Introduction: Understanding the scope of supply under Section 7 of the CGST Act is crucial for navigating GST implications across diverse scenarios. From free samples to director’s remuneration and guarantees, each aspect entails specific considerations that impact GST applicability.
Section 7 : Scope of Supply (Part III) Applicability of GST under different scenarios.
A. Free samples and gifts:
> It is a common practice among certain sections of trade and industry, such as, pharmaceutical companies which often provide drug samples to their stockists, dealers, medical practitioners, etc. without charging any consideration.
> The goods or services or both which are supplied free of cost (without any consideration) shall not be treated as `supply` under GST (except in case of activities mentioned in Schedule I of the said Act).
> Further as per section 17(5)(h) of CGST Act, 2017 provides that ITC will not be available in respect of such free sample goods unless the activity falls under Schedule I of the said Act.
> It is similarly applicable to “buy one get one free offers.”
B. Discounts including ‘Buy more, save more’ offers.
> Sometimes, the supplier offers staggered discount to his customers (increase in discount rate with increase in purchase volume). For example-Get 10 % discount for purchases aboveRs.5000/-, 20% discount for purchases above Rs.10,000/-and 30% discount for purchases aboveRs.20,000/-. Such discounts are shown on the invoice itself.
> Some suppliers also offer periodic / year ending discounts to their stockists, etc. For example-Get additional discount of 1% if you purchase 10000 pieces in a year, get additional discount of2% if you purchase 15000 pieces in a year.
> Such discounts are called “Volume Discounts” , passed on through credit note by supplier.
> ITC is require to be reversed from total ITC in GSTR-3B .
CIRCULAR NO. 92/11/2019 GST Dated 07.03.2019
C. Goods sent/taken out of India for exhibition or on consignment basis for export promotion.
> The activity of sending / taking the goods out of India for exhibition or on consignment basis for export promotion do not constitute supply as the said activity does not fall within the scope of section 7 of the CGST Act as there is no consideration at that point in time, except activity does not fall under Schedule I of CGST Act, 2017.
> The supply is not a “Zero rated Supply” also as it does not constitute supply only.
> The supply would be deemed to have taken place, on the expiry of six months from the date of removal, if the specified goods are neither sold abroad nor brought back within the said period.
Circular 108/27/2019 -GST 18.07.2019
D. GST on license fee charged by the States for grant of Liquor licences to vendors .
> In exercise of powers conferred under sub-section 2(b) of section 7 of CGST Act,2017, Notification No.25/2019-Central Tax (Rate) dated 30th September, 2019 has been issued.
> GST is not require to be paid on such license fee.
[Circular No.121/40/2019-GST] Dated: 11th October, 2019
E. GST On Director’s Remuneration.
The employees of the said company.
* The definition of “independent directors’ under section 149(6) of the Companies Act, 2013, read with Rule 12 of Companies (Share Capital and Debentures) Rules, 2014 makes it amply clear that such director should not have been an employee or proprietor or a partner of the said company, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed in the said company.
* out side the scope of Schedule III of the CGST Act and are therefore taxable. In terms of entry at Sl. No. 6 of the Table annexed to notification No.13/2017–Central Tax (Rate) dated 28.06.2017
(ii) leviability of GST on remuneration paid by companies to the whole-time directors including managing director who are employees of the said company.
> If the part of Director’s remuneration which are declared as “Salaries’ in the books of a company and subjected to TDS under Section 192 of the IT Act, are not taxable.
> Contract of service must be examined to decide the taxability.
[CircularNo.140/10/2020-GST] Dated:10th June, 2020
F. Whether various perquisites provided by the employer to its employee in terms of contractual agreement entered into between the employer and the employee are liable for GST?
> No-Schedule III to the CGST Act provides that “services by employee to the employer in the course of or in relation to his employment” will not be considered as supply of goods or services and hence GST is not applicable on services rendered by employee to employer provided they are in the course of or in relation to employment.
> Hence any perquisites paid in accordance with terms of employment will also be exempt.
Circular No. 172/04/2022 Dated: 06.07.2022.
G. Taxability of personal guarantee and corporate guarantee in GST.
Whether the activity of providing personal guarantee by the Director of a company to the bank/ financial institutions for sanctioning of credit facilities to the said company without any consideration will be treated as a supply of service or not and whether the same will attract GST or not?
> As per section 7(1)(c ) r.w Sr. No. 2 of Schedule I of CGST Act,2017
> supply of goods or services or both between related persons, when made in the course or furtherance of business, shall be treated as supply even if made without consideration
> As per Explanation (a) to section 15 of CGST Act, the director and the company are to be treated as related persons.
> Rule 28 of CGST Rules Prescribes the method of determining value for supply of goods or services or both between related parties, other than supply made through an agent.
Taxable value will be-
(a) Be the open market value of such supply;
(b) If the open market value is not available, be the value of supply of goods or services of like kind and quality;
(c) If the value is not determinable under clause (a) or (b), be the value as determined by the application of rule30 or rule31, in that order.
> RBI has provided guidelines for obtaining personal guarantee of promoters, directors and other managerial personnel of the borrowing concerns vide Para 2.2.9 of its Circular No. RBI/2021-22/121 dated 9th November, 2021, which is reproduced below:.
> “2.2.9 Guidelines relating to obtaining of personal guarantees of promoters, directors, other managerial personnel, and shareholders of borrowing concerns.
Banks should obtain an undertaking from the borrowing company as well as the guarantors that no consideration whether by way of commission, brokerage fees or any other form, would be paid by the form or received by the latter, directly or indirectly. This requirement should be incorporated in the bank’s terms and conditions for sanctioning of credit limits.
> exceptional cases where payment of remuneration may be permitted e.g. where assisted concerns are not doing well and the existing guarantors are no longer connected with the management but continuance of their guarantees is considered essential be cause the new management’s guarantee is either not available or is found inadequate.
> Accordingly, the open market value of the said transaction/supply may be treated as zero and therefore, taxable value of such supply may be treated as zero. In such a scenario, not axis payable on such supply of service by the director to the company.
But there might be some controversies arise in case of applicability of GST on personal guarantee as, though Circular says, no GST is applicable but, the department might come with the argument that, there is sub clause b of Rule 28(1) which states that if open market value not available then the value of supply of goods or services of like kind and quality and it might amount to taxability.
> In all these cases, the taxable value of such supply of services shall be the remuneration/consideration provided to such a person/guarantor by the company, directly or indirectly.
Whether the activity of providing corporate guarantee by a person on behalf of another related person, or by the holding company for sanction of credit facilities to its subsidiary company, to the bank/financial institutions, even when made without any consideration will be treated as a taxable supply of service or not, and if taxable, what would be the valuation of such supply of services.
> sub-rule(2) has been inserted in rule 28 of CGST Rules vide Notification No.52/2023 dated 26.10.2023
> Value will be deemedtobe1% of the amount of such guarantee offered, or the actual consideration, whichever is higher.”
Circular no.204/16/2023-GST Dated: 27.10.2023
Conclusion: Section 7 of the CGST Act delineates the contours within which GST applies to transactions ranging from free samples to director’s remuneration and guarantees. By comprehensively examining each scenario, businesses can ensure compliance and mitigate potential tax liabilities, thereby facilitating smoother operations within the GST framework.
Author Bio
for discounts that are volume discounts,. ITC is not required to be reversed. From the point of view of the recipient, ITC will automatically be reversed after filing of credit note in GSTR 1
sir, If you are availing credit as per 2A then no need to reverse, but if you are claiming as per books, you have to reduce the ITC so much of the amount of debit note(In case of recipient)