GST, the biggest landmark reform in India’s indirect tax regime, was finally able to see the daylight w.e.f. July 1, 2017. GST was introduced with an idea of unification of various indirect taxes focussing only to levy GST on ‘SUPPLY’ of goods or services. It is a well known fact that laws like every living being are bound to evolve. Laws are constantly amended, refined, redefined, to reflect the intention of the legislature or to take into consideration a scenario which wasn’t predicted while introducing the law.
GST laws being at a very nascent stage is not immune to such evolution. After more than a year of GST’s introduction, the Government has come up with the Central Goods and Services Tax (Amendment) Act, 2018, (‘Amendment Act’) wherein certain amendments in the GST law have been made and a couple of them are retrospective in nature. It is worthwhile to note that although the Amended Act has received presidential assent, the applicability of the Amended Act is yet to be notified.
One of the significant retrospective amendments is made in the definition of ‘supply’ which can be understood by way of the following comparative table:
|Supply includes||Section||Existing definition||Amended definition|
|7(1)(a)||All forms of supply of goods or services or both made or agreed to be made for a consideration by a person in the course or furtherance of business.||All forms of supply of goods or services or both made or agreed to be made for a consideration by a person in the course or furtherance of business.|
|7(1)(a)||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.||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.|
|7(1)(b)||Import of services for a consideration whether or not in the course or furtherance of business.||Import of services for a consideration whether or not in the course or furtherance of business.|
|7(1)(c)||Activities specified in Schedule I, made or agreed to be made without a consideration.||Activities specified in Schedule I, made or agreed to be made without a consideration.|
|7(1)(d)||Activities as referred to in Schedule II.||Omitted|
|7(1A)||Did not exist||Where certain activities or transactions, constitute a supply as per Section 7(1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II|
As per the existing definition of ‘supply’, the activities mentioned in Schedule II to the CGST Act were ‘deemed supplies’. However, under the Amendment Act, the definition has removed the deeming fiction of the activities mentioned in Schedule II. The retrospective amendment suggests that Schedule II has to be referred merely for classification purpose i.e. whether the underlying supply is goods or services.
To give a perspective on the amendment one can take into consideration the existing definition of supply i.e. Section 7(1)(d) read with Sr. No. 5(e) of Schedule I to the CGST Act which states that the activity of agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act would be deemed to be a supply. A view exists that under the existing definition of supply, transactions like liquidated damages, notice pay, could get covered under the said entry and hence qualify as ‘supply’.
As per the amended Section 7 of CGST Act:
a. a transaction has to qualify as ‘supply’; and
b. Refer Schedule II for classification of such ‘supply’.
In other words, under the amended definition of supply, the activities or transactions listed in Schedule II to the CGST Act would no longer be a deemed supply, rather, Schedule II would have relevance only from the perspective of classification of a qualified supply as ‘goods’ or ‘services’.
This brings us to an elementary question as to what the meaning of ‘SUPPLY’ is. The definition of ‘supply’ includes ‘supply’. Whenever confronted with a word which is not defined under the law or when the definition of a word is also included in its definition, the judiciary often resorts to the dictionary meaning.
A common understanding that could be derived from various dictionaries is that ‘supply’ would mean to PROVIDE something. If this meaning is adopted, then a question arises as to whether something is PROVIDED in the following transactions:
It is possible to take a view there is no underlying supply in the above mentioned transactions in absence of PROVIDING something. The meaning of supply suggests that there must be a positive act of providing or doing something. Mere recovery of an amount in absence of quid pro quo may not be construed as SUPPLY. Whether this view would sail through with the revenue authorities or the judiciary that is a question which may get answered after a long round of potential litigation.
In absence of availability of any Government literature in the public domain, it is unclear why Section 7(1)(d) i.e. the deeming fiction has been deleted. Also, since the amendment is retrospective in nature one would have to evaluate the consequences of the transactions which were ‘supply’ but would no longer be ‘supply’. If a transaction becomes non-taxable due to the removal of the deeming fiction would a recipient of such supply be able to get refund of the GST paid by the supplier? Further, would such non-taxable transaction qualify as ‘exempt supply’ and attract reversal of ITC?
Also, Section 7(1A) requires special attention which states that 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.
The provision suggests that the one has to mandatorily classify whether the underlying supply is goods or services as per Schedule II. But what if a transaction is not covered under Schedule II? Does it mean that a supply which is not classifiable under Schedule II shall not be chargeable to GST since its classification is not possible? Under the erstwhile service tax law (positive list regime) it was a settled position that the levy fails if classification is not possible or absent. Will this principle uphold under the GST regime too? Is this the intention of the Government or it’s a drafting error? Time will only tell.
Furthermore, all the State laws would also have to incorporate the amendments in line with the Amendment Act. Thus, as of now, it is unclear as to from which date the amendments shall come into force.
An eminent quote by Arthur Conan Doyle which seemingly applies while interpreting GST law:
“How often have I said to you that when you have eliminated the impossible, whatever remains, however improbable, must be the truth?”
Author: CA Chintan Vasa (The views expressed in this article are personal)