New Tax, New Ideas: Defining Supply under the Model GST Law

Yet another positive step taken by the government by releasing model Goods and Services Tax (GST) law on June 14, 2016 which takes us one step closer to the introduction of GST in India. GST is expected to be the biggest indirect tax reform in India and is aimed at removing the shortcomings of the existing indirect tax structure and bringing the Indian indirect tax structure at par with that being adopted globally. It is expected that GST will remove the cascading of taxes, reduce compliance burden of businesses, reduce indirect tax litigation and increase GDP.Presently, different indirect taxes are levied at different levels of the supply chain and different incidence of tax also varies for each levy. For instance, Excise duty is levied at the time of manufacture of goods, Value Added Tax (VAT) / Central Sales Tax (CST) is levied at the time of sale of goods, Entry tax is levied at the time of entry of goods into a State, Service tax is levied when services are performed, and many other indirect taxes with different incidence of tax.  As in the case of many other countries having implemented GST, the incidence of tax under proposed GST law in India shall be ‘supply’ of goods and/or services and only one tax shall be levied instead of multiple levies. In India, as per the model GST law released by the Government of India for public comments, GST shall subsume, Excise duty, VAT/CST, Service tax, Entertainment tax, Luxury tax and other levies proposed to be omitted from existing entry 84 and entry 54 of Union List and State list respectively of the Schedule VII of the Constitution of India.

The incidence of tax under GST regime shall be ‘supply’ of goods and/or services and the word ‘supply’ as per section 3 of the Model GST Act shall include the following:

  • All forms of supply of goods and/or services, such as sale, 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;
  • Importation of service, whether or not for a consideration and whether or not in the course or furtherance of business;
  • Supply specified in Schedule I , made or agreed to be made without a consideration

It is apparent from the above that the scope of supply is not only very wide, but also includes transactions which may not be covered under existing tax structure. Accordingly, the provision poses many questions and issues before the tax payers as well as the government, some of which are discussed here:

Taxability of barter and exchange transactions

Presently, barter is neither specifically included in the State VAT laws not in Finance Act, 1994. The same at present may be questioned by the revenue authorities. Under GST, specific inclusion of barter in the scope of supply indicates the intent of government to tax all free of cost exchange of supplies including those which generally take place between closely related entities.  Valuation of such supplies may also be a challenge. Firstly, it would be difficult to arrive at a correct value of the supplies bartered/exchanged and the values adopted at the end of both parties’ separately may not be the same

What would be the treatment of waste products manufactured?

Presently, residues and waste products are not considered excisable even if sold for a consideration. Courts have taken a view that residues or waste which are left as a result of a manufacturing process of some other product does are not excisable even if these are sold for a consideration. Even if there is a buyer for such products, it does not render the products marketable. It is also held by courts that merely an entry in the tariff does not make the product excisable when there is no manufactured involved in it. Shifting of incidence of tax from manufacture to supply, may require revising the position taken at present.

Will consideration play an important role in future? 

Presently, activities done or agreed to be done without consideration do not qualify as ‘service’ and accordingly are not subject to Service tax. Similarly, sale of goods without consideration is not charged to VAT, with certain exceptions. Consideration has been an essential element in Indian indirect tax laws to render a transaction taxable. However, in GST regime this may not be the case.

Consideration is mentioned in the first part of the scope of supply discussed in earlier paras along with other specific inclusions which may qualify as a supply even without consideration. Import of services without consideration shall be treated as a supply and transactions mentioned in Schedule I of the Model GST law if made without consideration shall be treated as a supply. Such supplies are:

  • Permanent transfer/disposal of business assets
  • Temporary application of business assets to a private or non-business use
  • Services put to a private or non-business use
  • Assets retained after deregistration
  • Supply of goods and/or services by a taxable person to another taxable or non-taxable person in the course or furtherance of business

The last inclusion above apparently brings almost all the supplies of goods and/or services without consideration within the ambit of supply. Thus, it apparently renders inclusion of the word ‘consideration’ in section 3 (wherein the scope of supply is provided), discussed in earlier paras, ineffective and gives ‘supply’ a very wide connotation.

Further, branch transfers i.e. transfer of goods from one State to another by an entity to its own branch in another State, would also fall within the scope of supply. Accordingly, GST may be levied on branch transfers as against the existing law. Further, valuation of such supplies would also be challenging. At present, under CST law, tax is not levied on branch transfers subject to furnishing prescribed declaration in Form F.

Some other transactions such as scrap sale of business assets for free, use of premise or facilities by a third party without consideration, importation of services without consideration, private use of business vehicles/ assets, supply of free samples, services put to private use such as CSR activities, etc. may be charged to GST even though these are not charged to tax at present.

Many organizations give free gifts to their customers, employees etc. and such gifts may also fall within the last clause of Schedule I discussed above. In some countries a threshold limit is prescribed in relation to free gifts that may be given by a taxable person to another person per year upto which GST is not chargeable. There is no clarity whether such an exemption in India would be given or not.

Import of services not in the course of business

Services received from a provider of service located in non-taxable territory by an individual located in taxable territory in relation to any purpose other than commerce, industry or any other business or profession is exempted from service tax by way of mega exemption notification. However, importation of services whether or not in the course or furtherance of business is specifically included in the scope of supply. In the absence of any details regarding exemptions in GST law, it is not clear whether importation of services for private consumption would be charged to GST or not. Generally these services constitute healthcare services, educational services, software and gaming licenses, legal and other private consulting services etc.

As the developments around GST are taking place at a rapid speed and the most awaited indirect tax reform may come into force anytime, it is high time to make an assessment of all segments of the business that may get affected, especially the mutual assistance among closely held companies as such assistance/ facilities are generally extended without consideration. A deeper analysis of the meaning and scope of supply is really important at this stage and the same may prove to be a key to smooth transition to the new regime.

By CA Deepak Chadha