Understanding the Scope of Supply under Goods and Services Tax

Within the Goods and Services Tax (GST) framework, 'supply' is recognized as the fundamental taxable event for levying taxes. The obligation to remit tax is triggered at the specific moment a supply of goods or services occurs. Consequently, accurately identifying whether a transaction qualifies as a 'supply' is crucial for establishing GST applicability.

Prior Tax System Concepts

Before the introduction of GST, the indirect tax system lacked a unified concept of 'supply.' The point at which indirect taxes were imposed differed across various tax legislations. For instance, excise duty applied to manufactured goods upon their removal from the factory. Service Tax was determined by 'point of taxation' rules for services provided, while Value Added Tax (VAT) was levied on the sale value of goods or service provision. The current GST system has integrated these disparate taxes to establish a single, consistent taxable event.

Recent Regulatory Amendments

As of February 1, 2023, significant updates from Budget 2023 have introduced several changes:

• Input Tax Credit (ITC) Reversal: Buyers who do not pay their suppliers the invoice value, including GST, within 180 days of the invoice date, are now required to reverse the claimed ITC along with interest under Section 50.
• Filing Restrictions: Sections 37, 39, 44, and 52 have been modified to prevent taxpayers from filing GSTR-1, GSTR-3B, GSTR-9, and GSTR-8 for a tax period beyond three years from their respective due dates.
• Ineligible ITC Expansion: Section 17(5) has been revised to include expenditure on Corporate Social Responsibility (CSR) initiatives as an ineligible ITC item for businesses.
• Exempt Transactions: High sea sales and similar transactions that are neither classified as a supply of goods nor services are now considered exempt, meaning proportional ITC cannot be claimed, as per the updated Section 17(3).
• Retrospective Effect for Schedule III: Schedule III has been amended, with paras (7) and (8) and explanation (2) now taking retrospective effect from July 1, 2017.
• Composition Scheme Eligibility: Section 10 of the CGST Act has been modified to permit businesses supplying goods via an e-commerce operator to opt for the composition scheme.

These amendments will become effective once officially notified by the CBIC.

Defining Supply under GST

The term 'supply' under GST encompasses a broad range of transactions, including sales, transfers, exchanges, barters, licenses, rentals, leases, and disposals. A transaction qualifies as a 'supply' under GST if a person engages in any of these activities in the course or furtherance of their business, and it involves a consideration.

Essential Components of Supply

Two key criteria define a 'supply' for GST purposes:

• The transaction involves consideration.
• The activity is conducted in the course or furtherance of business.

Should these conditions not be met, the transaction typically does not constitute a sale.

Illustrative Cases:

• If an individual purchases a table for Rs. 10,000 for personal use and later sells it to a dealer after ten months, this is not classified as a supply under CGST because it wasn't performed in the furtherance of business.
• Similarly, if someone offers free coaching to students as a hobby, this action is not considered a supply because it lacks consideration.

However, it is important to note that Schedule I of the GST Act outlines specific activities that are treated as supply even when executed without consideration.

Categories of Supply

Composite and Mixed Supplies

When multiple items are supplied together, they are categorized into either Composite Supply or Mixed Supply.

• A Composite Supply involves two or more goods or services that are naturally bundled and supplied together in the ordinary course of business. These items cannot be supplied independently. Within such a transaction, there is a primary supply and a secondary supply. The tax rate of the principal supply is applied to the entire bundled supply. For example, a dry fruit gift box for Diwali, including the dry fruits, box, and wrapper, constitutes a composite supply, as the box and wrapper are not typically sold separately from the main dry fruit content.
• A Mixed Supply, conversely, consists of two or more goods or services that are independent of each other and are not necessarily sold together. A key prerequisite for a mixed supply is that it must not qualify as a composite supply. In these instances, the highest tax rate among the individual supplies applies to the entire bundle. An example would be a Christmas package containing cakes, aerated drinks, chocolates, Santa caps, and other gift items, as each component can be purchased individually.

Import of Services

The import of goods or services for consideration is deemed a supply, irrespective of whether it is for personal or business purposes.

Detailed Scope of Supplies and Tax Implications

Activities Treated as Supply of Goods (Schedule II, GST Act)

• Transfer of Title: Any transaction involving the transfer of ownership of goods.
• Transfer of Business Assets:
  • Assets of a business that are transferred or disposed of, with or without consideration.
  • If an owner ceases to be a taxable person, their business assets are presumed to be supplied to them in the course of their business. This rule has exceptions:
    • When the business is transferred to another individual.
    • When the business is operated by a taxable representative.
• Unincorporated Entities: Supply of goods by an unincorporated association of persons (AOP) or body of individuals (BOI) for consideration.

Activities Treated as Supply of Services (Schedule II, GST Act)

• Transfer of Right in Goods: Transferring the right to use goods without transferring their title.
• Land and Building Related Activities:
  • Leasing, renting, tenancy, easement, or licensing for land occupancy.
  • Leasing or letting out of buildings, including commercial, industrial, or residential complexes used wholly or partly for business.
• Personal Use of Business Assets: When an owner utilizes or permits the personal use of business assets.
• Construction Services: Construction of a building or complex intended for sale to a buyer, either wholly or partly.
• Intellectual Property Rights: Temporary transfer or permission to use intellectual property rights.
• Immovable Property Rental: Renting of immovable property (note: rented residences are exempt from GST).
• Software Development: Development of information technology software.
• Non-Competition Agreements: Agreements to abstain from a particular act.
• Right to Use Goods: Transfer of the right to use any goods for consideration.
• Job Work: Any treatment or process applied to another person's goods is considered a supply of services.

Transactions Excluded from Supply (Schedule III, GST Act)

The following activities are neither classified as a supply of goods nor a supply of services, forming part of the negative list:

• Services provided by an employee to their employer.
• Funeral, burial, crematorium, or mortuary services, including transportation of the deceased.
• Services rendered by any court or Tribunal.
• Duties performed by Members of Parliament (MP), Members of Legislative Assembly (MLA), Members of Legislative Council (MLC), or Members of Local Bodies.
• Duties carried out by individuals holding positions as Chairperson, Member, or Director in bodies established by Central Government, State Government, or local authorities.
• Duties performed by any person holding a post pursuant to constitutional provisions in that capacity.
• Sale of land.
• Sale of building (with an exception: if a complex or building intended for sale to a buyer receives part consideration before completion, it is treated as a supply of services).
• Actionable claims, excluding those related to lottery, betting, and gambling.
• Supply of goods between non-taxable territories without entering India.
• Supply of warehoused goods to any person prior to customs clearance for home consumption.
• Supply of goods by a consignee to another person through endorsement of title documents, after dispatch from the foreign port of origin but before customs clearance for home consumption.

These specific transactions were incorporated into the Act effective February 1, 2019. However, Budget 2023 proposed that these entries would retrospectively apply from July 1, 2017. It's important to note that no refund will be issued for taxes collected between July 1, 2017, and January 31, 2019. These new amendments will be enforced once notified by the CBIC.

The GST legal framework thus streamlines tax implications by clearly distinguishing between activities that constitute goods, services, or neither.