The Goods and Services Tax came into force in India w.e.f. 1st July 2017. This new tax reform subsumed all the then prevalent indirect taxes and simplified the tax structure. Since inception the GST journey have been more of a roller coaster ride where the provisions were amended on day to day basis. In this blog series on Goods and Services Tax (GST), we will try to discuss the basic concepts related to GST in a brief manner.
In order to understand GST in an effective manner, the most important topic to understand is-
- What is the taxable event in GST?
- When does GST becomes applicable?
Taxable event in GST
The taxable event in GST is SUPPLY of goods or services or both. Whenever an event/activity satisfies the conditions of supply, GST becomes applicable.
In the earlier indirect tax regime, whether it was Value Added Tax, Central Sales Tax, Excise Duty or Service Tax, the tax liability was arising at the point of sale, manufacture, rendering of services etc. But with GST being implemented, the earlier concept of sale is no more relevant, the tax liability will arise whenever there is Supply.
Definition of Supply
The Constitution of India defines “goods and services tax” as any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption.
Section 7 of The Central Goods and Services Tax Act, 2017 defines supply. The definition of supply is an inclusive definition and is very broad in nature. As per the Act, the expression “supply” includes:
- all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
- import of services for a consideration whether or not in the course or furtherance of business; and
- the activities specified in Schedule I, made or agreed to be made without a consideration;
Supply not only constitutes sale, transfer but it also includes advance payments received from customers for business purpose. This concept of tax on advance receipts was present in service tax on services but was not applicable in case of goods.
Goods or Services under GST
When certain activities or transactions constitute supply then they shall be treated either as supply of goods or supply of services. The GST Act defines goods and services as:
Goods means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply.
Services means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
In case of any event of supply apart from the above definition we shall also refer to Schedule II of The Central Goods and Services Tax Act, 2017. This schedule specifies certain activities or transactions which are to be specifically treated as supply of goods or supply of services.
Note: Schedule II of The Central Goods and Services Tax Act, 2017 will be discussed in the next blog.
Elements of Supply:
The following are the most important elements that constitute supply:
Supply = sale, transfer etc. of goods or services + consideration + furtherance of business
However, there are special circumstances as mentioned in Schedule I, where an activity or transaction will be regarded as supply even if it is executed without any consideration or there was no furtherance of business.
Activities or Transactions on which GST is not applicable
Although the definition of supply is very broad in nature, but still there are certain activities or transactions which are out of the ambit of supply i.e., GST will not be applicable in the following cases:
- Activities or transaction which are specified in Schedule III.
- Activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.
Exception to the rule of consideration
Schedule I of The Central Goods and Services Tax Act, 2017 schedule provides for activities or transactions to be treated as supply even if made without consideration:
Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.
Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business:
Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.
Supply of goods—
(a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or
(b) by an agent to his principal where the agent undertakes to receive such good on behalf of the principal.
Import of services by a person from a related person or from any of his other establishments outside India, in the course or furtherance of business.
Schedule III of The Central Goods and Services Tax Act, 2017
This schedule provides for activities or transaction which are out of the scope of supply:
Services by an employee to the employer in the course of or in relation to his employment.
Services by any court or Tribunal established under any law for the time being in force.
(a) the functions performed by the Members of Parliament, Members of State Legislature, Members of Panchayats, Members of Municipalities and Members of other local authorities;
(b) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or
(c) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or a State Government or local authority and who is not deemed as an employee before the commencement of this clause.
Services of funeral, burial, crematorium or mortuary including transportation of the deceased.
Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.
Actionable claims, other than lottery, betting and gambling.
Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India.
Exception to the rule of furtherance of business
GST is essentially a tax on commercial transactions which means GST will be applicable only on those transactions which are executed in the course of furtherance of business. However there is an exception to this rule, i.e., import of services for a consideration. Import of services for consideration, even if not in the course -or furtherance of business are liable to GST.
Thus from the aforesaid discuss it is clear that the scope of supply is very wide. Each and every activity somewhere or the other constitutes supply. Further, though GST is a 3-year-old tax reform now but there are still many controversial issues related to its scope. In our blog series, we will try to give you an overview of basics of GST and try to share our view/knowledge on the same.