Meaning and Scope of Supply-2018

Every taxing statute provides for an event upon the occurrence of which, the respective tax will get attracted. This is popularly called taxable event. For example, excise duty is a levy on manufacture of excisable goods. The liability to pay excise duty under Excise law arises immediately upon manufacture of excisable goods. Similarly, Service tax is a levy on provision of services and VAT is a levy on sale of goods. In case of Goods and Services Tax(GST), it is a tax on supply of goods or services or both. Therefore, GST is a levy on ‘Supply’. Thus, it is important to understand the meaning and scope of the word ‘Supply’ used in GST law. 

The word ‘Supply’ is defined under section 7 of Central Goods and Services Tax Act, 2017. Accordingly, the meaning and scope of ‘Supply’ includes the following :- 

• Inclusive part of the definition under section 7(1)(a) of CGST Act, 2017 

• Import of Services for Consideration whether or not in the course or furtherance of business as provided under section 7(1)(b) of CGST Act, 2017 

• Activities listed in Schedule I as provided under section 7(1)(c) of CGST Act, 2017
• Activities listed in Schedule II as provided under section 7(1)(d) of CGST Act, 2017  

Inclusive Part of the Definition: 

Under the inclusive part, the word ‘supply’ is defined to include all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for consideration by a person in the course or furtherance of business. 

The inclusive part of the definition is of wide amplitude to cover every kind of transaction involving supply of goods or services if they are undertaken by one person to another person in the course or furtherance of business for aconsideration. Further, the term business is also defined extensively to include any activity of trade, commerce, manufacture, profession, vocation, adventure, wager or other similar activities irrespective their volume, frequency, continuity or regularity of such transactions. 

Import of Services for Consideration whether or not in the course of business: 

Under erstwhile Service Tax law, import of services are covered under Reverse Charge Mechanism (RCM) where the recipient of service in India is required to pay service tax directly to Government instead of service provider. However, import of services by an individual or Governments are exempt from service tax, which means that there was no requirement to pay service tax under reverse charge.

On the other hand, Customs law provide for levy of customs duty upon import of goods even though such imports are for personal use and not for business. 

Coming to GST, it appears that by including a specific clause under section 7(1)(ii), import of services for a consideration whether or not in the course or furtherance of business are also brought within the ambit of ‘Supply’ definition. Thereby all import of services including services for non-business purpose are also taxed in the manner similar to customs duty on goods. 

Example: Mr. A obtained interior designing services from Mr. B located in USA for designing his House. Even if receipt of this service is not in the course or furtherance of business, A would be liable to pay GST under RCM. 

Supply Includes Activities Listed under Schedule I: 

To become supply as per section 7(1)(a), consideration is essential. However, subclause(c) provides that activities listed in schedule I also becomes supply even though they are undertaken without consideration. These include; 

1. Permanent Transfer or disposal of assets whose active life is not completed and input tax credit on such assets has been availed 

Example: XYZ Ltd. Purchased a Machinery whose life expectancy is 10 years and availed the entire input tax Credit in its 1st year itself. After 5 years, it has transferred the machinery for no consideration. Even then, this transaction is to be treated as supply in order to reverse the ITC originally availed in the year of procurement in proportionate to the balance life of such machinery. 

2. Any supply of goods or services or both between related person (holding and subsidiary company)or between distinct persons (branches located in different states)when made in the course or furtherance of business. The only exception is in case of gifts not exceeding Fifty thousand rupees in a financial year given by employer to employee. 

As it is usual practice among group companies, head office and branch offices of same organisation, to exchange goods and services internally, this provision has been provided to deem these transactions as supply even in absence of consideration, in order to satisfy the requirements of destination-based consumption tax i.e. taxes should flow to the States where goods are eventually consumed. 

Example: Inter State Stock transfer made between two branches. 

3. Any Supply of goods between the Principal and Agent will constitute as Supply even in absence of consideration. This isalso provided to satisfy the requirements of destination-based consumption tax as explained above. 

4. Any import of services in the course or furtherance of business, by a taxable person from a related person (holding or Subsidiary) or from any of his other establishments outside India shall also be treated as supply even in the absence of consideration. 

Supply Includes Activities Listed under Schedule II: 

In terms of section 7(1)(d) of CGST Act, 2017, activities listed in schedule II are also to be treated as supply. These activities may independently qualify as ‘Supply’ in terms of section 7(1)(a). However, to avoid possible scope for ambiguity, these activities are listed under schedule II. In addition, the schedule also provides how each of the activities are to be treated i.e. whether as goods or services for determining their tax applicability. The activities listed in schedule II are listed as under; 

1. Any transfer of title (includes title in goods shall pass at a future date) in goods is a Supply of Goods, giving the enjoyment to use the goods or a share in the goods is a Supply of services. Example: Hire Purchase Agreement
2. Any lease, tenancy, easement, license, to Occupy land or Building is a supply of services. Example: Letting out of a residential Complex 

3. Any treatment, process or value addition made to another person’s goods is a Supply of Example: Packing and designing 

5. Where business assets are transferred or disposed of whether or not for a consideration, is treated as supply of 
6. Where business assets are put to use for other than business purposes i.e., for private use or made available for another person is treated as Supply of
7. Any person Ceases to be a taxable person, any goods forming part of the assets of business shall be deemed as supplied in the course or furtherance of business, unless- 

• the business is transferred as a going concern to another person; or 

• the business is carried on by a personal representative who is deemed to be a taxable person. 

Example: XYZ Ltd. decided to wind up and accordingly transferred its assets to ABC Ltd, such transfer amounts to Supply. 

7. Renting of immovable property is a Supply of services. 

8. Sale of an under constructing complex, building, civil structure or a part thereof is to be treated as supply of services except where any consideration has been received after issuance of Complete certificate or its first Occupation whichever is earlier. 

9. Temporary transfer or permitting the use or enjoyment of any Intellectual Property and any services relating to development or enhancement of software shall be treated as supply of services. Contrarily, permanent transfer of Intellectual Property including any canned or packed software may qualify as supply of goods. However, the question is whether a particular transaction relating to intellectual property shall be treated as supply of goods or service is practically redundant, since GST rate prescribed for transactions relating to intellectual property as goods or as services are same. 

10. Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act shall be treated as supply of services. 

11. Works Contract involving material and services shall be treated as supply of service. 

12. Restaurant and Catering services including supply of food and non-alcoholic beverages shall be treated as supply of services. However, this service does not include supply of alcohol as the said item is kept outside GST. 

13. Any unincorporated association like AOP/BOI supplying goods to its members for a consideration shall be treated as Supply of Goods. 

Exclusions Specified under Schedule III: 

With the above understanding of the meaning and scope of ‘Supply’ as defined for the purpose of levy of GST, we now proceed to understand are there any exclusions which does specifically kept outside the ambit of ‘Supply’ definition in order not to charge any GST. In terms of section 7(2), certain activities are listed in schedule III which are neither to be treated as supply of goods or services. The list includes the following; 

4. Services by an employee to the employer in the course of or in relation to his employment.The rationale behind not taxing employee services to employer is that employees are being subject to professional tax which is a state levy. Therefore, Government has intentionally brought employee services out of GST by excluding the same from the scope of Supply.
5. Services by any Court or Tribunal.
6. Functions performed by the members of the Parliament, assembly, panchayats, Municipalities, other local authorities and duties performed by any person in the Constitutional Capacity (President or Governor). 
7. 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.
8. Services of funeral, burial, crematorium or mortuary including transportation of the deceased. 

6. Sale of land and building after Issuance of Completion certificate or occupancy whichever is earlier. 

7. Actionable claims, other than lottery, betting and gambling. It is implied that all other actionable claims other than lottery, betting and gambling does not constitute as Supply. 

Conclusion: Summing up, ‘Supply’ is defined in widest possible amplitude by including all transactions undertaken for consideration. It includes transactions between related parties and inter-office transactions from one state to another, even in the absence of consideration. However, it excludes employee services to employer in the course of employment, immovable property transactions like sale of land and building, duties performed by the persons in the constitutional capacity like Governor and President, courts and Tribunal and functions performed by the Peoples representatives like MP`s and MLA`s.