus below example tries to highlight the distinction between Barter and Exchange: Exchange – Mr. X can exchange his old vehicle with the new one and pay only differential amount. Barter – Mr. X can render some services and obtain car for free of cost or at reduced price. Valuation of barter transactions under GST can be difficult because consideration is not monetary.

Thus for Supply to be taxable, it should be carried out by a person for a consideration. But Schedule I of CGST Act provides an exception to above criteria, thus in those case even there is no consideration the supply would be taxable.

Term consideration defined under Section 2(31) of the CGST Act is as follows:

• It includes ‘Payment made or to be made’ or ‘monetary value of any act or forbearance’ for supply of goods and/or services, whether by the recipient or any other person but shall not include any subsidy given by CG or SG.
• Deposit given in respect of supply shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply.

Supply carried without any consideration such as donations, gifts and free charities are outside the ambit of GST.

♣ Import of Services for a consideration whether or not in course or furtherance of business.

Importation of services for consideration for personal consumption shall also be liable to GST (on reverse charge basis). Exception – Schedule I (discussed below) provides for a situation where importation of services without consideration will also be liable to GST. Importation of Goods is dealt separately under the Customs Act and IGST shall be levied in addition to Basic Customs Duty. [Note: Basic Customs Duty is not subsumed in GST Regime]

♣ Activities specified in Schedule I made or agreed to be made without a consideration to be treated as Supply:

Schedule I of CGST Act

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

Above entry curtails the benefit of tax credit availed on business assets which are transferred without consideration

2) Supply of goods and/or services between related persons or distinct persons when made in the course or furtherance of business.

Stock Transfers: As per Section 25 of CGST Act, a person having a registration in a State or UT in respect of an establishment, has a establishment in another State or UT, then such establishments shall be treated as establishments of distinct persons. Thus inter-State stock transfers between branches would attract GST since entity would have different registrations in different states and Intra-State stock transfers within a State or UT would not attract GST unless the branches have separate registration. Above entry would ensure the seamless flow of Tax Credit in case of branch transfers.  Employer & Employee are related persons as per Sec 15, thus any supplies made by Employer to Employee even without consideration will be liable to GST. However, Gifts not exceeding INR 50,000 in value in a FY by an Employer to an Employee shall not be treated as supply of goods and/or services i.e. exempt from GST.

3) Supply of goods by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal, or by the agent to his principal where the agent undertakes to receive such goods on behalf of the principal.

4) Import of services by a Taxable Person from a related person or from any of his other establishments outside India, in course or furtherance of business.

Example – Group Company located outside India provides services such as IT support and Management support free of cost to its subsidiary located in India. Valuation could be a major challenge in such cases.

♣ Activities to be treated specifically as a supply of goods or as a supply of services as mentioned under Schedule II:

Schedule II of CGST Act inter alia classifies the transactions either as supply of Goods or Services.

Activities / Transaction	Supply of Goods or Services
Transfer of title in goods	Goods
Transfer of goods or of right in goods or of undivided share in goods without transfer of title	Service
Transfer of title in goods under an agreement which stipulates that property in goods will pass at a future date upon payment of full consideration as agreed	Goods
Lease, tenancy, easement, license to occupy land	Service
Lease of building including a commercial, industrial or residential complex for business or commerce, either wholly or partly	Service
Treatment or process which is applied to another person’s goods	Service
Development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software	Service
Where goods held or used for the purposes of the business are put to any private use or used for any non-business purpose, whether or not for a consideration, the usage or making available of such goods	Goods
Works Contract in relation to immovable property only	Service
Supply of food or article for human consumption other than alcoholic liquor.	Service

–

Why the specific distinction is required (Purpose of Schedule II): If the rates of GST are different for Goods and Services, liability of GST would be different. Determination of Time of supply of Goods and Services. Determination of Place of supply of Goods and Services. On Works Contract for immovable property and Supply of Foods, currently both VAT and Service tax are levied but under GST they would be treated only as a supply of services and taxed accordingly. Tax liability for Works Contract in relation to movable property would be determined by treating it as a composite supply in accordance with Section-8. Provisions of declared services as present under Service Tax Law are reproduced in Schedule II of the GST Act.

♠ Activities or transactions as specified in Schedule III shall be neither treated as a supply of goods nor a supply of services:

• Services by an employer to the employee in course or in relation to his employment.
• Services by a court or tribunal.
• Function performed by MP’s / MLA’s.
• Services of funeral, burial, crematorium or mortuary including transportation of the deceased.
• Actionable claims, other than lottery, betting and gambling.

♠ CG or SG may notify the transactions that are to be treated specifically as supply of goods only or supply of services only or neither a supply of goods nor a supply of services.

Definition of Goods [2(52) of CGST Act]:

“Goods” means every kind of movable property;

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 the contract of supply

Excludes: – Money and Securities.

• Above definition is based on the definition of goods as defined in the Sale of Goods Act, 1930.
• Stamp duty and Taxes on Land & Buildings are not subsumed in the GST regime.
• Securities shall have meaning assigned to it under Securities Contracts (Regulation) Act, 1956.

Definition of Services [2(102) of CGST Act]:

“Services” means anything other than goods, money and securities;

Includes:- Activities in relation to use of money or its conversion by cash or any other mode from one form, currency or denomination to another for which a separate consideration is charged.

• Above definition comprehensively covers each and every transaction that does not qualify as supply of goods.
• Inclusion part of definition covers activities only in the nature of money changing activity.
  

Taxable Person:

Understanding of Taxable person under GST is crucial because only “taxable person” is liable to pay GST on the supplies made by him.

Section 2(107) of CGST Act defines “Taxable Person” as a person registered or required to be registered u/s 22 or 24 of the CGST Act.

Persons liable to be registered (Section 22 & 24 of CGST Act):

♠ Threshold Limit

Every Supplier shall be liable to register under GST in the “State or Union Territory (UT)” from where ‘he makes’ a taxable supply of goods and/or services only if his aggregate turnover in a financial year exceeds INR 20 Lakhs. However, this limit is INR 10 Lakhs for the Supplier conducting business in NE states including Sikkim.

• In case of EPC Company executing projects in multiple States across India, then it has to get registration in each State where projects are executed.
• The turnover limit is to be calculated on aggregate basis for all the supplies made by a supplier from multiple states.

Aggregate Turnover [Section 2(6) of CGST Act]:

Means aggregate value of all taxable and “non-taxable” supplies, exempt supplies and exports of goods and/or services of a person having same PAN, to be computed on all India basis and excludes taxes, if any, charged under GST.

♠ Every person registered under existing law, shall be liable to be registered under the Act from the date on which GST comes into effect

♠ Mandatory registration for below persons inter alia irrespective of threshold limit stated above:

SNO	Cases
1.	Person making Inter-State supply.
2.	Casual Taxable person making taxable supply; [Means a person who occasionally undertakes transactions involving supply of goods and/or services in the course or furtherance of business whether as principal, agent or in any other capacity, in a State or a Union territory where he has no fixed place of business].
3.	Persons who are required to pay tax under Reverse Charge Mechanism.
4.	Non-resident taxable person; [Means any person who occasionally undertakes transactions involving supply of goods and/or services whether as principal, agent or in any other capacity but has no fixed place of business or residence in India].
5.	Person who is required to deduct TDS (under Section 51), whether or not separately registered under GST.
6.	Person who supplies goods and/or services on behalf of other registered taxable persons. (For E.g. Agent)
7.	Input Service Distributor (ISD), whether or not separately registered under GST
8.	Every E-Commerce Operator. [Means any person who owns, operates or manages digital or e-facility or e-platform for e-commerce ]
9	Person supplying Online Information and Database Access or Retrieval services from a place outside India to a person inside India.

Persons not liable to be registered (Section 23 of CGST Act):

• Person engaged in exclusively in the business of supplying goods and/or services that not liable to GST or wholly exempt from GST.
• An Agriculturist, to the extent of supply of produce out of cultivation of land.
• Persons who are engaged in making exclusive supplies of taxable goods and/or services on which tax is liable to be paid under RCM u/s 9(3). [Notification No. 5/2017 – Central Tax]

Principles for determining whether the supply is Inter-State or Intra-State [Chapter IV of IGST Act,2017]:

It is essential to determine whether a particular supply is an intra-State supply i.e. within the State or UT or an inter-State supply i.e. outside the State or UT, because tax under GST charged as follows:

Nature of Supply	Tax Charged under GST Regime
Intra-State	CGST & SGST
Inter-State	ICGS

Section 8 of IGST Act:

Supply of Goods and/or Services would be intra-State in below situation:

• “Location of supplier” and “Place of Supply” are in same State/UT.

Section 7 of IGST Act:

 Supply of Goods and/or Services would be inter-State in below situations:

• Location of supplier and Place of Supply are in different States/UT.
• Imported Into India.
• Supplier is located in India and the Place of Supply is outside India.
• Supply is made to SEZ Units/Developers.
• Residue clause: Any supply which does not qualify as intra-State supply and not covered anywhere else in this section.

The conclusion about the type of supply from the above principles can be made only after detailed understanding of the two components namely “Location of Supplier” and “Place of Supply”.

Composite and Mixed Supplies [Section 8 of CGST Act]:

Composite Supply:

Meaning:  Composite Supply means

• Two or more supplies of goods or services or combination thereof
• Naturally bundled and supplied in conjunction with each other in the ordinary course of business
• One of which is a principal supply ( other supplies are merely ancillary)

Example: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and where supply of goods is a principal supply.

Tax Liability:  Tax treatment of the principal supply to be meted to the entire composite supply

Mixed Supply:

Meaning:  Mixed Supply means

• Two or more supplies of goods or services or combination thereof
• Supplied in conjunction with each other for a single price
• Such supply does not constitute “Composite Supply”

Example:  Supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits having different GST rates for a single price.

Tax Liability:  Tax treatment of the supply attracting the highest rate to be applied to the entire mixed supply. 

Conclusion:

On application of provisions of Levy, Supply, definition of Goods & Services, it can be said whether a transaction is liable to GST or not. Supply under GST Regime would become a grey area if the definition remains so exhaustive.

Disclaimer: 

The above analysis of several provisions of GST is only for general understanding of the readers and should not be relied upon before obtaining appropriate professional advice.

For feedback or queries, author could be reached at cabavesh2017@gmail.com.

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