The concept of ‘supply’ is the key stone of GST architecture. Section 7 of CGST Act read with Schedule I & III covers the provisions relating to the term ‘Supply’. The concept of supply along with related issues have been discussed in this article.

Also Read- GST Series: Part 1 Section 3 to Section 6 of CGST Act 2017

Section 7 (1) (a) & (b) of CGST ACT 2017

Statutory Provisions

7. (1) For the purposes of this Act, the expression “supply” includes––

(a) 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

(b) import of services for a consideration whether or not in the course or furtherance of business;

The term ‘ Supply ‘ has not been defined in CGST ACT 2017. Section 7(1)(a) of the CGST Act contemplates various forms of supply such as sale, transfer, barter, exchange, license, rental, lease or disposal. These forms of supply are only illustrative and not exhaustive.

Parameters of Scope of Supply :- The important Parameters of scope of supply are consideration and furtherance of business. An activity made by a person for a consideration and in the course or furtherance of business is a supply under section 7(1)(a) of CGST Act.However, there are exceptions in the meaning of supply where certain activities are considered as supplies even without consideration and furtherance of business.

The requirement of consideration and necessity of furtherance of business for an activity to be considered as supply is as tabulated below :-

Sl Activities Consideration Furtherance of Business Statutory Provision Analysis
(a) Supply of goods & services Required Necessary Sec 7(1)(a)
(b) Import of services Required Not necessary Sec 7(1)(b)
(c ) Import of services by a person from a related person / establishment outside India Not Required Necessary Schedue1 – Clause (4)

 

Import of Services ( not goods) by a person ( taxable or not ) as amended w.e.f.01.02.2019 is relevant.
(d) Import for charity activities Required Not Necessary Sec 7(1)(b)
(e) Note :- The term ‘supply’ is from the point of view of person who is supplying and not person who is receiving the supply. Thus, if supplier is not in the business of supplying the goods or services, GST is not applicable. CBI&C vide press release No. 78/2017 dated 13-7-2017 clarified that GST is not payable by an individual selling old jewellery as he is not in business of selling such jewellery. The principal applicable to all the supplies made by the individuals.

Section 7(1)(c ) :

Statutory Provision :- For the purposes of this Act, the expression “supply” includes the activities specified in Schedule I, made or agreed to be made without a consideration.( Section 7(1)(c )

As per Schedule I to CGST Act 2017, Following activities to be treated as Supply even if made without consideration :-

(1) Permanent transfer/disposal of business assets where input tax credit has been availed on such assets.

(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.

(3) Supply of goods— (a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal, or (b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal

(4) Import of services by a person from a related person or from any of his other establishments outside India, in the course or furtherance of business.

The provisions related to activities indicated in Schedule 1 and scope of supply in respect of related activities are explained as under :-

Permanent transfer of business Asset or transfer of entire business as a going concern
Sl Activities Statutory Provision Whether Supply or Not Analysis & Reference
(a) Permanent transfer of Business Assets Schedue1 – Clause (1) Yes

(Subject to condition – ITC availed on such Assets)

It may be noted that this provision would apply only if input tax credit has been availed on such assets.

 

(b) Transfer of entire business as a going concern Schedule II – Clause 4(c )

 

Exempt from GST Notification No. 12/2017-CT dt 28.06.2017
(c ) Transfer of one of the units of business as going concern Schedule II – Clause 4(c ) No AAR-in re(2018) Rajashri Foods(P) Ltd
(d) Transfer of business as slump sale Schedule II – Clause 4(c ) exempt from GST AAR- Uttarakhand (2019) In re Innovative Textiles Limited

 

Supply of goods or services or both between related persons
Sl Activities Statutory Provision Whether Supply or Not Analysis & References
(a) Supply between related / distinct person Schedue1 – Clause (2)

 

Yes Establishments of same person with distinct GST Registration Numbers will be treated as ‘distinct persons’.
(b) Interstate/ inter branch stock transfer of Goods Schedue1 – Clause (2)

 

Yes
  • Even intra-state stock transfer or branch transfer will be subject to GST if there are separate GST registrations
(c ) Supply of services by HO to Branch or Inter branch supply Schedue1 – Clause (2)

 

Yes Activity of allocation of exp relating to common input service qualifies as supply (AAR –Maharashtra(2019) In re Cummins India Ltd )
(d) Services of employees for benefit of other Units (Cross Charges on employee Salary) It is held in AAAR-Karnataka (2018) In re Columbia Hospital Pvt Ltd that activity is to be treated as a taxable supply in terms of the entry 2 of Schedule I read with Section 7 of the CGST Act.

Note – If another division/branch is in position to avail Input Tax credit, it would be advisable to pay tax and avail ITC instead of entering into possible litigation.

(e) Supply of service by establishment of person in India to own establishment out of India Schedue1 – Clause (2) No It is not a supply provided that place of supply of the services is out of India.( Notification No. 09/2017 –IT(Rate) dated 28.06.2017- Sr No F )
(f) Re imbursement of expenses to liaison /branch office in India Schedue1 – Clause (2)

 

No Condition – liaison office does not have commitment power)

AAR- Rajasthan[2018] In re Takko Holding GMBH

(g) Free supply to related person  

Yes

CBI&C circular No. 92/11/2019-GST dated 7-3-2019
(h) Free Supply to unrelated person  

No

CBI&C circular No. 92/11/2019-GST dated 7-3-2019

(i) Interstate supply of Aircraft engine etc by airlines to own branch  

Yes

 

MF(DR) circular No. 16/16/2017-GST dated 15-11-2017

Supply of goods by a principal to his agent or by an agent to his principal
Sl Activities Whether Supply or NO Analysis & Explanation
(a) Supply of goods by principal to Agent Yes It is a supply if the agent undertakes to supply such goods on behalf of principal
(b) Return of goods by Agent to principal Yes It is a supply if the agent undertakes to supply such goods on behalf of principal
(c ) Supply of goods by a principal to commission Agent No Not a supply as commission Agent does not undertake supply on behalf of principal
(d) Supply by Del credere Agent ( when Supply as commission Agent) No Del credere agent is an agent who guarantees payment to supplier of goods or services, if recipient does not pay.

In some cases, the del credere agent himself pays to supplier and then recovers amount from recipient.( Act as C&F Agent)

In some case, the del credere agent advances short term loan to buyer and then buyer pays to the supplier ( Act as commission Agent)

CBI&C, circular No. 73/47/2018-GST dated 5-11-2018,

(e) Supply by Del credere Agent ( Receives the goods & then supply as C & F Agent) Yes

Import of services by a person from a related person/ other establishments outside India,
Sl Activity Anylises & Explanation
Import of services by a person from a related person or from any of his other establishments outside India The word ‘person has been amended vide CGST (Amendment) Act, 2018 w.e.f. -2-2019 ( Prior to the amendment,it was ‘taxable person’ Thus, import by any person from a related person outside India shall be ‘import’, but it should be in the course or furtherance of business.

Sec 7(1A) of CGST Act 2017Activities or transactions to be treated as supply of goods or supply of services :-

Statutory Provision

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.[( Section 7(1A)]

Analysis :-GST provisions are different for supply of goods and supply of services. In order to a avoid any litigation in this regard, the Legislature makes provisions that particular activity is a Supply of goods or a Supply of services. Schedule II has been prescribed wherein it has been fixed that a particular activity shall be treated either as Supply of goods or as Supply of services. (Section 7(1A) of CGST Act inserted vide CGST (Amendment) Act, 2018, with retrospective effect from 1-7-2017.)

Schedule II only differentiate a supply either as a supply of goods or as a supply of a services in case of an activity which has constituted a supply in accordance with the provision of Sec 7(1) of CGST Act 2017.Hence entries of Schedule II can be invoked under section 7(1A) only if an activity is qualified as supply under Sec 7 of CGST Act.

Thus, after insertion of Sec 7(1A) vide CGST Amendment Act 2018, Schedule II has lost its independent relevance (w.e.f. 01/07/2017 as amendment is with retrospective effect from 01.07.2017)

Section 7(2) of CGST Act :

Notwithstanding anything contained in sub-section (1),––

(a) activities or transactions specified in Schedule III; or

(b) 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.[ Section 7(2) of CGST Act 2017]

The activities or transactions specified in Schedule III will not be treated as supply of goods or services. As per Schedule III of CGST Act read with section 7(2)(a) of CGST Act, following matters will not be treated as supply of goods or services

Activities or transactions specified in Schedule III [Section 7]

Sl

Description

(a) Services by an employee to the employer in the course of or in relation to his employment
(b) Services by High Court, Supreme Court and District Court or Tribunal established under any law for the time being in force
(c ) (i) The functions performed by the Members of Parliament, Members of State Legislature, Members of Panchayats,

Members of Municipalities and Members of other local authorities

(ii) The duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity.

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

(d) Services of funeral, burial, crematorium or mortuary including transportation of the deceased
(e) Sale of land and, building (excluding, sale of flat in a complex after completion or after its first occupation)
(f) Actionable claims, other than lottery, betting and gambling
(g) Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India.
(h) a) Supply of warehoused goods to any person before clearance for home consumption;

(b) Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption;

(inserted vide CGST (Amendment) Act, 2018, w.e.f. 1-2-2019)

Supply by employee to employer & Vice Versa : The explanation appended to Section 15 of the CGST Act provides that employer and employee will be deemed to be “related persons”. Accordingly, supplies by employer to employees would be liable to GST even though these supplies are made without consideration since they are considered as related persons (except gifts by employer to employee for an amount not exceeding Rs 50,000)

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, transactions which are excluded from the levy of tax for transactions between employee and employer are

1. Supply of services by employee to employer in the course of employment

2. Gifts by Employer to employee not exceeding Rs 50,000 in a Financial Year

Section 7(2)(b) of CGST Act – Government Activities under GST :

Statutory Provision

Notwithstanding anything contained in sub-section (1)

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.

Analysis & Explanation :-The activities or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities is business under section 2(17)(i) of CGST Act and any activity in course of business is supply under GST Act.

Thus, excluding sovereign activities of State, all activities of Government is ‘business’

‘Sovereign activities’ are those activities which can only be done by the Government. Examples are dispensing Justice, maintaining armed Forces, conducting audit by C&AG, elections to Parliament or State Legislatures etc

As per section 7(2)(b) of the Act,the activities by the Central Government,/ State Government/ any local authority in which they are engaged as public authorities, as may be notified by Central Government will not be treated as supply of goods or services – section 7(2) of CGST Act.

Thus, the activities by Government will be liable to GST unless specifically excluded by a notification by Central Government.

Section 7 (3) of CGST Act :- 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 supply of goods and not as a supply of services; or a supply of services and not as a supply of goods.

Disclaimer : Every effort has been made to keep the information cited in this article error free. Suggestions and feedback to improve the task are welcome.

The author can be approached at caanitabhadra@gmail.com

Part 3 of the series will cover the topic “ Composite & Mixed Supplies under section 8 of the CGST Act.

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