Concept of Supply under GST


 Part-III:

In this last part of the series “Concept of Supply”, we shall discuss the Schedule II and III to the CGST Act 2017

[ ………..(1A) 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 of the CGST Act 2017, was amended with effect from 1/2/2019. The amendment led to the insertion of the aforementioned sub section (1A) to section 7. As a reason of the amendment, it has been clarified that, Schedule-II to the CGST Act 2017, do not possess the ability to conclude if any activities amount a “supply”. Whereas if any activity amounts to “Supply” as per Section 7(1), “Schedule-II will only identify as to what is to be considered as “supply of goods” or “supply of services”. The introduction of this schedule under the GST Laws, puts to rest the long drawn litigations, which existed in contracts wherein “goods and or services or a combination of both existed” during the pre GST regime.

Schedule II: “Activities” or “Transactions” to be treated as “Supply of Goods” or “Supply of Services”.

1. Transfer:

    • (a) Any transfer of the title in goods is a supply of goods
      Any activity which would result in change in the title of goods will be regarded as “supply of goods”. The terms of consideration may be immediate or deferred, as long as the seller is transferring the “risk” and “rewards” in the goods, it would be considered as a “supply of goods”.
      Eg: Sale of 100 chairs by a carpenter, 50% being paid immediately and 50% to be paid in 60 days. In such case the change in title of goods is immediate, even though the payment terms are as mentioned. Thus this transfer is considered purely as “supply of goods”(benches).

    • (b) Any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services.
      Where the essence of any contract entails retaining the ownership of goods with the actual owner, however the right to enjoy the possession is transferred, such contracts would be considered as “supply of services”. The tenure of transfer of possession may differ from case to case basis; however the nature of supply would continue to remain as “supply of services”.
      Eg: In the example given above, If the carpenter has agreed to give 100 chairs on rent instead of selling them, and the possession can be enjoyed by the recipient for an agreed period of 3 years. In such case the possession would be transferred immediately against rent to be received and this “transfer of possession” would be treated as “supply of services”.

    • (c) 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. Goods which are sold under financing models such as “Hire purchase” or “Lease”, wherein the ownership is not immediately transferred but is agreed to be transferred in future. In case of such transaction, although the ownership is not transferred immediately but is agreed to be transferred, for the purpose of GST Laws, such transfer is considered as “supply of goods”.
      A clear distinction between supply as “goods” or “services” helps to a concrete treatment from the tax perspective and also, the rate of tax can be accordingly determined.

2. Land and Building

    • (a) any lease, tenancy, easement, licence to occupy land is a supply of services
      Where there is an agreement through which only the “right to occupy land “is given but not the “right to own the land”, it may can be said to be a “supply of services”.
      Eg: A land owner has entered into an agreement to allow usage of his land by a company for setting up and running “circus” shows for a period of 2 months. It will be purely considered as a supply of services.

    • (b) 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.
      Eg: In case of contract of renting of a office space, which only provides “rights to occupy the office space” for the agreed time against payment of rent, but does not give “right to own the office space”. Such contract is considered as a “supply of services”.
      Eg: In case of a residential premises is let out, for use as an office, in such case, it would constitute as supply, and would be liable for GST, although it will also be considered as a “supply of services”.

3. Treatment or process

    • Any treatment or process which is applied to another person's goods is a supply of services. Contracts under which, goods belonging to other person are subjected to treatment or process, and where the owner of the goods pays a consideration in respect of carrying out such treatment or process, will be considered as a supply. In such case the effective position of the goods is with the person who carries out such treatment or process, however the ownership of the goods continues to remain with the owner of goods. Such a transaction is considered as a “supply of service”.

    • Eg: “Zen Trucks” is a manufacturer of trucks and offers various types of carrier bodies for its buyers. The trucks can be sold as a “goods carriage van” or “cold storage van” etc. Based on the orders placed by the buyer, “Zen Trucks” gives the “treatment” or “process” orders to M/s “Well build” a company engaged in “Body Building and Designing”. In such case the trucks on its basic frame (CHASIS), are sent by “Zen Trucks” to M/s “Well Build”. M/s “Well Build” is only responsible to carry out the desired type of “Body Building & Designing”. They will be paid consideration for carrying out such “process”. The ownership of the trucks always is with “Zen Trucks”. Thus this transaction of carrying out the “process” on goods belonging to others, is considered as a “supply of services”.

4. Transfer of business assets

    • (a) 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 a usual business scenario there can be a possibility of stock “write off” or “disposal of stock” on being obsolete or owing to a business decision. In such a situation even if such disposal takes place with or without consideration, it will tantamount to “supply”. Such supply would be considered as “supply of goods”. The liability of GST can be in the following manner.

      • Sr No Particulars GST implications
        1 Where stock is disposed for a consideration GST is payable on transaction value
        2 Where stock is disposed without consideration ITC in respect of such stock to be reversed
        3 Where stock is disposed with/without consideration to a related party GST will be payable on the value determined as per GST valuation rules

    • (b) 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 goods which are a part of business Asset, it may be fixed or current asset (stock), if any such assets are put to any usage other than business usage, then such activity will amount to “supply” and it will be considered as a “supply of services”.

    • (c) 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. The provisions in this clause are self-explanatory, what one can conclude on this basis is that, in case of closure of business, it would be assumed that the business assets have been supplied and the GST liability would occur on the basis of the transaction value generated on sale. Only in case a business is transferred in the manner specified along with assets being taken over, in such case there would be no supply and thus there won’t be any tax liability.

5. Supply of Services

    • (a) renting of immovable property The discussion in respect of this has already been covered kindly refer to point number 2 above.

    • (b) 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, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.
      In case of construction services, GST is applicable. While purchasing a residential or a commercial building, it is a deeming fiction of law that the buyer is in receipt of construction services even when ultimately he is to become the owner of an “immovable property”. However there is a bench mark in respect of levy of tax on construction services. The transaction of acquiring immovable property will be first considered as availment of construction services only if any part of the consideration is paid prior to issuance of completion certificate by a competent authority or first occupation of such immovable property.
      Eg: AB Builders has announced the launch of its new building and the bookings are open just by paying a token amount of Rs 5001. The payment of remaining consideration is to be made over a period of 3 years in specified installments. The completion certificate would be issued after 2 years 10 months subject to completion of building. In such case, GST would be applicable, as part consideration is received prior to issuance of completion certificate.
      Eg: AB Builders has a project which in which the building is entirely ready and has been given the completion/occupation certificate. After the issuance date of certificate Mr M books a flat in this building. In such case, as the entire consideration would be received after issuance of completion certificate/occupation certificate, there would be no GST liability. This would be purely a case of sale of immovable property by “AB Builders”, which is outside the scope of GST Laws.

    • (c)Temporary transfer or permitting the use or enjoyment of any intellectual property right An agreement entered in respect of transfer of right to use any intellectual property rights, on the basis of agreed terms is considered as a “supply of services”
      Eg: A scientist has patents registered in respect of technology developed by him. He enters into an agreement with a company which would use the technology for a period of 3 years and would be paying consideration as per agreed terms. Such agreement of “temporary transfer” of right to use technology will be considered as a “supply of services”.

    • (d)development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software
      Software industry has loomed large and has grown in multifold manner over the period of last 20-25 years. Thus there has been a variety of services across the software line of business. Any type of service which can be encompassed under the aforementioned categories would be considered as a “supply of services” under GST.

    • (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act
      Any agreement by virtue of which a person may be refrained from participating in any venture or would be restrained from conducting any activity against which consideration would be payable, such agreement is also considered as a “supply of service”. These type of agreements were essentially brought under the taxation net under the erst-while service tax laws. Ever since, such agreements are charged to tax. The roots of such act of abstinence can be traced in the “Indian Contract Act 1872”. In the modern business era, where there are “anti-competitive agreements” or “contracts of restrictive trade”, the applicability of this category of service comes into picture.

    • (f) 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.

6. Composite supply The following composite supplies shall be treated as a supply of services, namely

    • (a) works contract as defined in clause (119) of section 2
      Works contract usually is a composite contract consisting of goods and or services or a combination of both. Works contract is in relation to immovable property, it may be in relation to construction, repairs, renovation, alteration etc. In the pre-gst regime, “works contract” was subject to huge number of litigations. Whether to tax it as “sale of goods” and charge it to “VAT” or to tax it as “provision of services” and make it subject to “Service Tax”, was the constant factor of dispute. The position under GST laws however is far more settled, as now the supply by way of works contract, by virtue of Schedule-II has been identified and classified as “supply of services”.

    • (b) 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.
      The Pre-GST regime saw levy of “VAT (Abated)” as well as “Service Tax (Abated)” on activity of serving food in a restaurant/eating joint. However vide introduction of Schedule-II, the activity of serving and selling food and beverages in a restaurant will be considered as a “Supply of Service”.

7.Supply of Goods

    • The following shall be treated as supply of goods, namely Supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration

    • Schedule-III: ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED AS NEITHER SUPPLY OF GOODS NOR SUPPLY OF SERVICES
      This schedule envisages transactions which would be considered neither supply of goods nor supply of services. This is not a totally new introduction under the Indirect tax laws. Under the Pre-GST regime, “Negative list of services” existed. This list covered a certain transactions which were not liable for levy of service tax. On the lines of the same rationale of law, the Schedule-III has been introduced. Following are the supplies which constitute neither supply of goods nor supply of services.
      • (a) Services by an employee to the employer in the course of or in relation to his employment. However any services provided by the employer which are over and above the employment contract, would be liable for levy of GST.
      • (b) Services by any court or Tribunal established under any law for the time being in force.
      • (c) the functions performed by the Members of Parliament, Members of State Legislature, Members of Panchayats, Members of Municipalities and Members of other local authorities.
      • (d) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or 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.
      • (e) Services of funeral, burial, crematorium or mortuary including transportation of the deceased.
      • (f) Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.
      • (g) Actionable claims, other than lottery, betting and gambling.


CA Aumkar Gadgil



  • Disclaimer:The views provided above are on the basis of our understanding of the GST Laws, Rules and Regulations. The adjudicating or Judicial Authorities may or may not agree with the views expressed above