Benjamin Franklin had once said that there are only two things, which are certain in life, and these are “Death” and “Taxes”. I personally think that, of the two certainties “Death” would still be tagged as better of the two,since Death strikes only once, and fortunately it doesn’t undergo frequent revisions!! Financial year 2017 will experience one such certainty which is GST rollout. Being the biggest tax reform it is crucial that the “Taxable Event” of GST is clearly understood.In the article below the author mulls on the concept of taxable event and endeavours to reflect the practical examples where taxability would arise.
With GST standing at welcome gate of new financial year, it is inevitable for all of us to know as to when would GST liability arise? And this question takes us to the most profoundly discussed aspect of any tax regime, which is “Taxable Event”. It garners highest debates and discussion form legislators and administrators since it is the “Taxable Event” which finally culminates into “GST liability”.
Each of us must have at some point of time buried ourselves in plethora of judgements that spoke volumes,explaining terms like “Manufacture ( Taxable event (TE) under Excise Duty Act) or “Sale” ( TE under CST or VAT), or “Provision Of Service”(TE under Service Tax Act), or “Act Of Importation” ( TE under Customs Act ).Let us therefore now greet a word which may soon get the honour of being surfaced as moot word for discussions in several decisions of juries and this word is “Supply”.
Under GST “Taxable Event” occurs when “Supply” happens. This therefore necessitates us to understand as to what shall constitute “Supply”?.
What Is “Supply”:
For a transaction to be treated as “Supply” it should have below constituents, which could be understood by series of logical question and answer :
1) Supply is of “What”?
Answer: Supply should be of Goods and/or Service’s and it is of “Taxable Supplies”
2) Supply is made by “Whom”?
Answer: Supply should be made by “Taxable Person”
3) Supply is made “Where”?
Answer: Supply should be made in “Taxable Territory”
4) “How” is Supply made?
Answer: Supply should be made in course or furtherance of business.
5) “Why” is Supply made?
Answer: Supply should be made for “Consideration”.
6) “Which” form Supply can take?
Answer: Supply could take 8 forms:
Property in goods is transferred or agreed to be transferred by seller to buyer.
It refers to alienation or conveyance or passing on of the property of a thing form one person to another.
Swapping of goods or services without using a medium of exchange such as money.
Negotiation by which one person transfers to another person funds and this transfer could be either at a price agreed upon, or which could be fixed by commercial usage.
Permission granted by competent authority to exercise certain privilege which, without such authorisation, would have constituted as an illegal act.
A contractual agreement by which one party conveys an estate in property to another party, for a limited period, subject to various conditions, in exchange for something of value, but still retains ownership.
Sum or amount agreed in the lease or tenancy agreement to be paid by the tenant to the landlord for exclusive possession of the property leased for the period of the lease
In relation to property it refers to the act of transferring or relinquishing of that property to another’s care or possession usually by deed or will.
One of the most significant implication of point 6(b) above would be “All self-supplies will be taxable and that means all “Inter State” stock transfers will be taxable.
Also Point 4 above ponders us to think as to what will constitute “Course or Furtherance of business”.While the plain english meaning of the term “furtherance” would be something is being done which causes promotion or advancement in the activity of business,however mere grammatical understanding is not sufficient and here are 4 criteria which one should test positive for the transaction to fall in the definition of supply :
(Thus if an individual buys a car for personal use and after a year sells it to a car dealer then such transaction will not be considered as “Supply” since is not made by the individual in the course or furtherance of business).
Till now we had been speaking about Sec 3 (1)(a) of Model GST Act and therefore may misunderstand that “Consideration” is necessary for the transaction to be tagged as supply,however, there are cases where even if consideration is not there yet the transaction can still fall within the definition of “Supply”. Sec 3(1)(b) specifies that any importation of service shall be treated as supply irrespective of whether consideration is there or not and irrespective of whether or not such importation is in course or furtherance of business.The readers may carefully note that the Sec 3(1)(b) is specifying only importation of service and is silent of importation of goods, the reason being, “Importation Of Goods” is dealt separately under the Customs Act, 1962, wherein IGST shall be levied as additional duty of customs in addition to basic customs duty.
Further Sec 3(1)(c) specifies situations as narrated in Schedule I where even if the transactions happens without any consideration yet these shall be considered as supply. So let us delve into what these transactions are:
1. Permanent transfer/disposal of business assets.
Example: Interstate movement of assets on permanent transfer of business locations.Or simple disposal of assets without any consideration.
2. Temporary application of business assets to a private or non-business use:
Example: A Director of a company temporarily transfers his official computer to home for some personal use. OR, a dealer of air-conditioners transfers an air conditioner from his stock in trade, for personal use at his residence.
3. Services put to a private or non-business use:
Example: A Director using a part of rented office premise for personal use.
4. Assets retained after de-registration:
Example: Entire Business sold-out however few assets on which input GST was availed at time of procurement is yet retained by promoters of the business for personal use.
5. Supply of goods and / or services by a taxable person to another taxable or non-taxable person in the course or furtherance of business.
Example: Gifted article or scheme based articles promoted for furtherance of business.
(Note that the supply of goods by a registered taxable person to a job-worker in terms of section 43A shall not be treated as supply of goods).
As is evident from above that the word “Supply” is wide in its import, consequently the practical implication connotes need for meticulously examining the context and the legal repercussions.With only couple of months left before the biggest Tax Reform of the country sees itself running through the veins of corporates, it is essential that professionals whether in corporate or consultancy examines its business structure and map each of its transaction with the tax repercussions that it will have.A draft “Cost Impact” and “Fund Flow Impact” should serve as baseline for management to set the discussion rolling and make informed decisions.
(CA Rajeev.Joshi ( CA,CISA,DISA,BSc (Microbiology)) The author is a Senior Management & Tax Consultant with over two decades of comprehensive industrial experience.He could be reached at firstname.lastname@example.org/9619912774)