Meaning and Scope of Supply and Levy of GST

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  • Last Updated on 12 September, 2022

Supply and Levy of GST

Table of Contents

1. Background

2. Statutory provisions

3. Scope of supply

4. Inclusive definition

5. All forms of supply are taxable

Check out Taxmann's GST How to Meet Your Obligations (Set of 3 Vols.) which is Taxmann's bestseller commentary lucidly explains every provision of GST. The discussions are supported by Case Laws & various Examples. It also covers various GST Acts, Rules, Notifications, and Circulars & Clarifications.

1. Background

The Goods & Services Tax will subsume many taxes described in Chapter 1. Most important of them are excise duty, service tax and VAT. Excise duty is levied on manufacture of goods but payable at the time of removal from factory, service tax is levied on rendering of service and sales tax is levied when property in goods is transferred from one person to another.

As per section 9 of CGST Act, GST will be levied on intra-State supply of goods or services at the specified rate. As per section 5 of IGST Act, IGST will be levied on inter-State supply of goods or services. Therefore, it is essential to understand the meaning of ‘supply’ as supply of goods or services will attract GST. The taxable event is now ‘supply’ and not other events explained above.

2. Statutory provisions

Supply has been defined in section 7 of GST Act. Schedule I specify the activity which are considered as supply even when they are rendered without consideration. Schedule II of Act specifies the matter which are to be considered as supply of goods or supply of services.

2.1 Definition of supply

The word supply has been defined u/s. 7 of the GST Act in an inclusive manner. The Section 1 of the GST Act provides that the supply will include all forms of supply of goods or services or both agreed to be made for a consideration by the person in a course or furtherance of business. The Section 7(1)(b) of the Act provides that the import of service made in the course or furtherance of business or not for consideration shall be considered as ‘supply’.

The Schedule-I specifies certain activities which will be considered as ‘supply’ even if made without consideration. The sub-section (1A) provides that the transactions specified in Schedule-II is only for the purpose of classifying the activity or transaction into goods or services. The sub-section (2) provides the power to specify the activities of transaction under taken by Central Government, State Government or Local Authority when the function is public authority which shall not be considered as supply of goods or services. The Schedule-III specifies certain transactions which are not considered as supply of goods or services.

The scope of various transactions are discussed in detail in subsequent sub-paras.

2.2 Supply without consideration

As per section 7(1)(c), the activities specified in Schedule I shall be considered as supply even when these are performed without consideration. Further the sub-section (3) provides power to Central or State Government on recommendation of council to specify by notification to consider any transaction as supply of goods or services or neither of them.

2.3 Activities either goods or services

Section 7(1)(d) of the GST Act has been deleted w.e.f. 01/07/2017 and Section 7(1A) has been incorporated in Section 7 from 01/07/2017. The Section 7(1A) provides that the activities of transaction listed in Schedule-II shall either be considered as goods or services as specified in the schedule.

2.4 Activities which are neither supply of goods nor supply of services

Sub-section (2) of section 7 of GST Act provides that the activities or transactions specified in Schedule III and notified by government, will not be considered as supply of goods or supply of services. Please refer to Chapter 6 for detailed discussion.

2.5 Composite or mixed supply

As per section 8 of GST Act, the tax liability on a composite or a mixed supply shall be determined in the following manner:

(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and

(b) a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.

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2.6 Definition of supply as given in statutory provisions of other countries

There are many countries in the world where the goods and services tax is levied on supply of goods or services. Most of the countries defines the word ‘supply’ in very wide manner. Many countries have defined the words in an inclusive manner and not exhaustive manner. As an example, definition of supply given in sections 9-10 of Australian GST Act is reproduced below:

(1) A supply is any form of supply whatsoever.

(2) Without limiting sub-section (1), supply includes any of these:

(a) a supply of goods;

(b) a supply of services;

(c) a provision of advice or information;

(d) a grant, assignment or surrender of real property;

(e) a creation, grant, transfer, assignment or surrender of any right;

(f) a financial supply;

(g) an entry into, or release from, an obligation:

(i) to do anything;

(ii) to refrain from an act;

(iii) to tolerate an act or situation;

(h) any combination of any 2 or more of the matters referred to in paragraphs (a) to (g).

(3) It does not matter whether it is lawful to do, to refrain from doing or to tolerate the act or situation constituting the supply.

(3A) For the avoidance of doubt, the delivery of:

(a) livestock for slaughtering or processing into food; or

(b) game for processing into food;

under an arrangement under which the entity making the delivery only relinquishes title after food has been produced, is the supply of the livestock or game (regardless of when the entity relinquishes title). The supply does not take place on or after the subsequent relinquishment of title.

(4) However, a supply does not include a supply of money unless the money is provided as consideration for a supply that is a supply of money.

Australian Government publishes GSTR Rulings giving clarification on various issues raised by trade and industry in Australia. It will be observed from definition of supply given in Australian GST Act that ‘supply’ has been defined in very wide manner. These rulings are very helpful in understanding the scope of various terms including ‘supply’.

3. Scope of supply

Meaning and scope of ‘supply’ can be explained by understanding the meaning of various terms which have been used in the definition as reproduced in above para. The meaning of various terms are discussed in this Chapter in following paras :

(a) It is an inclusive definition and not exhaustive definition

(b) All forms of supply are included

(c) As an example, sale, transfer, barter, exchange, license, rentals, lease or disposal made or agreed to be made are considered as supply

(d) Supply specified in clause (a) of section 7(1) should be for consideration

(e) Supply should be made by person. For meaning of person

(f) Supply should be in course of or furtherance of business

(fa) Activities or transaction with members of Club or Association

(g) Importation of service is considered as supply

(h) Scope of supply without consideration

(i) Transaction considered as transaction in goods or services

(j) Meaning of Goods & Services

(k) Mixed or Composite supply

(l) Levy of Tax

4. Inclusive definition

It has been defined in inclusive manner and not exhaustive. The word ‘includes’ used in the statutory provision enlarges the meaning of supply. It also indicates that the definition given in the statute is not exhaustive. The Hon. Supreme Court in the case of CIT v. Taj Mahal Hotel [1971] 82 ITR 44 observed as follows with:

“The word ‘includes’ is often used in interpretation clauses in order to enlarge the meaning of the words or phrases occurring in the body of the statute. When it is so used, these words and phrases must be construed as comprehending not only such things as they signify according to their nature and import, but also those things which the interpretation clause declares that they shall include”.

Clause (a) of section 7(1) specifies certain form of supply. These specific forms are only given as example. Any other form of supply will also be included in the definition. Sections 9-10(2) of Australian GST Act reproduced above inter alia provides following activity as supply:

(a) Provision of advice or information

(b) A grant, assignment or surrender of real property.

These activities are not specifically specified in the definition of supply in section 7(1) as it is inclusive definition. The above form of supply will also be covered under the meaning of supply given in section 7.

5. All forms of supply are taxable

The clause (a) of sub-section (1) provides that all forms of supply are covered in definition. The various proposition for characterizing the activity as supply and different aspects of supply are briefly discussed in this para. The various propositions are as follows:

(a) For every supply there should be a supplier. It is essential to determine the person who has made the supply as tax is levied on supply.

(b) Generally, for every supply there is a recipient i.e. person who acquires the supply. However, the statute may provide for tax on self-supply.

(c) The supply may be exclusively of goods or services or mix of goods and services. Sub-section (3) of section 7 empowers the State Government or Central Government to specify by notification that transaction shall be considered as supply of goods or supply of service or either supply of goods or supply of services.

(d) The transaction may involve two or more supply. The word ‘composite supply’ has been defined in section 2(30) as follows:

(30) “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable 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;

Illustration: Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.

Sometimes supply consists of two or more supply of goods or services or any combination thereof. These services are naturally bundled and supplied conjunction with each other in the ordinary course of trade. One of the supply is principal supply and other supply is provided to facilitate the enjoyment of principal supply. Such supply is called composite supply. For Example, the passengers travel in Rajdhani Express from Bombay to Delhi. The price paid for purchase of tickets consist of three services (1) Transportation of passenger. (2) Supply of food. (3) Supply of bed rolls. All the services are bundled together. Passenger has no option but to avail both the services. As per clause (a) of section 8 of the GST Act such supply of three service shall be treated as composite supply of which supply of transportation of passenger will be considered as principle supply.

The CBEC has vide DOF letter No. 334/1/2008-TRU dated 29-2-2008 has clarified about classification of incidental or ancillary service to this effect. The clarification is reproduced below:

Classification of taxable services:

Taxable services are defined separately under clause (105) of section 65 of the Finance Act, 1994. Services are supplied as a single composite service by bundling number of different services or disaggregating a single supply into different components. Tax liability may vary depending upon the treatment of the transaction either as a single composite service or multiple supply of service. For the purpose of levy of service tax, a single composite service is to be classified under any one of the specified taxable services.

For the purpose of classification of a service covering number of separate services, a view has to be taken as to whether an individual service is merely a component of the overall supply or is itself a distinct and independent supply i.e., whether the component is merely ancillary to the principal supply or the component can be considered as separate taxable service in its own right. A service, which does not constitute for a customer an aim in itself but a means of better enjoying the principal supply, is considered as a supply ancillary to the principal supply.

Section 65A states the principles for classification of taxable services. Classification of a composite service is based on that component of the service which gives the essential character. There is a need to determine whether a given transaction is the one containing major and ancillary elements or the one containing multiple and separate major elements. In the case of a transaction containing a major and ancillary elements, classification is to be determined based on the essential features or the dominant element of the transaction. A supply which comprises a single supply from an economic point of view should not be artificially split. The method of charging or invoicing does not in itself determine whether the service provided is a single service or multiple services. Single price normally suggests a single supply though not decisive. The real nature and substance of the transaction and not merely the form of the transaction should be the guiding factor for deciding the classification.

It is evident from the same that ancillary and incidental services which are provided for better enjoyment of principal service will be classified along with the principal service. For example, the person goes to stay in the hotel primarily for the purpose of accommodation provided by the Hotel, but he is provided with other facilities of TV, telephone, air conditioner, etc. to make his stay more convenient and enjoyable. Therefore, these services cannot be considered as independent service but it will always be considered as part of accommodation service. The entire service thus will be considered as accommodation service. Such supply can be considered as composite supply.

(e) To make supply the entity must do something. The ordinary and natural meaning of term supply as per “Revised updated oxford Dictionary” is ‘to furnish or provide’. It follows that an entity must take action to make supply. The person who make supply must carry out some activity. The activity may be passive or physical. For example, wholesalers store the goods and make supply of goods either of full consignment or sell part consignment. The wholesaler carries the activity of storing and breaking up the consignment into various parts. Therefore, wholesaler makes supply. The tax will be payable by him. It was held by Court in New Zealand that person supplying must do something for the recipient and not against recipient. The Court in the case of section 65 reported in 1996 (17) NZTC 7408 has observed as follows:

“In that case a costs order was made against a solicitor who was truck off the roll by the New Zealand Law Practitioners Disciplinary Tribunal. The costs order required the solicitor to pay amounts to the New Zealand Law Society and the District Law Society for their costs and expenses relating to the disciplinary proceedings. Willy DJ held that these payments were not consideration for a supply of service by the Law Societies to the solicitor. He ruled that the ordinary meaning of the word supply limited the breadth of the phrase ‘supply of services’ which was only so wide as to include activities where the provider has done something for, not against, the recipient. To rule otherwise would lead to absurdity because it would allow the concept of a supply to encompass situations where a person sues for recovery of property, or steals something from someone else.”

(f) Supply cannot be made by more than one person. Whenever supply is made, the person making the supply must be identified and tax is recoverable from that person. There is normally one person for making supply.

The applicability of provision to some of the activities are discussed below:

(a) Illegal activities

(b) Providing of goods or services by recipient

(c) Services provided by Liquidator

(d) Vesting of property with Government Authority

(e) Two-way supply in case of barter

(f) Transaction i.e. occurrence should be analysed

(g) Supply under tri party arrangement

(h) Payment by money cannot be considered as supply

(i) Goods sent for exhibition

(j) Display of name or placing of name plates of donor

(k) Reciprocal arrangement

(l) Perquisites

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5.1 Illegal activities

The activity may be carried out legally or illegally i.e. without compliance with statutory provisions. Assuming the thief has stolen car and sells the car to person X. It is illegal to steal a car and thereafter sell it to another person. However, sale of car by thief to the person X will constitute supply liable to be taxed. But, however, if a particular activity is totally prohibited, such activity cannot constitute supply. The European Court in the case of Vereniging Happy Family Reustenburgerstrat v. Inspecteur der Omzetbelasting [1989] 4 BVC 216 has held that there was no liability of VAT on illegal distribution of prohibited drugs because their supply was subject to total prohibition in the member States.

5.2 Providing of goods or services by recipient

The recipient of a supply may provide or make a thing available for the supplier to use in making the supply. However, the provision of such a thing is not necessarily for a consideration. The corollary of this proposition is that providing or making the things available does not necessarily give rise to a supply. It will depend on the facts and circumstances of the transaction between the parties whether the supplier’s use of, for instance, facilities provided by the recipient in order to make the supply is simply part of the circumstances in which the supply is to be made, or does in fact involve a supply by the recipient to the supplier.

For example, a supplier may need to perform services on the recipient’s premises. The recipient may agree to allow the supplier to use its computer facilities and stationery in performing the services. Depending on the particular circumstances, allowing the use of these things could be a condition of the contract that goes to defining the supply which the supplier makes rather than being a supply of these things to the supplier by the recipient.

5.3 Services provided by Liquidator

In many cases, the borrowers/creditors of the company file petition before Hon. High Court for liquidation of the company and appointment of liquidator to sell the assets. The proceeds by selling the assets are utilized for making payment to borrowers/creditors. The liquidator provides different types of services like considering appointment of valuers, inviting tenders for sale, evaluate the tender and selling the asset to deserving person. The services provided by liquidator are also considered as supply and the income earned by the liquidator will be chargeable to tax.

It may be statutory requirement to appoint liquidator for liquidating the assets of the company, but in this case, the liquidator performs various activities for receiving consideration. This activity is different than compulsory acquisition of property by government under different statute.

5.4 Vesting of property with Government Authority

The Government for public interest for various purposes acquires land or other property by issuing notification in gazette. The effect of gazette notification is that the ownership of the land or other property described therein is vested in Government authority and not in the owner. The owner’s interest in the property is extinguished and it vests with the Government. It appears that in such case, the owner have not made any supply as Government has compulsorily acquired the property without any action on the part of the owner. Mere acceptance of amount by the owner as compensation of acquisition does not mean that the owner has made the supply. However, if the owner does something/undertakes any action for transfer of land, the owner is said to have made the supply.

5.5 Two-way supply in case of barter

In case of barter, the consideration is not in monetary form but it is in a non-monetary form. The consideration itself is separate supply. In these kinds of transaction, there are two-way supply. Therefore, each party to the transaction must pay GST on supply it makes. Each party will be entitled input tax credit provided the input has been used in the course or furtherance of business.

Assuming that person ‘A’ approaches professional, say, ‘X’ for certain advice with regard to dispute of his property. He agrees to give share of part of the property in case the dispute is resolved and he acquires the property. The consideration paid by Mr A to Mr X is not in monetary terms. Here Mr X is providing professional advice and receiving property in consideration of providing professional service. Mr A is receiving professional advice and paying the amount by way of part of property. In this case two-way supply is made; one by Mr. X of professional advice and second by Mr A by providing right in the property. Thus in case of barter, always two-way supply is made.

Dive Deeper:
Time & Value of Supply of Goods under GST
Place of Supply in GST with Examples
What is meant by Time of Supply under GST?

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