In this article we will discuss the relationship of supply with the consideration and its repercussions regarding the chargeability of GST. The section 7 of the Central Goods & service Tax Act talks about the scope of supply. We can in other words say that the section 7 is the gate way to the GST. If the some thing is not covered within the scope of supply then it will be outside of the scope of the GST provisions and hence not chargeable to GST. The relation between consideration and supply is utmost important in respect of chargeability of any transaction under the provisions of the CGST Act. If the relationship between the same is not proved then certainly the supply can not be taxed under the GST Act. The recent advance ruling which we will discuss later in this article, also substantiates the same . To better understand the topic firstly we look forward for the definitions of supply and consideration.
The section 7 of the CGST Act 2017 is as under :
Scope of supply.
(1) For the purposes of this Act, the expression “supply” includes—
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;
import of services for a consideration whether or not in the course or furtherance of business; [and]
the activities specified in Schedule I, made or agreed to be made without a consideration
omitted
[(1A) Where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.]
(2) Notwithstanding anything contained in sub-section (1),—
activities or transactions specified in Schedule III; or
such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.
(3) Subject to the provisions of [sub-sections (1), (1A) and (2)], the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as—
(a) a supply of goods and not as a supply of services; or
(b) a supply of services and not as a supply of goods
So if we look at the condition as envisaged in Sec 7(1)(a), we come to the conclusion that for the purpose of supply an activity should be made for consideration (except the activities mentioned in the schedule I). So if in any case consideration is missing the activity will not be termed as supply and hence will be outside the scope of GST.
Now we move further to discuss the term consideration under the CGST Act,2017:
Consideration u/s 2(31) of the CGST Act, 2017:
“consideration” in relation to the supply of goods or services or both includes—
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:
Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;
If we go through the definition of consideration we emphatically can say that the payment can be made in money or otherwise but it should be “in respect of , in response to , or for the inducement of the supply…” meaning thereby that it should have direct relation with supply otherwise it will not be treated as consideration.
We all know that the interplay of other laws and statutes into the GST act unless and until specifically restricted by the particular provision . Therefore we must borrow the definition of consideration from the Section 2(d) in The Indian Contract Act, 1872 also and which defines consideration as :
“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise;”
The definition of the consideration as given in the Indian Contract Act prominently made clear that the consideration should be at the desire of the promisor otherwise it will not be considered as such . It makes no difference if some benefit flows to the promisor because it the desire or will of the promisor which makes the benefit into the consideration, if such desire or will is missing then it will not be construed as consideration.
Further Section 25. of Indian Contract Act, 1872 specifically prescribes that “Agreement without consideration, void, unless it is in writing and registered or is a promise to compensate for something done or is a promise to pay a debt barred by limitation law.”
Therefore any transaction or agreement or supply barring the exceptions given in the statute are void and thus have no legal effect .
The recent ruling of Maharashtra Appellate Authority for Advance Ruling in the case of Vijay Baburao Shirke [2020] 120 taxmann.com 103 (AAAR-MAHARASHTRA) reiterated the fact that the there must be direct nexus between the supply made and the consideration made otherwise it can not be termed as supply within the provisions of the GST and consequently outside the scope of the GST.
The crux of the ruling : For occurrence of any taxable event, there must be direct and immediate link between supply made and consideration received. Hence, where applicant owns horses, which participate in races organised at different race clubs, and upon winning, applicant is awarded prize money in respect of horse which wins race, said prize money would not be subject to GST as there is no element of service when applicant’s horse wins race and gets prize. There is no direct nexus between activities carried out by horse owners viz. by providing thoroughbred horses to race clubs for organizing horse race events, and prize money received by such horse owners .
One most important take out from the above ruling is that the “every supply is a contract but not every contract is supply” under the provisions of the CGST Act, 2017.
The above referred advance ruling prominently emphasizes upon the direct relationship of the supply and consideration. So if someone wants to prove the consideration in a way which is something very remote and indirect then certainly it will not cover within the ambit of the GST.
This article is an endeav or to share some learnings obtained. The views expressed are of the author and are intended solely for informational purpose only. Though due care is taken while preparing the document, possibility of errors cannot be ruled out. Expert guidance, where required and reference to the original act, notification, circular, rules etc is highly recommended.
(About the author – The author is a member of ICAI and can be reached at Email: nikhilkumarca@gmail.com, Mobile: 09936424523, Twitter : @CA_NikhilKumar, FB: canikhillko Office: Flat No. 102, First Floor, Vasundhra Complex, Ring Road, Sector-16, Indira Nagar, Lucknow-226016 , U.P., India )
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Nice article. Remind me of tax classes