Very often we come across situations where incomes derived through a particular nature have to be analysed for tax treatment under both Income Tax Act 1961 as well as GST Law. We had a different scenario in pre GST era, where service tax was levied based on the provisions of Finance Act, VAT was levied based on the provisions of various state laws and Central Sales Tax Act, CENVAT, Excise Duty, CVD, SAD, Octroi, Entry Tax, Luxury tax etc. were levied based on various statutes of Centre, States and Union Territories.
Introduction of GST Law in the country is a big transformation in the indirect tax system with the motive of ‘One Nation One Tax’ to replace the multi-layered and complex tax structure with a transparent technology driven tax system. With this motive various statutes in the country are subsumed into GST Law (leaving behind Customs Duty, Electricity Duty, tax on alcoholic liquor for human consumption etc.).
Various taxes were levied in pre GST regime under different statutes at different point in time like on the removal of goods in case of Central Excise, issue of invoice or receipt of payment or completion of provision of service in case of Service Tax and sale of goods or transfer of property, under the VAT/ CST laws. Since various statutes are subsumed under GST there shall be single taxable event as compared to different taxable events under erstwhile laws. Because of this the taxable event i.e., time of supply is a single point in time for levy of tax for different types of transactions. This gave rise to framing of wider definitions of “Supply” and ‘Aggregate Turnover’ under GST Law (include everything and leave nothing), these definitions are reproduced below.
Section 2(6) “aggregate turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess.
Section 7 – Scope of supply
(1) For the purposes of this Act, the expression “supply” includes––
(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) ……..; and
Consequent to the introduction of wider definitions under GST Law, opens up inclusion of more and more transactions under GST purview for levy of taxes. In this article I have tried to analyse whether GST is to be levied on various receipts of income which are either chargeable to tax or exempt under Income Tax Act, 1961.
It can be seen from the above definition that the aggregate turnover is a sum of different taxable, exempt, export supplies etc. Therefore, any receipt of income to be included in the aggregate turnover needs to be related to any transaction that amounts to supply in terms of Section 7(1)(a) of the CGST Act, 2017, which stipulates that any transaction must consist the following three components to qualify as supply:
i. The transaction must involve a supply of goods or services or both, such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made.
ii. The transaction must be for consideration by a person.
iii. The transaction must be in the course or furtherance of business.
Analysis of various transactions based on its nature:
1. Salary received from partnership firm by a working partner:
In case of a working partner getting salary from a partnership firm, the said salary is neither service nor goods in terms of clause 1 of schedule III of CGST Act, 2017 and is not to be included in the calculation of aggregate turnover and no GST is to be levied on the same.
2. Share of profit from a partnership firm:
The receipt of amount towards share of profit from partnership firm is not under the purview of GST as the share of profit is nothing but application of money and is not to be included in the calculation of aggregate turnover and no GST is to be levied on the same.
3. Salary received as director from a private limited company:
a. Executive director: the services of the executive director are treated as the services rendered as employee to the said company which is neither service nor goods in terms of clause 1 of schedule III of the CGST Act, 2017 and is not to be included in the calculation of aggregate turnover and no GST is to be levied on the same.
b. Other than Executive director: the remuneration paid for the services of non-executive director is chargeable to GST under reverse charge mechanism under section 9(3) of the CGST Act, 2017 in the hands of the company, under entry no. 6 of the Notification No. 13/2017-Central Tax (Rate) dated 28/06/2017. The value of taxable services is to be included in the calculation of aggregate turnover and GST is to be paid by the said company under reverse charge mechanism.
4. Rental Income:
a. Commercial Property: the transaction of rental/lease of commercial property amounts to supply; the periodical income received towards the impugned supply of service & the same is in the course or furtherance of business and hence the said transaction amounts to supply in terms section 7(1)(a) of the CGST Act, 2017. Thus it is a taxable supply and to be included for calculation of aggregate turnover.
b. Residential Property: the services by way of renting of residential dwelling for use as residence are exempted from GST in terms of entry no. 12 of the Notification no. 12/2017 dated 28/06/2017. Thus impugned supply of service of renting residential property becomes exempt supply. Aggregate Turnover includes the value of exempted supplies also. Therefore, the income received by the applicant towards rent of residential property is to be included in the aggregate turnover.
5. Receipt of income out of insurance policies, dividend on shares and Capital Gain/Loss on sale of shares:
a. Dividend on shares and Capital Gain/Loss on sale of shares: The term ‘Securities’, which has the same meaning assigned to it in clause 2(h) of the Securities Contracts (Regulation) Act, 1956, in terms of Section 2(101) of the CGST Act, 2017, includes shares, scrips, stocks, bonds, derivative instruments etc., that have explicitly excluded from the purview of GST, by virtue of its exclusion from the definition of ‘goods’ and ‘services’, as contained in Section 2(52) and Section 2(102) of the CGST Act, 2017 respectively. Thus the dividend on shares, capital gain/loss from sale of shares are relevant to securities and the income earned in this relation is nothing but application of money. Therefore, this income earned out of shares, which are excluded from the definition of Goods or Services, also get excluded from the definition of Supply. Therefore, it is not relevant to the aggregate turnover and is not required to be added to the calculation of aggregate turnover.
b. Income out of maturity of insurance policies: the impugned income would be received on the maturity of insurance policies i.e., on closure of the insurance contract consequent on maturity of the said policies. The insurance premium on policies are taxable under GST, being consideration for service provided by insurance companies. Therefore, on completion of the said contract/maturity of the policy, there would not be any service involved between policy holder and insurance company. Therefore, amounts received on maturity of insurance policies are not relevant to the aggregate turnover and hence not required to be added to the calculation of aggregate turnover.
6. Interest Income received from different sources:
Different sources of income like Interest earned or received on loan, advance, deposits, debentures, National Savings Certificate (NSC), Post office deposits, PF Account, National Pension Scheme (NPS). All these interest incomes are out of the deposits/loans extended. The services by way of extending deposits, loans or advances in so far as the consideration represented by way of interest or discount (Other than interest involved in credit card services), are exempt under entry no. 27(a) of the Notification No. 12/2017-Central Tax (Rate) dated 28/06/2017. Thus interest earned or received out of the deposits/loans/advances extended, amounts to exempt service and the actual amounts deposits/loans/advances become the value of the service. Thus these amounts are to be included in the calculation of aggregate turnover.
The above analysis of various incomes under GST are in view of the Ruling of the Authority for Advance Ruling, Karnataka vide ruling no. KARADRG 30/2020 dated 04/05/2020. Analysis of various income is to be done on case to case basis as GST is a single tax for various income of indirect nature and the definitions of ‘Supply’ and ‘Aggregate Turnover’ are being wide in nature.