TLC Legal

GST – Levy, Concept of Supply, Other Important Definitions & Composition

Scheme

Advocates

WIRC, ICAI, Surat

14th April, 2017

By

Sushil Solanki

Principal Commissioner of Service Tax (Retd.)

Partner, TLC Legal, Mumbai

TLC LegalAdvocates

Levy & Collection of Tax

Scope of Supply

Composite & Mixed supplies

Works Contract

Definition of Agent & Agriculturist

Composition Scheme

Contents

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TLC LegalAdvocates

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LEVY OF GST

TLC LegalAdvocates

• Levy on all ‘intra-state’ supplies of goods or services or both - CGST

• Levy on ‘inter-state’ supplies governed by IGST Act - IGST

• Exclusion made only for alcoholic liquor and NOT for opium, narcotics

substances, etc.

• GST on 5 petroleum products to be levied from notified date – Even after

levy of GST, power to levy ED, VAT & CST to continue in the Constitution

• Govt. may notify categories of supply of goods or services under Reverse

Charge Mechanism (S. 9(3))

• Govt. may specify e-commerce services where e-commerce operator is

liable to pay GST like Uber, Ola, etc.4

Levy & Collection of GST (S. 9)

TLC LegalAdvocates

• On purchase of taxable goods and services from URD, buyer liable to GST

on Reverse Charge basis

• No definition of taxable goods and services

• Illustrations:

• Purchases from suppliers falling below threshold limit

• Trader purchasing office supplies like stationery, tea, cleaning services from

URD

• A company purchasing cold drinks, cigarettes or sweets from nearby shops

• A hawker giving old utensils to manufacturer on job work basis

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Levy of GST on purchases from URD (S. 9(4))

TLC LegalAdvocates

• The expression ‘supply’ includes –

(a) All forms of supply

• such as sale, transfer, barter, exchange, license, rental, lease or

disposal made or agreed to be made

• For a consideration

• In the course or furtherance of business

(b) Import of services

• for a consideration,

• whether or not in the course or furtherance of business

(c) Schedule I activities made without consideration

(d) Schedule II activities treated as supply of goods or services

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Supply (S. 7)

TLC LegalAdvocates

• Inclusive definition – difference between ‘include’ and ‘such as’, hence very

wide

• The difference between exhaustive and inclusive definitions has been explained

in P. Kasilingam v. P.S.G. College of Technology (1995) Supp 2 SCC 348:

“A particular expression is often defined by the Legislature by using the word

‘means’ or the word ‘includes’. Sometimes the words ‘means and includes’ are

used. The use of the word ‘means’ indicates that “definition is a hard-and-

fast definition, and no other meaning can be assigned to the expression than

is put down in definition”. (See : Gough v. Gough; Punjab Land Development and

Reclamation Corpn. Ltd. v. Presiding Officer, Labour Court.) The word ‘includes’

when used, enlarges the meaning of the expression defined so as to

comprehend not only such things as they signify according to their natural

import but also those things which the clause declares that they shall include.

• UOI vs Godfrey Phillips 1985 (22)ELT 306 (SC)- Inclusion can not be extended far

away from nexus to main concept.7

Supply (S. 7) – Inclusive definition

TLC LegalAdvocates

• Barter/exchange –

• Not liable to tax under VAT, but taxable under GST

• E.g. architect/ construction services against transfer of flat, exchange of old phones/cars for new ones - taxable

• Swapping of debts against bills of exchange – falls under definition of money, hence not taxable

• Valuation issues may arise

• Disposal –

• Disposal of waste without consideration – not taxable – e.g. flaring of gas, refuse, etc.

• Disposal of business assets, where ITC is availed – taxable, even if without consideration

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Supply (S. 7(a)) – Issues

TLC LegalAdvocates

• Consideration includes

• Any payment made in money or otherwise (a)

• Monetary value of any act or forbearance (b)

• In respect of, in response to or for inducement of supply

• By recipient or any other person

• Excludes subsidy given by Govt. and deposits which are not adjusted against

consideration

• Consideration in kind is covered – litigation galore

• Issues relating to supply of Free material – e.g. packing material to supplier;

cement to contractor; parts to machinery manufacturer; cosmetics to

beautician

• Use of words like ‘in respect of’ or ‘for the inducement of supply’ may lead

to a view that value of free supply may be required to be added9

Consideration (S. 2(31))

TLC LegalAdvocates

• Inducement for making supply – e.g. bribe for clearing a proposal, tip to

waiter/taxi driver:

• Gratuitous payment vs. payment for inducement of supply

• New Zealand GST Law uses similar definition

• Subsidy

• Subsidy by Flipkart to the seller – to be added in the value of supplier

• S. 15(2)(e) – subsidies directly linked to the price is to be included in value

• Sale of products by related companies below the cost – whether ‘direct

subsidy’ – litigation prone

• Deposits excluded, when not adjusted towards price of a supply – repairs

and maintenance deposits by Society

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Consideration (S. 2(31))

TLC LegalAdvocates

• In the course or furtherance of business

• Broad nexus necessary

• Commr of Gift Tax vs. P Gheevargheese (SC) – “In the Course of business” –activity should have some relationship with carrying on business

• Cinemax India Ltd vs. UOI (2011 (24) STR -3 (Guj) – meaning of ‘furtherance’–act of furthering/ helping forward/ promotion/progress of business

• Business (S. 2(17))

• Profit motive not required

• Single transactions or occasional transactions are also covered

• Admission to any premises e.g. park/ museum/ zoo entry fees

• Fees as holder of office e.g. director, position in a trade association, etc. (Cl (g))

• Services by race club

• Services by Govt. is also business

• Whether sale of personal car is liable to GST – No, FAQ clarifies it.11

Supply (S. 7(a)) – Issues

TLC LegalAdvocates

• Import of services for personal consumption – also taxable

e.g. downloading of songs, software on payment

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Supply (S. 7(b)) – Issues

TLC LegalAdvocates

• Transfer of business assets, where ITC has been availed

• Business Assets transferred w/o consideration to third party – taxable only if

ITC availed

• Gift upto Rs. 50,000 in a year to employee – not a supply

• Services by an employee to an employer in the course of employment – in the

negative list (Sch. III)

• All perquisites which are part of employment contract are not supplies e.g.

bonus, LTC, rent free accommodation or car, medical reimbursement, etc.

• Gift of any goods or services beyond contractual terms – is covered under this

entry e.g. Diwali gifts or vouchers

• Litigation prone as activities like free lunch or free car or parties or foreign

trips

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Schedule I – Supply without Consideration

TLC LegalAdvocates

• Supply between related and distinct persons (inter-branch transfer)

• Supply between related person – taxable, even if no ITC availed

e.g. supply of goods purchased from Composition Dealer or in-house making of

furniture when transferred to related person or other branch – taxable

• Import of service from a related person or from his foreign establishment,

in the course or furtherance of business

• Supply of goods by Principal to Agent and vice-versa

• Valuation – Open Market Value or 90% of sale price of recipient

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Schedule I – Supply without Consideration

TLC LegalAdvocates

Major Drafting Lacunae

• Conditions of ‘for consideration’ or ‘in the course or furtherance of

business’ absent in certain clauses – Does it mean it would be supply, even

without consideration??

• Allowing use of furniture/ utensils by community/association to its

members free (Cl. 1(b))

• Free leasing of land/ building (Cl. 2(a)/(b))

• Allowing use of brand name/ trade name without consideration (Cl.

5(c))

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Schedule II – Activities treated as supply

TLC LegalAdvocates

• Renting of residential premises

• If premises used for business or commerce – covered under Cl. 2(b)

• Renting for residential purpose – not covered under Cl. 2(b)

• However, Cl 5(a) covers all types of renting irrespective of its use,

hence, even renting for residential use is supply

• Any treatment or process on another person’s goods is supply of services

• E.g. processing charges, job work charges, etc.

• Transfer of goods forming part of assets of a business, whether or not for

a consideration is supply of goods(Cl. 4)

• Similar provision in Singapore & Malaysia law

• One interpretation : Immovable property is broken and sold

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Schedule II – Other Issues

TLC LegalAdvocates

• Business goods put to private use or allowing Use for non-business purpose

is supply of service (4 (b))

• E.g. computer, AC taken for residential purpose

• Stock on closure of business – tax to be paid (Cl. 4 (c))

• Transfer of business as going concern – not taxable

• Similar provision in Singapore & Malaysia

• Even transfer of one of the business vertical is covered by this entry ,

provided it happens

• However, reversal of credit would be required on input in stoch n for

capital goods in terms of ITC provisions

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Schedule II – Other Issues

TLC LegalAdvocates

• Construction activities - Provision similar to present ST Law (5(b))

• Sale prior to issue of CC/ OC or first occupation only taxable

• First Occupation – Prone to litigation

• Following Composite supply is Supply of service:

• Works contract of immovable property

• Restaurant services / outdoor catering

• Other composite supplies to be treated as goods or service as per

predominant nature test

• E.g. composite repairs contracts of goods

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Schedule II – Other Issues

TLC LegalAdvocates

• Agreeing to the obligation to refrain from an act or to tolerate an act or a

situation or to do an act

• There must be a contractual binding to do, not to do or tolerate

anything for a consideration like non-compete fees, post-employment

restrictions

• Areas of doubt – notice pay, out-of-court settlements, late delivery

charges, fine for speeding vehicle in factory

• Development of Software –services but sale of Tally Soft ware - goods

• Supply of goods by an unincorporated AOP to its members with

consideration is taxable (7)

• Supply of services – whether not taxable because of mutuality

doctrine. Definition of “Business” covers supply of facilities by

club/association/society to its member19

Schedule II – Other Issues

TLC LegalAdvocates

• Services by an employee to the employer in the course of or in relation to

his employment

• Sale of land and building post OC

• Whether land rights like development rights or long-term lease would

be considered as ‘sale of land’. Bombay High Court in Chheda Housing

held that development rights are in the nature of immovable property.

• Sale of land and building is governed by Transfer of Property Act,

which recognizes ‘transfer’ as a mode and not the sale

• Actionable claim, other than lottery

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Schedule III – Negative List

TLC LegalAdvocates

• Agent means a person who carries on the business of supply or receipt of

goods or services on behalf of others

• Registration

• Agent to take registration as supplier

• Even Principal needs to declare the agent’s premises as his additional place

of business in his registration (S. 2(85))

• Issue – whether a service provider is required to declare details of all his

agents in his registration? e.g. LIC, transporters, Railways, newspaper, MFs

• Taxability – supply to and from agent is taxable (Sch. I)

• Valuation (Rule 3)

• Open market value – Price at which a person (seller or buyer/Principal or

Agent) can buy such goods on the same day or

• 90% of the price at which sale is made by the agent(recipient) on same day 21

Agent (S. 2(5))

TLC LegalAdvocates

• Input Tax Credit (S. 16(2))

• If goods are received by agent on behalf of principal – deemed as

receipt of goods by Principal

• GST on commission amount

• Even though GST would be paid on full sale value by the agent, still he

would be required to pay GST on commission

• Liability of GST (S. 86)

• Joint and several of agent & principal

• In case of failure to pay GST by agent, principal liable

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Agent (S. 2(5))

TLC LegalAdvocates

• Agriculturist means an individual or HUF who undertakes cultivation of

land-

• By own labour or

• By labour of family or

• By servants or hired labour under personal supervision of self or any

family member

• Agriculturist not required to register (S. 23(1)(b))

• Issues:

• Absentee landlord

• Farming by non-individuals/HUFs

• Only cultivation of land is excluded – sericulture, poultry farming,

dairy, hatchery outside agriculturist

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Agriculturist (S. 2(7))

TLC LegalAdvocates

• Composite supply means supply

• Consisting of two or more taxable supplies of goods or services

• Which are naturally bundled

• Supplied in conjunction with each other in ordinary course of business

• One of which is a principal supply

• The said principal supply will be considered as supply for GST purposes (S. 8)

• Principal supply means the supply of goods or services which constitutes the

predominant element of the composite supply and other supplies are ancillary

• E.g.-Supply of goods along with transportation, packing and insurance – supply

of goods

• Air travel along with free meal – supply of air travel service 24

Composite & Mixed Supplies (S. 2(30)& 2 (74))

TLC LegalAdvocates

• Potential controversies:

• In case of separate consideration for different goods and services,

whether composite supply or not

• Primary and secondary packing

• Combo offers like movie with popcorn

• Preferential location charges for a flat

• Supply of pen drive with laptop

• Comprehensive AMC –

• Whether any principal supply?

• If so, which is the principal supply - repair service or supply of goods

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Composite & Mixed Supplies (S. 2(30)& 2 (74))

TLC LegalAdvocates

• Mixed supply means

• two or more individual supplies of goods or services

• Made in conjunction with each other

• For a single price

• Where it is not a composite supply

• E.g. Diwali gift hamper consisting of dry fruits, chocolates, cookies, juices

• Potential controversies - Whether composite or mixed supplies –

• Mobile phones with charger and earphones

• Shampoo free (28% rate) with Hair oil (12% rate) – GST rate 28%

• Biscuits free(12% rate) with Atta(5% rate)

• Backpack given free by travel agent

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Mixed Supplies (S. 2(30)& 2 (74))

TLC LegalAdvocates

E.g. Biscuits(18% rate) supplied free with Juice(12% rate) GST Rate 18%

Suppose separate amount charged for both items and notional value of Rs. 1

charged for biscuits

– Can Dept. challenge value of biscuits saying price is not the sole

consideration ?

- Can price of juice be considered as payment ‘in relation to’ supply of

biscuits

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Mixed Supplies (S. 2(30)& 2 (74))

TLC LegalAdvocates

• Works contract means a contract for building, construction, …, repair, maintenance.. of any immovable property, wherein transfer of property in goods is involved

• Works contract vs. construction services

• Scope of Works contract is wider

• If different rates, construction will still be in 5(b) because specific will override general; despite construction specifically being held as works contract by Supreme Court

• Works contract for movable property – not covered by Definition

• E.g. AMC for ACs, furniture polishing

• Such cases would be covered in composite supply & principal supply to be determined

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Works Contract (S. 2(119))

TLC LegalAdvocates

• Goods (S. 2(52)) –

• every kind of movable property

• money & securities not included

• actionable claim included – but later excluded through an entry in negative

list, except for lottery, betting & gambling

• Services (S. 2(102))-

• Anything other than goods – very wide leading to litigation – can immovable

property be covered ?

• money & securities not included

• Capital goods(S. 2(19))-

• Any goods, which is capitalized in books of A/cs of person claiming ITC

• Used or intended to be used in the course or furtherance of business

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Goods, capital goods and services

TLC LegalAdvocates

• Benefit of Composition Scheme can be availed by a persons whoseaggregate turnover was < Rs. 50 lac in previous F.Y.

• Aggregate turnover means - value of all supplies (taxable supplies, exempt supplies, exports and inter-State supplies) of a person having the same PAN all India basis

• Scheme can not be opted by a taxable person:

• Who make supply of services (restaurant service allowed composition);

• Who makes supply of goods which are not leviable to GST (Petroleum dealer selling Lubricants or kerosene)

• who makes any inter-State outward supplies of goods

• who makes any supply of goods through an electronic commerce operator (sale thru Flip cart)

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Composition Scheme (Sec.10)

TLC LegalAdvocates

• The Composition Scheme has to be availed uniformly in all States by a registered taxable persons

• A taxable person availing the benefit of Composition Scheme cannot:

• Collect any tax from the recipient on supplies

• Avail the benefit of credit of input tax.

• Max Rate for Composition Scheme: 1 % for Manufacturers, 0.5% for Traders, 2.5% for Restaurant Service (these are CGST Rates, SGST to be added for final rate)

• Quarterly Return

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Composition Scheme (S.10)

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QUESTION- ANSWER TIME

Contact details:E-mail: sushil@tlclegal.inTel: 022 – 61708500/400Tel (Dir.): 022- 22823142

TLC LegalAdvocates

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