“Supply” Now & Then: With reference to GST in India

“SUPPLY” This word has become the foundation stone for all the future financial transactions in India. All the beams, pillars, walls, rather the complete structure of the indirect taxation in India have been built on and around this one word. Under the proposed GST regime, any transaction which is not a supply cannot be taxed and a transaction may be taxed under GST only if it is a supply.

Under the existing tax regime different indirect taxes are charged on happening of various events like Excise Duty is charged on the event of removal of goods from the place of manufacture, VAT is charged on the event of transfer of risks & rewards associated with the goods and service tax is charged upon the provision of services being rendered, however the charging event in case of GST shall be supply of goods or service or both.

When a single word or a single term becomes so important and is going to be the axis of the biggest source of revenue for the nation, it is obvious to expect from the government to define such term in a very clear & precise manner.

Under the proposed GST regime a sincere effort has been made by the legislators to cover the whole universe under the definition of supply, their motto must have been to ensure that “UNLESS AND OTHERWISE SPECIFICALLY EXCLUDED IN THIS ACT, SUPPLY INCLUDES EVERYTHING”.

The definition of supply begins with the word “includes” which itself  gives a very extensive meaning to any term, but the placement of the word “includes” makes the definition a bit ambiguous as the definition starts in this manner, “Supply includes all forms of Supply.”  Draftsmen could rather have used more appropriate word like “means and includes “thereby giving the meaning as “Supply means and includes all forms of Supply”.

In P. Kasilingam v. P.S.G. College of Technology (1995) Supp 2 SCC 348, Honorable Supreme court held that “A particular expression is often defined by the Legislature by using the word ‘means’ or the word ‘includes’. Sometimes the words ‘means and includes’ are used.  The use of the word ‘means’ indicates that “definition is a hard-and-fast definition, and no other meaning can be assigned to the expression than is put down in definition. The word ‘includes’ when used, enlarges the meaning of the expression defined so as to comprehend not only such things as they signify according to their natural import but also those things which the clause declares that they shall include. The words “means and includes”, on the other hand, indicate “an exhaustive explanation of the meaning which, for the purposes of the Act, must invariably be attached to these words or expressions”

So the intention of the legislature is very clear that they do not want to take any chance and restrict the meaning of term “Supply” to contain a few transactions only, rather they want the definition of supply to be such an extensive so as to cover all the hypothetical situations which may have been left by them in a hurry. Government must understand that providing such vague definitions with all the possibilities of mischief on the part of tax authorities, will not pass a good signal to the people of India who are eagerly awaiting for this proposed GST regime with the sheer excitement and hope, that one day will come when EASE OF DOING BUSINESS IN INDIA will become a reality.

As discussed in our earlier articles on “Place of Supply under GST” & “All about Returns under GST”, there will be four different taxes under the proposed GST regime with about five to six different tax rates, also there will be separate provisions for levy of tax on Goods & Services, separate provisions for inter-state supplies & intra- state supplies and at least 37 returns to be filed every year.

When this was not enough, the legislators gifted the businessmen of the country with such an extensive definition of Supply under GST. I firmly believe that this could not have been the government’s perception to provide a business friendly environment in terms of ease of doing business in India.

Anyhow, we must accept what we have got and try to understand the meaning and inclusions of the term supply as defined under section 7 of CGST Act 2017.

But before we check out what all is included in the term “Supply”, let us see what all has been kept out of the purview of supply. Schedule-III of CGST Act’ 2017 provides a list of transactions which should not be considered to be supply under the proposed GST regime, these transactions are:

1. Services by an employee to the employer in the course of or in relation to his employment shall not be chargeable to tax under GST.

2. Services by any court including District Court, High Court and Supreme Court or Tribunal established under any law for the time being in force shall not be chargeable to tax under GST.

3. No GST shall be charged on:

(a) the functions performed by the Members of Parliament, Members of State Legislature, Members of Panchayats, Members of Municipalities and Members of other local authorities;

(b) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or

(c) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or a State Government or local authority and who is not deemed as an employee before the commencement of this clause.

4. Services of funeral, burial, crematorium or mortuary including transportation of the deceased has been kept out of purview of GST.

5. Sale of land will not be covered under GST, however where consideration of supply includes value of land in case of construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, such transaction shall be treated as supply of service.

But where the entire consideration of such has been received after issuance of completion certificate (in case required) by the competent authority or where the entire consideration of supply has been received after its first occupation, such supply shall not be taxable under GST. Same practice is followed under the existing tax regime also with only difference that even if such supply is taxable under the present indirect tax regime, then also corresponding provisions have been made to exclude the value of land from such supplies; however under the proposed GST value of land included in consideration shall also be subject to tax.

6. Sale of building after completion shall also be not taxable under GST and same principles as stated above will follow.

7. Actionable claims, other than lottery, betting and gambling are kept out of ambit of GST. It is clear from the definition itself that government is going to charge GST on lottery, betting and gambling.

Actionable Claims means any claim which can be enforced by a legal action or a suit. As per section 3 of the Transfer of Property Act, 1882 actionable claim means a claim to any debt, other than a debt secured by mortgage of immoveable property or by hypothecation or pledge of moveable property, or to any beneficial interest in movable property not in the possession, either actual or constructive, of the claimant, which the Civil Courts recognize as affording grounds for relief, whether such debt or beneficial interest be existent, accruing, conditional or contingent. For example DEPB Licenses, REP Licenses, right to participate in the draw to be held in a lottery, right to claim and recover insurance money, arrears of rent, Right to return earnest money, Claim for share in partnership, The right to the proceeds a business etc.

However any vouchers or coupons which enable a person to enjoy any services on a specified date or at the time of redemption of such voucher or coupon shall not be treated as actionable claims.

Now let us check out what all is included in the definition of Supply and for this we will decode the meaning of each and every word used in the definition of “Supply” as defined u/s 7 of CGST Act’2017.

Section 7 of CGST Act 2017 defines Supply as follows: “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; Supply includes import of services for a consideration whether or not in the course or furtherance of business;

As per this definitions Supply includes all forms of supply, so we will now discuss all forms of supplies mentioned in the definition itself. It is pertinent to note that the definition of supply is inclusive and it may include other forms also even if not mentioned in the section. Keeping this in mind lets discuss the various forms of supplies as mentioned in the definition.

Sale: The word sale is basically used in context of supply of goods, the term sale has not been defined in this act. So sales must derive its meaning from The General Clause Act 1857, but unfortunately it has also not been defined under the same act. Supreme Court in the case of “The State Of Madras vs. Gannon Dunkerley & Co.” has held that the meaning of the expression ‘sale of goods’ had the same meaning as per defined by the ‘Sale of Goods Act, 1930’.So as per legislative history of India, meaning of the term Sales shall be taken from The Sales of Goods Act 1930.

According to section 4(1) of the Indian Sales of Goods Act, “a contract of sales is a contract whereby the seller transfer or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another“.  This definition of sales was an exhaustive definition which had a very limited scope of taxability and there were many transactions taking place at that time in which though there was transfer of property in goods for consideration, but not all the elements as required by The Sales of Goods Act to bring such transactions under the ambit of Sale, were present and hence the government was unable to tax these transactions. So to bring such transactions under the tax net and on the recommendations of various States, a fiction of deemed sale under Article 366(29A) was introduced by The Constitution (Forty Sixth Amendment) Act 1982. As per Article 366 (29A) of The Constitution of India “tax on the sale or purchase of goods” includes:

• a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration; (this covers the case of compulsory acquisitions and transfer of controlled commodities)
• a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; (at present both Vat and Service tax is charged on works contracts)
• a tax on the delivery of goods on hire purchase or any system of payment by installments;
• a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;
• a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; (this covers supply of goods by Clubs, societies etc.)
• a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration,

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.

Every clause mentioned in Article 366(29A) of The Constitution of India had its own legislative history; we will not discuss them here in details, but by including the word “sale”, the legislators covered almost all the supplies of goods made for consideration under the definition of “Supply”.

An interesting point to note here is that though they covered all these transactions under the definition of supply, but they intentionally changed the nature of supply in most of these clauses from “supply of goods” to “supply of services”. As per clause 6 of Schedule –II of CGST Act 2017 works contract shall be treated as a supply of services. Also supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration shall also be treated as a supply of services.

Now the question arises, that in such circumstances which definition shall prevail? Doctrine of Repugnancy as defined in various judgments of Apex states that “There is no doubt that both Parliament and the State Legislature are supreme in their respective assigned fields. It is the duty of the court to interpret the legislations made by Parliament and the State Legislature in such a manner as to avoid any conflict. However, if the conflict is unavoidable, and the two enactments are irreconcilable, then by the force of the non obstante clause of Article 246(1), the parliamentary legislation would prevail notwithstanding the exclusive power of the State Legislature to make a law with respect to a matter enumerated in the State List.”, However we could not find a case where a matter of repugnancy between the Central Acts and The Constitution have been decided.

Transfer: Transfer basically denotes a situation where goods are supplied for the purpose other than sales like stock transfers , consignment transfers etc. under the existing tax scenario such transfers are not taxable at all, however since the definition of supply incorporates transfers also, so such transfers are also going to be a taxable event under the proposed GST regime.

Barter & Exchange: Barter means exchange a goods or services with another goods or services without determining considerations in terms of money. Barter is a very commonly followed practice in some trades, like in case of shortage of supply of a particular commodity businessmen give their stock on loan to the other businessmen and receive same or other goods at that time or at some later stage. Under existing tax regime barter of goods is also not taxable. However the intention of law is clear to bring such transactions under tax net.

License: as per Cambridge dictionary, license means an official document that gives you permission to own, do, or use something. Under the existing tax regime also a transaction for charging license fee or franchisee fee is generally treated as services and is taxable under service tax.

Rental: under the existing tax regime rentals in case of goods where control, risk and rewards are transferred to the consumer VAT is charged on such transactions and transactions where control retains with the transferor, service tax is charged on such transactions for example in case of taxi rentals service tax is levied, however where a cab is hired without driver VAT is charged on such transactions. Under the proposed GST regime both the transactions shall be subject to GST.

Lease: under the existing tax regime VAT was charged on lease of movable goods & service tax was charged on lease of immovable goods being commercial properties. Under the proposed GST regime both the transactions shall be subject to GST. Also no separate provisions have been made for lease of residential properties, so now lease of residential properties shall also be subject to GST in case such property is leased in the course or furtherance of business.

Disposal: Disposal of assets under transfer of an undertaking as a going concern is popularly known as slump sales. There has been a legislative history that a slump sale is not a sale of a particular asset or goods but it is a sale of business as a going concern and it cannot be chargeable to indirect taxes in India, so to square-up these judgments, disposal of such goods have also been covered in the definition of supply.
Also clause 4 of Schedule –II states that

• in case of transfer of business assets where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person;
• in case of transfer of business assets where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services;
• in case of transfer of business assets where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—

(i) the business is transferred as a going concern to another person; or

(ii) the business is carried on by a personal representative who is deemed to be a taxable person.

Such supply shall be made or agreed to be made:  i.e. even advance received for supply agreed to be made in future is chargeable under GST.

For a consideration: an important ingredient of a transaction to constitute a supply is the presence of consideration, however some cases have been specified in Schedule-I of CGST Act 2017, where a transaction even if made without consideration, shall be treated as supply and value of such supply shall be determined as per  Determination of Value of Supply Rules. Such transactions as mentioned in Schedule-I of CGST Act 2017 are:

1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets shall be treated as taxable supply even if made without consideration.

2. Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business. However gifts up to fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both. To know more about the concept of related person, distinct person, value of such supplies etc. please read our another article “Value of taxable supply under GST”

3. Supply of goods by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or Supply of goods by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal, even f made without consideration, shall be treated as supply.

4. Import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business, shall also be treated as a supply.

By a person:      Section 2(84) defines the term person, as per this definition “person” includes:

(a) an individual;

(b) a Hindu Undivided Family;

(c) a company;

(d) a firm;

(e) a Limited Liability Partnership;

(f) an association of persons or a body of individuals, whether incorporated or not, in India or outside India;

(g) any corporation established by or under any Central Act, State Act or Provincial Act or a Government company as defined in clause (45) of section 2 of the Companies Act, 2013;

(h) any body corporate incorporated by or under the laws of a country outside India;

(i) a co-operative society registered under any law relating to co-operative societies;

(j) a local authority;

(k) Central Government or a State Government;

(l) society as defined under the Societies Registration Act, 1860;

(m) trust; and

(n) every artificial juridical person, not falling within any of the above;

in the course or furtherance of business; this part of the definition is self explanatory viz. a supply shall be taxable only if it is in the course or furtherance of business i.e. personal supplies shall not be taxable. It is important to note that supply of goods for captive consumption has been held to be taxable by various courts of law in case where such goods were removed out of place of production, however under GST if such goods are transferred to a branch or other place of business located within same state, where such place is declared as additional place of business in the registration details of the registered person and such place is not declared as separate business vertical, then such transfer of goods even in the course or furtherance of business shall not be taxable under GST.

Though it seems that the definition of supply itself has brought an end to the never ending controversy related to classification of goods vs. services, however this is not so. Almost all the provisions under the proposed GST regime treats Goods and services differently and even rate of taxes related to goods and services are also expected to be different for goods and services.  For these reasons a separate Schedule-II has been provided in CGST Act’2017 which provides a list of transactions and their classifications as supply of goods or supply of service. Transactions mentioned in this schedule and their classifications are as follows:

• any transfer of the title in goods is a supply of goods;
• Supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration shall be treated as supply of goods
• any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services;
• any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods.
• any lease, tenancy, easement, licence to occupy land is a supply of services;
• any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services.
• Any treatment or process which is applied to another person’s goods is a supply of services. (job work amount to manufacture then no service tax only vat however now gst)
• renting of immovable property, shall be treated as supply of services;
• where consideration of supply includes value of land in case of construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, such transaction shall be treated as supply of service. But where the entire consideration of such has been received after issuance of completion certificate (in case required) by the competent authority or where the entire consideration of such has been received after its first occupation, such supply shall not be taxable under GST.
• temporary transfer or permitting the use or enjoyment of any intellectual property right shall be treated as supply of services ;
• development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software shall be treated as supply of services;
• agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act shall be treated as supply of services
• transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration shall be treated as supply of services

Legislature is trying to bring more and more transactions under the provision of services, making it clear that rate of tax on supply of services under GST are going to be much higher than the rate of taxes on supply of most of the goods. So this never ending controversy shall continue under GST regime also. For the same reason, section 7(3) of CGST Act 2017 states that 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.

There may be cases where more than one goods or services or both are supplied together which cannot be supplied separately or separate value for each component cannot be determined or charged from customers, so what would be taxability in such cases? Fortunately, CGST Act 2017 provides solution to these kinds of situations, such kind of cases have been defined as mixed supply and composite supply under GST.

As per Section 2(74) of CGST Act 2017,  “mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply. For example A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately;

As per Section 8 of CGST Act 2017 a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.

As per Section 2(30) of CGST Act 2017, “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply. For example where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply

As per Section 8 of CGST Act 2017 a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply.

At last, an important point left for discussion is that, How will the legislators decide whether a transaction is in furtherance of business or not and what will happen to transactions which are presently under negative list of services, such as supplies to NGO’s like hospitals, educational institutions providing education, medical facilities and relief to poor, ambulance services provided to a hospital, mid-day meals provided to Schools etc.  Shall we assume that now government is not interested in providing these services at cheaper rate to people of India or government will provide some exemptions to these services in the days to come? Let us keep our fingers crossed for the outcome of next meeting of the GST council to be held on 18 & 19 May 2017.

Thank you for reading article written by CA. Mithun Khatry

Suggestions are invited at khatrimithun@hotmail.com

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This article includes general information about legal issues and developments in the proposed law of GST in India. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances.

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