Concept and Supply

Schedule I of the CGST Act, 2017, specifies four activities that are treated as supply even if made without consideration, provided they are undertaken in the course or furtherance of business.

1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets: If a business asset, on which ITC was claimed, is permanently transferred or disposed of (e.g., given as a free sample or gift), it is considered a supply even 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: This includes transactions between head office and branch office, or between group companies, if they are distinct persons, and transactions between related parties (e.g., employer-employee, if exceeding certain limits for gifts).
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: This covers consignment sales or other agency arrangements where the agent acts in his own name.
4. Importation 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: This ensures that services imported from related entities abroad are taxed under reverse charge.

The definition of 'business' under GST is very wide and plays a critical role because most activities are considered 'supply' only if undertaken in the course or furtherance of business (except for import of services for consideration and Schedule I activities).

As per Section 2(17) of the CGST Act, 2017, 'business' includes:
(a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
(b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);
(c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;
(d) supply or acquisition of goods including capital assets and services in connection with commencement or closure of business;
(e) provision by a club, association, society, or any such body (for a subscription or otherwise) of the facilities or benefits to its members, as the case may be;
(f) admission, for a consideration, of persons to any premises;
(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;
(h) activities of a race club including by way of totalisator or a licence to bookmaker or activities of a licensed bookmaker in such club; and
(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authority.

Relevance to Supply: For an activity to be considered a 'supply' under Section 7(1)(a) of the CGST Act, it must be made 'in the course or furtherance of business'. Even for activities listed in Schedule I (supply without consideration), the condition 'in the course or furtherance of business' generally applies (e.g., permanent transfer of business assets). This broad definition ensures that almost all economic activities, even those not for profit, are covered under GST if they fall within the ambit of 'business'.

Under GST, 'supply' is the taxable event. As per Section 7(1) of the Central Goods and Services Tax (CGST) Act, 2017, the term '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) Importation of services for a consideration whether or not in the course or furtherance of business.
(c) The activities specified in Schedule I, made or agreed to be made without a consideration.
(d) The activities to be treated as supply of goods or supply of services as referred to in Schedule II.

Essentially, for most transactions, a supply must involve consideration and be made in the course or furtherance of business to be taxable. However, Schedule I lists exceptions where consideration is not required, and Schedule II clarifies whether certain transactions are supply of goods or services.

A transfer of 'business assets' without consideration constitutes a supply under GST specifically when the conditions laid out in Schedule I, Para 1 of the CGST Act, 2017, are met.

Condition: "Permanent transfer or disposal of business assets where input tax credit has been availed on such assets."

Explanation:

• Permanent Transfer/Disposal: This implies that the asset is permanently removed from the business's inventory or use, such as giving it away as a gift, donating it, or writing it off. Temporary use or transfer (e.g., giving an asset on lease or rental) would typically involve consideration and fall under Section 7(1)(a).
• Business Assets: These are assets used or intended to be used for the purpose of business.
• Input Tax Credit (ITC) Availed: This is the crucial condition. If the business had claimed ITC on the purchase, manufacture, or acquisition of that asset, then its permanent transfer or disposal without consideration becomes a 'deemed supply' and is taxable. The intent is to reverse the benefit of ITC availed when the asset is no longer used for taxable supplies or is given away for free.

Example: A company purchases a laptop for Rs. 50,000 + GST of Rs. 9,000 (at 18%) and claims ITC of Rs. 9,000. After two years, the company decides to give this laptop to an employee as a gift (without consideration). Since ITC was availed on the laptop, this permanent disposal is a 'supply' under Schedule I, and GST would be leviable on its open market value at the time of disposal. If ITC was not availed (e.g., due to blocked credit provisions), then its free disposal would not be a supply under this provision.

Schedule III of the CGST Act, 2017, lists activities or transactions that are specifically excluded from the scope of 'supply' and, therefore, are not liable to GST. These include:

1. Services by an employee to the employer in the course of or in relation to his employment: This means salaries and wages paid to employees are outside GST.
2. Services by any court or Tribunal established under any law for the time being in force: Judicial services are not subject to GST.
3. Functions performed by Members of Parliament, Members of State Legislature, Members of Panchayats, Members of Municipalities and Members of other local authorities: Services rendered by elected representatives are outside GST.
4. Duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or 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, who is not deemed as an employee before the commencement of this clause: This covers constitutional functionaries.
5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building: Sale of developed land is outside GST. Sale of building is also outside GST, except for sale of under-construction property where consideration is received before completion.
6. Actionable claims, other than lottery, betting and gambling: Most actionable claims (e.g., a claim for unsecured debt) are not supply, but lottery, betting, and gambling are taxable.
7. Supply of goods from a non-taxable territory to another non-taxable territory without such goods entering into India: This covers high seas sales or merchanting trade where goods do not cross Indian customs frontiers.
8. Supply of warehoused goods to any person before clearance for home consumption: Sale of goods in a customs bonded warehouse before customs clearance.
9. Supply of goods by the consignee to any other person by endorsement of document 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: This also relates to sales before customs clearance.

No, services provided by an employee to an employer in the course of or in relation to his employment are specifically excluded from the definition of 'supply' under GST.

This exclusion is provided in Schedule III, Para 1 of the CGST Act, 2017, which lists activities or transactions that shall be treated neither as a supply of goods nor a supply of services.

Implication: This means that salaries, wages, and other benefits provided by an employer to an employee as part of the employment contract are outside the purview of GST. Consequently, no GST is leviable on such transactions, and employers are not required to charge GST on the remuneration paid to their employees. This is a fundamental aspect of GST, ensuring that the employer-employee relationship, within the scope of employment, is not subject to indirect taxation.

The 'Reverse Charge Mechanism (RCM)' is a system where the recipient of goods or services is liable to pay GST, instead of the supplier. This shifts the responsibility of tax payment from the supplier to the recipient.

Circumstances of Applicability [Section 9(3) & 9(4) of CGST Act, and Section 5(3) & 5(4) of IGST Act]:

1. Specified Categories of Goods/Services (Section 9(3) CGST Act / 5(3) IGST Act): The Central Government, on the recommendations of the GST Council, notifies specific categories of goods or services or both, where the recipient is liable to pay tax under RCM. Examples include legal services by an individual advocate, goods transport agency (GTA) services, sponsorship services, import of services, etc.
2. Supply from Unregistered Person to Registered Person (Section 9(4) CGST Act / 5(4) IGST Act - currently applicable only to specified real estate projects): Originally, this provision mandated RCM on all supplies by an unregistered person to a registered person. However, its operation has largely been suspended or restricted to specific notifications. Currently, it is primarily applicable to supplies by unregistered promoters to registered promoters in the real estate sector for specific goods/services.

Implication for the Recipient:

• Tax Liability: The recipient becomes solely responsible for paying the GST to the government.
• Compliance Burden: The recipient must undertake all compliance procedures related to that supply, such as issuing a self-invoice (if required), depositing the tax, and reporting it in their GST returns.
• Input Tax Credit: The recipient can generally claim Input Tax Credit (ITC) of the tax paid under RCM, subject to normal ITC rules. This means RCM is largely revenue-neutral for registered recipients, but it ensures that tax is definitely collected on certain supplies.

RCM ensures that tax is collected on supplies where the supplier might be difficult to track or regulate, or where the government wants to ensure compliance from the recipient side.

Consideration is a crucial element for most supplies to be taxable under GST. As per Section 7(1)(a) of the CGST Act, 2017, an activity qualifies as a supply if it is made or agreed to be made for a 'consideration' by a person in the course or furtherance of business. Section 2(31) of the CGST Act defines 'consideration' broadly to include any payment in money or otherwise, or any act or forbearance, 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. It also includes the monetary value of any act or forbearance. However, a deposit given in respect of a supply is not considered as consideration unless the supplier applies such deposit as consideration for the said supply. The only exceptions where consideration is not required for an activity to be a supply are those specified in Schedule I of the CGST Act, such as permanent transfer/disposal of business assets where ITC has been availed, supply between related persons or distinct persons, supply of goods by an agent to principal or vice-versa, and 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.

The concepts of 'distinct persons' and 'related persons' are critical in GST, especially concerning Schedule I, which treats certain transactions between them as supply even without consideration.

Distinct Persons [Section 25(4) & 25(5) of CGST Act]:

• A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory, shall, in respect of each such registration, be treated as distinct persons.
• Establishments of a person in different States/UTs are considered distinct persons. Also, if a person has multiple registrations within the same State/UT for different business verticals, they are treated as distinct persons.
• Implication: Supply of goods or services or both between such distinct persons, in the course or furtherance of business, is a 'supply' even if made without consideration (Schedule I, Para 2).

Related Persons [Explanation to Section 15 of CGST Act]:

• Persons are deemed to be 'related persons' if:
  • they are officers or directors of one another's businesses;
  • they are legally recognised partners in business;
  • they are employer and employee;
  • any person directly or indirectly owns, controls or holds twenty-five per cent or more of the outstanding voting stock or shares of both of them;
  • one of them directly or indirectly controls the other;
  • both of them are directly or indirectly controlled by a third person;
  • they are members of the same family;
  • one of them is the sole agent or sole distributor or sole concessionaire of the other.
• Implication: Supply of goods or services or both between related persons, in the course or furtherance of business, is a 'supply' even if made without consideration (Schedule I, Para 2). This ensures that transactions within a group or between associated entities are brought under the GST net. For example, free services provided by a head office to its branch in another state would be taxable.

Yes, the 'importation of services' without consideration can be taxable under GST, but only under specific circumstances.

As per Section 7(1)(b) of the CGST Act, 2017, importation of services for a consideration, whether or not in the course or furtherance of business, is treated as supply.

However, Schedule I, Para 4 of the CGST Act, 2017, specifically states that 'importation 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 be treated as supply even if made without consideration.

Therefore, if an Indian company (taxable person) imports services (e.g., management consultancy) from its head office abroad (a related person or other establishment) for no charge, but in the course or furtherance of its business in India, it would still be considered a 'supply' and liable to GST under the Reverse Charge Mechanism. If the import of service is from an unrelated person without consideration, it would not be a supply.

The activities of an 'agent' have a specific impact on the concept of supply, particularly under Schedule I of the CGST Act, 2017.

Schedule I, Para 3, states that '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' is treated as a supply even if made without consideration.

Key aspects:

• Acting on behalf of: The crucial factor is whether the agent acts 'on behalf of' the principal. This is typically evidenced by the agent issuing an invoice in his own name for the supply of goods, even though he is acting for the principal. If the agent merely facilitates the supply and issues an invoice in the name of the principal, then the transaction between the principal and agent (e.g., commission) is a supply of service, but the goods movement itself is not a separate supply between them without consideration.
• Deemed Supply: This provision deems the transfer of goods between principal and agent (where the agent acts in his own name) as a supply, making it taxable. This prevents avoidance of tax on such movements.

Example: A manufacturer (principal) sends goods to a consignee (agent) who sells them to customers in his own name. The transfer of goods from the manufacturer to the consignee is a 'supply' under Schedule I, even if no consideration is paid at that stage. The consignee then makes a further supply to the customer.

The distinction between Composite Supply and Mixed Supply is crucial for determining the applicable GST rate, as the tax rate for the principal supply applies to a composite supply, while the highest tax rate applies to a mixed supply.

Composite Supply [Section 2(30) of CGST Act]:

• Definition: Means a supply made by a taxable person to a recipient comprising two or more 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.
• Key Characteristics: Naturally bundled, supplied in conjunction, one is a principal supply.
• Tax Treatment: The entire supply is treated as a supply of the principal supply, and the tax rate of the principal supply applies.
• Example: When a consumer buys a television set and gets a warranty and maintenance contract along with it. The supply of goods (television) is the principal supply, and warranty and maintenance services are ancillary. The entire transaction is a composite supply of television.

Mixed Supply [Section 2(74) of CGST Act]:

• Definition: 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.
• Key Characteristics: Not naturally bundled, can be supplied independently, but supplied for a single price.
• Tax Treatment: The entire supply is treated as a supply of that particular supply which attracts the highest rate of tax.
• Example: A gift pack consisting of a chocolate, a cake, a fruit juice, and a toy, sold for a single price. These items can be sold separately and are not naturally bundled. If the cake attracts 18% GST, chocolate 12%, fruit juice 5%, and toy 12%, the entire gift pack will be taxed at 18%.

The treatment of 'free samples' or 'gifts' under GST depends on whether input tax credit (ITC) was availed on their procurement.

As per Schedule I, Para 1 of the CGST Act, 2017, 'permanent transfer or disposal of business assets where input tax credit has been availed on such assets' is treated as a supply even if made without consideration.

• Free Samples: If a business distributes free samples of its products (e.g., medicines by a pharmaceutical company) and has availed ITC on the raw materials or the finished product, then such distribution is considered a 'supply' and GST would be leviable. However, if ITC was not availed, then it would not be a supply. Furthermore, Section 17(5)(h) of the CGST Act specifically blocks ITC on goods disposed of by way of gift or free samples. Therefore, if ITC is blocked, no GST liability arises on their free distribution. The practical implication is that if a business distributes free samples, it cannot claim ITC on them, making the cost of GST an expense.
• Gifts: Gifts given by an employer to an employee exceeding Rs. 50,000 in value in a financial year are treated as supply between related persons (Schedule I, Para 2) and are taxable. Gifts up to Rs. 50,000 in a financial year are not considered supply. Gifts to unrelated third parties, where ITC has been availed on the goods, would be considered supply as per Schedule I, Para 1.

The 'place of supply' is a fundamental concept in GST that determines the nature of a supply (whether intra-state or inter-state), which in turn dictates whether CGST/SGST or IGST is leviable.

Determination of Nature of Supply:

• Intra-State Supply [Section 8 of IGST Act]: A supply of goods or services or both where the location of the supplier and the place of supply are in the same State or same Union territory. Such supplies attract CGST and SGST/UTGST.
• Inter-State Supply [Section 7 of IGST Act]: A supply of goods or services or both where the location of the supplier and the place of supply are in different States or different Union territories or a State and a Union territory. Also includes import/export and supply to/from SEZ. Such supplies attract IGST.

Crucial Distinction:

1. Type of Tax: The primary reason for this distinction is to determine which type of GST (CGST+SGST/UTGST or IGST) is to be charged. CGST and SGST/UTGST are collected by the Central and State Governments respectively for intra-state supplies, while IGST is collected by the Central Government for inter-state supplies.
2. Revenue Apportionment: IGST is designed to ensure seamless flow of credit and proper apportionment of revenue to the consumption state in a destination-based tax system. The IGST collected on inter-state supplies is later apportioned between the Central Government and the destination State Government.
3. Input Tax Credit (ITC) Utilization: The rules for utilizing ITC differ based on the type of tax. For instance, IGST credit can be used against IGST, CGST, and SGST liabilities, whereas CGST credit can only be used against CGST and IGST, and SGST credit against SGST and IGST.

Therefore, correctly determining the place of supply is paramount for compliance, correct tax collection, and proper ITC utilization under GST.

While both 'exempt supply' and 'zero-rated supply' result in no GST being charged to the end consumer, their implications for input tax credit (ITC) and overall tax chain are fundamentally different.

Exempt Supply [Section 2(47) of CGST Act]:

• Definition: Means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under Section 11 (CGST Act) or Section 6 (IGST Act), and includes non-taxable supply.
• Tax Treatment: No GST is charged on outward exempt supplies.
• Input Tax Credit (ITC): A supplier making exempt supplies cannot claim ITC on inputs used for making such supplies. This leads to a 'break' in the ITC chain, and the GST paid on inputs becomes a cost to the supplier (known as 'cascading effect').
• Example: Supply of certain essential food items, educational services, healthcare services.

Zero-Rated Supply [Section 16 of IGST Act]:

• Definition: Means any of the following supplies of goods or services or both, namely: (a) export of goods or services or both; or (b) supply of goods or services or both to a Special Economic Zone (SEZ) developer or a Special Economic Zone unit.
• Tax Treatment: These supplies are taxable, but the tax rate is effectively zero.
• Input Tax Credit (ITC): A supplier making zero-rated supplies is allowed to claim ITC on inputs used for making such supplies. The supplier can either supply without payment of tax under bond/LUT and claim refund of accumulated ITC, or pay IGST on such supply and claim refund of such tax. This ensures that the entire supply chain for exports and SEZ supplies is tax-free, making Indian goods/services competitive globally (known as 'zero-rating with refund').
• Example: Export of goods from India to the USA, or supply of services to an SEZ unit.