Barter and exchange are two significant forms of supply under GST. Not much has been written and spoken on these two concepts. This paper is an attempt to go a little deeper into the nitty gritty of both phrases. Barter has been the oldest mode of making transactions since the beginning of civilization till money has not come into existence. Later, barter has been shifted to a more sophisticated mode that is exchange, where money also started getting involved even though partially. It is an effort to discuss the issues relating to these terms by way of the question and its answer.
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Q 1. What is the barter system in GST parlance?
A. Term Barter is not defined in CGST Act, 2017. Barter is said to be a process of giving a thing in return for another thing, where no value is fixed. For example, bartering a bike with a scooter. Barter involves two independent supplies. As per Black’s Law Dictionary, Eighth edition, barter means, The exchange of one commodity for another without the use of money.
Barter was in prevalence more specifically when money (a generally acceptable means of exchange was not evolved) but in today’s time also these types of transactions are gaining ground. Such as exchanges of apparel by a manufacturing unit with an advertisement company for promotion of the products or joint development agreements etc.
Q 2. What is Exchange in GST parlance?
A. Like barter, term exchange is also not defined in CGST Act, 2017. A transaction of Exchange also contains two independent supplies like barter. As per Black’s Law Dictionary, Eighth edition, Exchange means, The act of transferring interests, each in consideration for the other. Hereunder, the value of goods/services to be exchanged shall be determined and then an exchange will take place. The difference in the value of goods/services exchanged shall be settled in money or money’s worth.
For Example, a new phone is supplied for 30000/- with an exchange of the old phone. Otherwise, the price of a new phone is 34000/-, for rule 27, the value of the new phone which would be subject to GST shall be 34000/-.
These transactions shall be considered as supply only when sec. 7 of CGST Act is complied with, such as these should have happened in the ordinary course of business. If an old phone is of a person who is an employee in a private company, then this would not be considered as supply. Then only one transaction is supply i.e., Giving away a new phone for 34000/-.
Q 3. What is the treatment of barter transactions in GST?
A. Barter passes the test of Sec 7 of the Act. Now the question arises of the levy of the tax on the respective transaction. Section 9 of the Act creates a charge of tax over the taxable event i.e., supply. A conjoint reading of both sec 7 and 9 clarifies that barter is supply and subject to tax under GST law.
In Barter, there are two transactions involved. When a bike is given in return for a scooter, then the person giving the bike is affecting the first supply thereafter second supply is affected by the person giving the scooter in return. In Both supplies of Bike and scooter, GST has to be charged after determining the correct HSN and rate of tax thereto. Place of supply (POS) for both supplies to be determined to know the type of transaction so as to know the type of tax i.e., CGST+SGST (Intra State Transaction) or IGST (Inter-State Transaction).
Both Transactions shall be separately reported by respective suppliers in its GSTR-1/3B. Of course, a test of a business is to be applied to attract sec. 7 to call the transaction as supply. If a transaction is not conducted in the ordinary course of business, then no supply consequently no GST.
Valuation of the same cannot be made as per principles laid down in sec 15(1) of the Act as twin conditions have not complied. Sec 15(1) coins two conditions, 1. Price is the sole consideration and 2. Parties are not related. The first condition of these twins has not complied. In the case of barter and exchange, price is not the sole consideration, there would always be something in kind also. In this scenario, valuation as per sec 15(1) is rejected and the law leads us to rules. A relevant rule for determining valuation under the present situation is Rule 27 of the CGST Rules.
Under this rule guiding force is open market value or price of like kind and quality. Though, it would be difficult to determine the value of like kind and quality in the case of services. This is going to give a tough time to both taxpayers and the exchequer and consequently give rise to more litigation.
Q 4. What shall be the consideration in the barter transaction?
A. Consideration is an essential element to be present in a transaction to be called as supply as per sec. 7 of the act. Under barter, there are two independent supplies; money is not involved in any of the supply. How would it pass the test of supply which requires consideration to term it as supply? Moreover, schedule I of the act can also be checked if any transaction falls in that so no consideration is required to term it as supply. For this, we have to analyze the definition of the consideration provided in the Act.
Sec. 2(31) of the Act defines
“consideration” in relation to the supply of goods or services or both includes—
1. any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
2. the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:
With the above definition, it is amply clear that consideration need not necessarily be in the money but can be in kind also. So, in the case of barter transactions, one good/service is a consideration for another good/service exchanged.
Q5. How can we differentiate between Barter and Exchange while dealing with them in GST?
A. Supply has been defined under sec. 7 of CGST Act, 2017. As per this, barter and exchange, both are different forms of supply. But, as mentioned in earlier questions also, both terms are not defined under GST law. Therefore, to differentiate, we have to visit other law(s) or judicial precedents. Although both terms sound similar but have significant differences.
As per sec. 118 of the Transfer of Property Act, 1882, when two persons mutually transfer the ownership of one thing for the ownership of another, neither thing nor both things being money only, the transaction is called an “exchange”.
Barter is an exchange without assigning value to goods/services exchanged. Whereas exchange is barter after determining values to goods/services bartered.
Another judgment by the Supreme Court in the case of CIT v. Motors and General Stores (P) Ltd. [(1967) 66 ITR 692 (SC)] made a distinction between barter and exchange:
“… It is clear therefore that both under the Sale of Goods Act and the Transfer of Property Act, the sale is a transfer of property in the goods or of the ownership in immovable property for a money consideration. But in exchange, there is a reciprocal transfer of an interest in the immovable property, the corresponding transfer of an interest in the movable property being denoted by the term barter.
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SIR, PERSON A IS GOODS SUPPLY TO PERSON B AND AFTER THAT PERSON B SUPPLY GOODS TO PERSON A , BUT PAYMENT HAS NOT BEEN TAKEN FROM A TO B AND SAME NOT TAKEN B TO A , CAN I TAKE ITC IN THIS SITUATION PLEASE HELP ME