pri Meaning and Scope of Supply Meaning and Scope of Supply


The year 2017 will be known as the year in which the most important economic reform was introduced in the country – the Goods and Services Tax.

The idea of GST was to subsume various indirect taxes levied by Centre like Central Excise Duty, Countervailing Duty etc. and indirect taxes levied by State like octroi, entry tax, luxury tax etc The purpose of GST was to address issues which existed in the old tax regime by “broadening the tax base, eliminating cascading of taxes, increasing compliance and reducing economic distortions caused by interstate variations in taxes.”[1]  The reform was introduced with effect from 1st July 2017.

The road to the introduction of GST began in 2000 with the Vajpayee Government talking about GST. A task force was formed in 2003 under Vijay Kelkar to recommend tax reforms. In 2004, Kelkar recommends GST to replace the then existing tax regime.  It was in Budget 2006-07 that the implementation of GST from April 1, 2010, was proposed by P. Chidambaram, the Union Finance Minister.

In 2011, Congress Party introduces Constitution (115th Amendment) Bill 2011. However, the Bill lapsed because 15th Lok Sabha was dissolved. In 2014, the Constitution (122nd Amendment) Bill 2014 was introduced. It was passed in May 2015. The Bill amended the Constitution of India to include GST and enabled Parliament and state legislature to frame laws on GST.

Clause 12A was inserted in Article 366 of the Constitution. It defines goods and services tax as “tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption.”[2]

On 12th April 2017, four GST bills were enacted: Central GST Bill, Integrated GST Bill, Union Territory GST Bill, The GST (Compensation to States) Bill. Central GST or CGST Bill makes provisions for levy and collection of tax on intra-state supply of goods or services for both by the Central Government.  Integrated GST or IGST Bill makes provisions for levy and collection of tax on inter-state supply of goods or services or both by the Central Government. The Union Territory GST or UTGST Bill makes provisions for levy on collection of tax on intra-UT supply of goods and services in the Union Territories without legislature. The Compensation Bill provides for compensation to the states for loss of revenue arising on account of implementation of the goods and services tax for a period of five years as per section 18 of the Constitution (One Hundred and First Amendment) Act, 2016.

The Central Goods And Services Tax Act, 2017 (hereinafter referred as ‘the Act’)  received the assent of the President on 12th April 2017 and the aim of the Act is “to make a provision for levy and collection of tax on intra-State supply of goods or services or both by the Central Government”

Meaning of Supply

Incidence of Tax

Incidence of tax determines the point at which the tax is to be levied i.e., taxable event. For the purposes of GST, the taxable event is “supply” of goods and services. GST law departs from the earlier understanding of “taxable event” under the State VAT Laws, Excise Laws and Service Tax Laws i.e. sale, manufacture and service respectively.

Section 7

The concept of ‘Supply’ is the cornerstone of GST architecture. The provisions relating to meaning and scope of supply are contained in Chapter III of the Act read with various Schedules given under the said Act.

Section 7 of the Act defines the scope of supply. It is an inclusive definition. Supply should be:

  • Of goods and services
  • For consideration
  • Made in the course or furtherance of business
  • By a taxable person
  • A taxable supply.

Section 7(1)(a)

The clause of sub-section 1 i.e. 7(1)(a) includes all forms of supply of goods and services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for consideration in the course or furtherance of business. Consideration is one of the most essential conditions for the supply of goods and/or services. It doesn’t always mean money. It has been defined under Section 2(31) of the Act.

In order to understand the term ‘in the course or furtherance of business,’ we need to understand the term business which is defined under Section 2(17) of the Act. It includes any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit. It also includes any activity or transaction in connection with or incidental or ancillary to the aforementioned listed activities. In addition, any activity or transaction is undertaken by the Central Government, a State Government or any local authority in which they are engaged as the public authority shall also be construed as business.

Section 7(1)(b)

This clause expands the definition of supply. It brings within the ambit of ‘supply’, the importation of services for a consideration whether or not in the course or furtherance of business.

For example, A, a proprietor, has received the architect services for his house from an architect located in New York at an agreed consideration of $ 5,000. The import of services by A is supply under Section 7(1)(b) though it is not in the course or furtherance of business.

Section 7(1)(c) read with Schedule I

This includes all supplies made by a taxable person to a taxable/non-taxable person, even if the same is without consideration. These are mentioned in Schedule 1 appended to the Act.

Section 7(1)(d) read with Schedule II

Section 7(1)(d) of the Act refers to Schedule II for determining whether a particular transaction is a supply of goods or supply of services.

Section 7(2) read with Schedule III

Activities specified under Schedule III can be termed as “Negative List “under the GST regime. This schedule specifies transactions/activities which shall be neither treated as supply of goods nor a supply of services.


Section 8

The application of GST rates poses no problem if the supply is of individual goods or services. However, in certain cases, supplies are not so simple or clearly identifiable. Some of the supplies are a combination of goods or a combination of services or a combination of goods and services and each component of such supplies may attract a different rate of tax.

In order to determine whether supplies are composite supplies or mixed supplies, one needs to determine whether the supplies are naturally bundled or not naturally bundled in the ordinary course of business.

Composite Supply has been defined under Section 2(30) of the Act. In a composite supply, goods or services or both are bundled owing to natural necessities. The elements in a composite supply are dependent on the ‘principal supply’. Principal supply means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary. It has been defined under Section 2(90) of the Act.

For example, when a consumer buys a T.V. and he also gets a warranty and a maintenance contract with the T.V., this supply is a composite supply. In this example, the supply of T.V. is the principal supply, warranty and maintenance services are ancillary.

Works contract and restaurant services are classic examples of composite supplies. No formula can be laid down to determine whether a service is naturally bundled in the ordinary course of business. Each case must be looked at individually.

Mixed Supply has been defined under Section 2(74) of the Act. In the case of mixed supply, individual supplies are independent of each other and are not naturally bundled. A supply can be a mixed supply only if it is not a composite supply. As a corollary, it can be said if the transaction consists of supplies not naturally bundled in the ordinary course of business, then it would be a mixed supply.

A mixed supply of two or more supplies shall be treated as supply of that particular supply that attracts the highest rate of tax.

For example, a shopkeeper selling storage water bottles along with a refrigerator. Bottles and the refrigerator can easily be priced and sold independently and are not naturally bundled. So, such supplies are mixed supplies.



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