Non-GST Supply under GST laws – creating a nightmare

CA. HARI C

Agricultural Income is exempt under the Income Tax Act. But practically it is added to Total Income for rate purposes. High slab individuals end up paying a portion of tax on agricultural income. Same fate awaits Non-GST supply under the GST laws.

Goods and Services Tax (GST) as introduced on 01^st of July 2017 is a tax on Supply of Goods or Services or both in the course or furtherance of business. Many taxation laws existed prior to 01^st July 2017 like Central Excise, Service Tax, State VAT, CST etc were subsumed in GST with an objective to make it simpler and non-cascading. GST gained its power from the 101^st Constitution Amendment Act. The GST became operational with the enactment of CGST Act, State GST Acts, UTGST Act, GST (Compensation to States) Act and IGST Act.  As is the practice with any law, GST also had ‘inclusions’, ‘exclusions’, ‘exemptions’, etc’.  When there is complexity and confusion in understanding the provisions or when the law needs a lot of interpretations, it becomes cumbersome for the people to follow it. This leads to unnecessary complications of In-correct returns, claims etc and finally imposition of penalty.

Non-GST Supply and No-Supply are not defined in the law. But the same has been included in the GSTR. This leads to a lot of interpretations to the whims and fancies of the Users. The professional community themselves are divided on these issues. This becomes more imperative for the Government to come out with proper clarifications especially when it comes to apportionment of Input Tax Credit and calculation of aggregate turnover. As per section 17 of the CGST Act, Input Tax Credit has to be apportioned first between Business use and Non-business use and thereafter between Taxable and Exempt Supplies. Taxable supply [2(108)] means supply of goods, services or both which is leviable to tax. Exempt Supply [2(47)] means supply of goods, service or both which attracts ‘nil’ rate of tax or which may be wholly exempt from tax and includes non-taxable supply. Non-taxable supply [2(78)] means a supply of goods or services or both which is not leviable to tax under CGST or IGST.  Terms defined in GST laws include newer terms (which further need more clarification) and one Term includes another Term.

Section 17(3) states that the value of exempt supply shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transaction in securities, sale of land and subject to clause (b) of paragraph 5 of Sch II, sale of building. In CGST amendment act 2018 , under Explanation to sec 17(3) it is stated that “for the purposes of this sub-section, the expression ‘‘value of exempt supply’’ shall not include the value of activities or transactions specified in Schedule III, except those specified in paragraph 5 of the said Schedule”.

Levy means central tax on all intra-state supplies of goods, services or both except on the supply of alcoholic liquor for human consumption, on the value determined u/s 15 and at such rates. To levy central tax the supply should be within the State and it should be of goods, services or both. Tax cannot be levied if;

a) there is no supply of goods or supply of services or supply of goods and services or

b) there are no goods or services involved or

c) value cannot be determined or

d) rates not prescribed or

e) if alcoholic liquor is supplied.

The term SUPPLY in sec 7 includes

a) ‘supply of goods orsupply of services or supply of goods and services’

i. made or agreed to be made

ii. for a consideration

iii. by a person

iv. in the course or furtherance of business.

b) import of services for a consideration whether for business or not

c) activities in Sch I made without consideration.

Goods mean (a) every kind of movable property, (b) actionable claim, (c) growing crops, grass and things attached to ground but are severed before supply. But Money and Securities are not Goods. Services mean (a) anything other than goods, money and securities (b) activities relating to the use of money or its conversion for which a separate consideration is charged. Here Money and Securities are expressly excluded from both Goods and Services. Thus supply of money and securities will not become SUPPLY.

‘Goods’ include Actionable Claims. But Sch III states that transaction or activity in actionable claims (except lottery, betting and gambling) is neither supply of goods nor services.  Transaction in Lottery, Betting and Gambling are excluded from Sch III. That means they are treated as Goods and supply of which are leviable to GST.  To make matters simple, definition of ‘Goods’ could have included these three items in place of actionable claims.

The Act has a ‘supply’ within a SUPPLY. One is the term in GST ‘SUPPLY’ and the other is the English phrase ‘supply of goods or services or both’.  In most of the other sections the phrase ‘supply of goods or services or both’ is used.  It should be clarified as to which ‘supply’ to be used for interpretation.

The circumstances under which GST cannot be levied are:

1. A transaction where there is no supply of goods or services or both.

2. Supply of Money or Securities.

3. Supply without consideration, except for items in Sch I, given below:

a. Gift to an employee valuing upto Rs 50,000/- in a financial year.

b. Permanent transfer or disposal of business assets where ITC has not been

c. Temporary transfer of business assets whether ITC was availed or not

d. Supply  of Goods, Services or both between unrelated persons or non-distinct persons in the course or furtherance of business

e. Supply of Goods, Services or both between related persons or distinct persons not in the course or furtherance of business.

f. Supply of Goods by a Principal to an Agent where Agent does not undertake to supply goods on behalf of the Principal

g. Supply of Goods by an Agent to Principal where Agent does not undertake to receive goods on behalf of the Principal

h. Import of services by a Taxable Person from a related person/establishment outside India,not in the course or furtherance of business.

i. Import of services by a Taxable Person from a unrelated person/establishment outside India, whether  or not in the course or furtherance of business

j. Import of services by a Non-Taxable Person from any  person/establishment outside India, whether  or not in the course or furtherance of business.

4. Supply of alcoholic liquor for human consumption

5. Activities in Sch III, which are treated neither as supply of goods nor as supply of services.

6. Activities of the Central Government, State Government and Local Authority in the capacity as Public Authorities in relation to a function entrusted to a Panchayat under Article 243G of the Constitution shall be treated neither as supply of goods nor as supply of services.

7. The supply of Petroleum products till notified.

8. Supply of Goods, Services or both by a person having aggregate turnover upto Rs 20 Lakhs in a year.

9. Sale of Goods in High Seas before it is imported into India.

10 .Supply of Warehoused goods before Importing into India.

11. Supply of goods from one Non-taxable territory to another non-taxable territory.

The GSTR forms contain the words Non-GST Supply, No-Supply, Nil Rated supply, Exempted supply under “Pt-II-5 –Outward Supplies made during the financial year on which tax is not payable”. The above words are not defined in the law.

There are following categories of supplies:

1. Supply of Goods,Services or both leviable to GST ie Taxable Supply.

2. Supply of Goods,Services or both not leviable to GST ie Non-taxable Supply like Alcohol, Petroleum Products etc.

3. Supply of Goods or Services exempted by Notification.

4. Rate of tax on Supply of Goods or services notified as ‘Nil’.

5. Export Supply or supply to SEZ termed as ‘Zero Rated’.

6. Transactions or Activities not treated as Supply ie items in Sch III.

7. Things or activities not considered as Goods or as Services in the definition itself i.e. Money and Securities.

In the case of Real Estate Projects, the rate of tax applicable was 18%. But 1/3^rd of the value was allowed as abatement for land and the effective rate became 12%. The real value of land charged by the Builder may be different from this abatement. It becomes difficult to identify the value of Sale of Land for reversal of ITC.

In a Bar Hotel with restaurant, income comprises of Room Rent above Rs 1000/-, Room Rent upto Rs 1000/-, Liquor Sales and Restaurant Sales. Here also the bifurcation of GST and Non-GST Supplies will create confusion while applying Input Tax Credit. The ITC availed and claimed is like a Democles’ Sword above the Taxable Persons’ head. The authorities may resort to their whims and fancies in reversing ITC. The authorities will be relying blindly on the data in GSTN. There will be more of demands than redressal.

The activity of SUPPLY has been defined, explained and clarified in many ways in the GST Laws. The Government and the Council should consider giving clarity to these issues arising out of practical problems.  Left to themselves, these confusions will snow ball into litigations of unwanted scale. They should also ensure that the Rules and Forms are consistent to the extent of Terms and provisions included in the Act.