1. The concept of sale, manufacture, service for applicability of respective taxes prevalent under the current regime will be dissolved under GST and the applicability of GST will be triggered by the term ‘supply’. Thus, understanding of the term ‘Supply’ holds supreme importance.
The government on releasing the Model Goods and Services Tax Law in June 2016 (‘Old MGL‘) coined the term ‘Supply’ whereby the Government tried to encompass all the transactions under the GST net, leaving no room for any exemption (except for the exemptions specified under the GST law). However, the definition of supply had various anomalies/ ambiguities regarding which concerns were raised by multiple stakeholders (including industry, legal fraternity etc.).
The Government appreciated the suggestions made by various Stakeholders and amended the definition of ‘Supply’ while introducing the Model Goods and Services Tax Law in November 2016 (‘New MGL‘). However, basic tenet of the definition which provided for an inclusive scope for all transactions such as sale, transfer, barter made for consideration in the course of furtherance of business, remains same. We have highlighted the important changes as well as the implications of such changes in the definition of ‘Supply‘.
Supply- Definition of
2. To begin with, the definition of ‘supply’ provided under New MGL has 5 sub-sections and refers to 4 schedules. The nature of transactions covered under four schedules are as follows:
|♦||Schedule I specifies list of transactions carried out even without consideration which would constitute ‘supply’|
|♦||Schedule II specifies transactions which shall be treated as supply of ‘goods’ or ‘services’ respectively|
|♦||Schedule III provides for transactions that are neither ‘supply of goods’ nor ‘supply of services’.|
|♦||Schedule IV provides for activities or transactions undertaken by Central Government, a State Government or any local authority which shall be treated neither as a ‘supply’ of goods nor a supply of services|
Comparison of New/and old Definition of Supply
3. To understand the changes, it is imperative that we compare the definition of ‘Supply‘ in a tabulated form:
|Clause||Old Definition||New Definition||Comments/ Anomalies/ Ambiguities removed post introduction of new definition|
|1(a)||all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business||all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business||No change in the definition of New MGL.It is from this clause that all transactions under the sun will be exigible to GST unless specifically exempted|
|1(b)||importation of service, whether or not for a consideration and whether or not in the course or furtherance of business, and||importation of services, for a consideration whether or not in the course or furtherance of business, and||Import of services by non-assessee’s (persons not required to obtain registration) on FOC basiswas exigible to GST.However, under the new definition, any such service imported by non-assessee’s without consideration is not exigible to GST.
It is important to note that under the new definition there will be legal as well as compliance implications for certain transactions. One example is import of service by an individual for self-consumption against consideration. This transaction will attract GST and the service provider will be required to discharge GST and take registration himself or through an agent.
|1(c)||a supply specified in Schedule I, made or agreed to be made without a consideration.||a supply specified in Schedule I, made or agreed to be made without a consideration.||There are considerable changes in the ‘Schedule I’, which have been discussed below.|
|2||Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as a supply of goods or a supply of services.||Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as a supply of goods or a supply of services.||No change|
|2A||Where a person acting as an agent who, for an agreed commission or brokerage, either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply.||—–||This clause has been deleted from the definition, amended and then inserted in Schedule I. The new clause provides more clarity to such nature of transactions.This clause in Schedule I provides that transactions for supply of goods (the earlier definition provided for services as well) between Principal to Agent and vice-versa even without consideration would be exigible to GST|
|3||Subject to sub-section (2), the Central or a State Government may, upon recommendation of the Council, specify, by notification, the transactions that are to be treated as—
|–||The said clause, has been retained and has been shifted from 3rd to 4th clause|
|3||–||Notwithstanding anything contained in sub-section (1), (a) activities or transactions specified in schedule III; or (b) activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities as specified in Schedule IV, shall be treated neither as a supply of goods nor a supply of services.|| This clause has been newly inserted. This clause refers to Schedule III and Schedule IV. As mentioned above, Schedule III refers to transactions that are neither ‘supply of goods’ nor ‘supply of services’ and Schedule IV provides for activities or transactions undertaken by Central government, a State government or any local authority which shall be treated neither as a ‘supply’ of goods nor a supply of services.Further, the old MGL did not provide for Schedule III (as provided under New MGL), however, few transactions covered under Schedule III of New MGL, were provided in few sections of the Old MGL.
As regards transactions enlisted under Schedule IV of Old MGL vis-à-vis under New MGL, there is no such difference.
|4||Notwithstanding anything contained in sub-section (1), the supply of any branded service by an aggregator, as defined in section 43B, under a brand name or trade name owned by him shall be deemed to be a supply of the said service by the said aggregator||—-||The said clause has been deleted under the current law. This comes as a surprise for the industry and legal fraternity considering the fact that the term ‘aggregator’ was introduced in budget 2015 to tap service providers such as ‘OLA’, ‘UBER’ etc.With this deletion various ambiguities such as whether a service provider will qualify as an aggregator or not will also come to rest.
However, to keep such transactions under the GST ambit, such aggregators have now been covered under the definition of ‘e-commerce operator’. Though the Government has tried to simplify the law by bringing all such aggregators under the definition of e-commerce operator, the compliance burden on such service providers has been increased manifold.
|5||————–||The tax liability on a composite or a mixed supply shall be determined in thefollowing manner —
|Though OLD MGL covered such transactions under GST ambit by defining the term ‘composite supply’, however, no mechanism was provided to ascertain the rate of Tax leviable on such transactions.For reference, we have provided below the definition of ‘composite supply’ as provided under Old MGL:
‘(27) “composite supply” means a supply consisting of –
provided in the course or furtherance of business, whether or not the same can be segregated;’
The new MGL has bifurcated the abovementioned transactions by defining ‘composite supply’ and ‘mixed supply’. The definitions of ‘Composite supply’ as well as ‘Mixed supply’ is as follows:
“composite supply” means a supply made by a taxable person to a recipient comprising two or more supplies of goods or services, 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;
“mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply;’
In view of the above, one can determine the rate of tax of goods as applicable on the principal supply (as provided under composite supply) or on goods/ services so supplied.
Changes in Respective Schedule
4. Having analysed the changes in the definition of ‘supply’ we now proceed to highlight the changes in the respective schedules.
Schedule I (of Old MGL) – Entries as provided in the earlier schedule covered following transactions:
|♦||Sale/disposal of business assets|
|♦||Application of business assets to private or non-business use|
|♦||Services put to a private or non-business use|
|♦||Assets retained after de-registration|
|♦||Supply of goods/ services by a taxable person to another taxable or non-taxable person in the course or furtherance of business|
|♦||Supply of goods by a registered taxable supply to a job worker in terms of Section 43A not to be treated as supply of goods|
The above listed transactions had various anomalies which are simply evident from reading such entries. We have highlighted few anomalies which are as follows:
|♦||Transfer/ disposal of business assets against which input credit was not availed would also attract GST. Such anomaly has been removed under the New MGL.|
|♦||Business assets/ services put to private or non-business use were taxable, and the corresponding credit of using such business assets/ services was disallowed. The Government has removed the levy on use of business assets for private or non-business use.|
However, Schedule I of New MGL includes supplies between related persons in course or furtherance of business. Due to this, non-monetary incentives by employer to employee may still be under the tax net, even if given for personal use. This is because such incentives can be construed to be in course or furtherance of business.
|♦||Assets retained post de-registration by an assessee were exigible to GST. This clause would cover transactions wherein individual proprietor’s would be exigible to GST. The Government has removed this clause in the new MGL.|
|♦||Supply of goods/ services without consideration by a taxable person to another taxable/ non-taxable person in the course or furtherance of business was deemed supply. Through this transaction, all FOC supplies by taxable person to any person fell under the GST net. This provision faced enormous opposition from industry as it directly impacted their marketing and sales promotional operations. Hence, the Government has removed this clause and accordingly, tax is not leviable on FOC supplies provided such supplies are made to related persons if in course or furtherance of business.|
|♦||The entry pertaining to supply of goods to job worker has been removed from the schedule and, therefore, such transaction would now be treated as supply. However, under the New MGL tax will not be levied on supply to job worker on fulfilment of certain conditions.|
As regards Schedule II of Old MGL, confiscation and sale of assets of a taxable person (by banks, financial institutions etc.) for recovery of debt was considered as supply by such taxable person. The new law has removed this entry.
Schedule III which has been inserted only in the new MGL, broadly covers various transactions such as:
|♦||Services by any employee to employer in course of or in relation to his employment|
|♦||Services by any Court or Tribunal|
|♦||Functions performed by the Members of Parliament, State Legislature, Panchayats, Municipalities, and Other local authorities. Also duties performed by any person who holds any post under provisions of constitution|
|♦||Services by a foreign diplomatic mission|
|♦||Services of funeral, burial etc.|
No change has been made in entries in Schedule IV.
5. With the above analysisone can see that the definition of supply has evolved under the new MGL as certain ambiguities have been removed. However, the drafting of the legislation still requires a lot of work in order to bring clarity and avoid any futile litigation on such provisions.