Concept of Supply under GST Part-II

In this part, we shall discuss the clause (b) and clause (c) of Section 7 of the CGST Act 2017

Section 7, (For the purpose of this section, supply includes………As per clause (b ) of Section 7 of the CGST Act 2017 , Import of services for a consideration whether or not in the course or furtherance of business.

The term Import of services has been defined in Section2 (11) of the IGST Act 2017, “import o4f services” means the supply of any service, where

  • (i) the supplier of service is located outside India.
  • (ii) the recipient of service is located in India.
  • (iii) the place of supply of service is in India.

It would be pertinent to note that for a transaction to be an “Import of service”, it must fulfill all the above requisites. Another factor to be considered is that an import of service is considered as a supply if the same is being made for a “Consideration”. However it is immaterial, if the import of service has been made in course or furtherance of business. Therefore for the purpose of this act following equation can be considered for considering Import of service as a “Supply”.

Illustration 1:

X Ltd India imports technological support services from YB inc USA, for its business. X Ltd has also duly paid consideration for technological support services. This amounts to a supply under GST Laws. GST would be payable in this case under the Reverse Charge Mechanism by virtue of notification 13/2017 Central Tax, issued under the provisions of Section 9(3) of the CGST Act 2017.

Illustration 2:

Mr X in India has purchased a subscription for a fitness Application on his mobile phone for his personal usage for an amount of Rs 3,500. The mobile application owner/developer is located in UK. Considering the definition of Import of service as mentioned above, it can be said that there is “Import of Service” taking place for a consideration. Even though the service is not to be used in course or furtherance of business, still the import of service for consideration would amount to supply. In such case assuming that Mr X is not registered, the UK based app owner/developer would be required to have a representative in India for paying GST on his behalf. The issue is that GST under reverse charge cannot be paid in a B to C transaction.

As per clause (c) of Section 7 of the CGST Act 2017, Activities specified in Schedule I to the CGST Act 2017, which are made or agreed to be made without consideration also amount to supply.

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

Any activity of permanent transfer of business asset (fixed asset /inventory), on which Input tax credit is availed, on account of scrapping of assets on being obsolete or even distribution as a sample, where absolutely no consideration is recovered. In such case, the transaction amounts to “supply” even if it has been undertaken without consideration. It would be important to note that in such case there would be no GST payable on outward supply as the consideration is absent (assuming that such transfer or disposal is being made to a unrelated person) where the transaction value is NIL. However the Input tax credit availed if any will have to be reversed. In disposal of business asset without consideration to a related person, even though the transaction would be without consideration, the valuation as “transaction value” will not be acceptable and thus valuation of outward supply will be determined using the CGST Valuation Rules.

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. Provided that gifts not exceeding 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.

Since the Pre-GST regime, the transactions between related persons have always been under the scanner. The obvious reason is that there is always a high probability of value manipulation which the related parties can undertake for mutual benefits also leading to evasion of tax. Thus the specific provision under this schedule envisages the scenario of “Zero consideration” transactions amongst the “Related Persons”, which has been considered as a “Deemed Supply”, and thus GST would be payable. The value in such case will have to be determined as per the CGST Valuation Rules.

Distinct person is a new concept which has been introduced under the GST Laws. Since the registration under GST is recognized qua the state, a person having same Permanent Account Number (PAN), if has registered business across various states/Union territories, then his registration in one state would be considered as a distinct person for another. In the Pre-GST regime, often a transaction of “Stock Transfer” would be undertaken. A person use to send his goods one branch to another branch in different state/union territories. Under the Pre-GST regime this transaction would amount to mere “Stock transfer” which did not attract any output tax. Only implication would be in respect of “Tax retention”. However the same does not happen under the GST regime. A mere transfer of stock from one branch to another branch in a different state/union territory would amount to supply, even if the same is without consideration. In such case Outward GST is payable and the valuation for the purpose of determining “GST liability” will have to be done according to the CGST Valuation Rules.

“Employees” have also been encapsulated as a part of the term “Related persons”. Thus supplies made to employees by the employer, especially “free of cost” have also come under the lens of the tax authorities. Gifts to employees is not a unusual in the business scenario. Thus the provisions clearly mentions that “gifts to employees up to a value of Rs 50,000 per annum, would not be considered as a supply. However any gifts given in excess of Rs ,50,000 per employee would amount to “Supply” under this act and would be liable to tax.

Illustration: If an employer has procured refrigerator worth Rs 25,000, and given it as a gift to the employee, then such gift would not amount to “Supply” as the value per annum is less than Rs 50,000. However if the price of the refrigerator is Rs 52,000, then gifting such fridge would amount to supply, and GST would be payable on Rs 52,000 and not just on amount over and above Rs 50,000.

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.

Supply of goods through agents was not under the taxation net under the Pre-GST regime, as there was no sale made in such case, rather the agents would be only given the possession of the goods with a responsibility to sell the same. However with the introduction of the GST Laws, the supplies made to agents by the principal or supply made by the agent to the principal where he has received goods on behalf of the principal, would be a taxable event under the GST Laws, and the tax would be payable. In this case generally the agents are to receive consideration in form of commission. That is to say the agents do not receive or pay anything for the goods they procure or receive on behalf of principal. However the supply of goods to agents would attract GST. The valuation of goods supplied, for the purpose of determining GST will be done as per the CGST Valuation Rules.

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.

Import of services by any person for a consideration is considered as supply even if the same is used in the course or furtherance of business. However import of services by a taxable person from a overseas related person or from his own establishment outside India, will be considered as a supply even if the same is without consideration. In such case it would be pertinent to note that the valuation of transaction would be done as per the CGST Valuation Rules.

The discussion in respect of Schedule II and Schedule III to the CGST Act 2017, would be covered under the Part-III of the series “Concept of Supply”

  • 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
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