OCTOBER 06, 2016

By Avinash Poddar, CA

MODEL GST law was placed in the public forum on 14th June 2016. The said document runs into 190 pages and comprises of Model CGST, SGST Act, Schedules (I to IV), GST Valuation (Determination of value of supply of goods and services) Rules 2016 and IGST Act.

As we all are aware that Goods and Services Tax in India in one of the largest tax reforms since Independence. The decision as regards to when the tax shall be levied depends on the taxable event. We need to identify the taxable event first because on that basis only we decide about the leviability of tax.

Position under the Present Laws i.e. the taxable events under the prevalent law are

• Under Service Tax -

Service provided or agreed to be provided by one person to another in the taxable territory.

• Under Central Excise -c

Manufacture or production of goods in India

• Under Customs -

Goods imported into, or exported from, India

• Under VAT/CST

Sale of goods within a state and Sale of goods inter-state, respectively.

Taxable event under proposed Goods & Services Tax Law

Under the GST regime taxable event is supply. Under GST there will be single taxable event and hence all the taxable events discussed above will get replaced. Therefore the term supply becomes very much relevant and important under GST. We need to understand this term very clearly and minutely so that there are lesser chances of mistakes in determination of tax liability and so disputes are also less.

Section 3 of the CGST/SGST Act 2016, which is also applicable to IGST Act as per provisions of Section 2(f), provides the meaning of term supply.

Meaning and scope of supply - Section 3

(1) Supply includes

(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,

(b) importation of service, whether or not for a consideration and whether or not in the course or furtherance of business, and

(c) a supply specified in Schedule I, made or agreed to be made without a consideration.

(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.

(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.

(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—

(i) a supply of goods and not as a supply of services; or (ii) a supply of services and not as a supply of goods; or (iii) neither a supply of goods nor a supply of services.

(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.

Analysis

First of all let us analyse and discuss about the term supply as defined under Section 3 to the extent of clause (a) of sub section (1) and clause (c) of sub section(1) of Section 3.

• One of the major issues that I understand and foresee is, due to the inclusive definition of the term supply there will be room for lot of disputes in future.

• Inclusive definition provides free hand to the trade, professional and department to do interpretation and include those things also which are not included in the definition but which are more or less similar to those included in the definition. This always proves to give rise to disputes. Appropriate example of such case is inclusive definition of term manufacture under Section 2(f) of the Central Excise Act 1944.

• Since under GST the taxable event is supply , it was necessary for the lawmakers to define this term very precisely and exhaustively.

• The possibility of any ambiguity in the definition or explanation of said term should have been avoided to the extent possible.

• As per me, the term supply must have been defined in a very simple and definitive way. And there is requirement also of the same because this term is the most crucial term under GST and being the taxable event is the base for deciding about the taxability.

• Before proceeding further, let us try to understand the manner in which the term supply is defined in the statutes of different countries.

- Under Canadian GST "supply means the provision of property or a service in any way, including sale, transfer, barter, exchange, licence, rental, lease, gift, or other disposition".

- Under Malaysia GST , where GST made applicable with effect from April, 2015, Section 4 thereof defines supply as "subject to subsections (2) and (3), "supply" means all forms of supply, including supply of imported services, done for a consideration and anything which is not a supply of goods but is done for a consideration is a supply of services."

• The above two definitions if we see are exhaustive definition but Model GST law has opted for coming out with an inclusive definition and hence even if something is not mentioned in the statute it can be covered under the meaning and scope of supply.

• Further to this another term which catches eyes is such as . Now when the opening lines are includes all forms of supply then where is the need for adding words such as….Anything that is being supplied will attract GST, simple. Why words such as or examples as barter, exchange, etc. was given. It was of no use.

• Till this it was okay but Section 3 of the Model GST Law moved one step further to this. It provides that even those supplies which are without consideration will be regarded as supply and GST on the same will be applicable. This is specified under clause (c) of sub section (1) of Section 3.

• Schedule I provides a list of matters, which will be treated as supply without consideration. The list is as under:

- 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.But, this will not cover goods sent for job work.

Supply without Consideration - Analysis (food for thought)

• Permanent transfer/disposal of business assets without consideration

This gets taxed even if supplied without consideration. This transaction will be found in a situation where one unit of the same company or same entity transfers to another unit of same entity. Most of the times it will be a B2B transaction. And when one person pays GST the other will take credit so this clause has no additional cost involved. But yes compliance is certainly there.

• Temporary application of Business Assets to a private or non-business use, without consideration

It is usually seen that employees or directors use the assets belonging to office for their personal purpose. Like use of car, use of mobile phone, etc. So basically if we try to understand even where the relation of employer employee is there GST may be made applicable. I still doubt whether this is really the intention and hence we will have to wait and watch.

• Assets retained after deregistration

Business Assets which are retained after deregistration are essentially the inputs and capital goods which remain unutilized or are not consumed in course of supply of goods and/or services. Therefore, one needs to pay GST on the value of such inputs and capital goods. Effectively, it means reversing the Input Tax Credit claimed on such assets. However, assets on which input tax credit is not availed at the time of purchase, for the same were not an eligible inputs or capital goods, payment of GST would be an additional tax burden.

• Supply of goods and/or services by a taxable person to another taxable or non- taxable person in the course or furtherance of business. But, this will not cover goods sent for job work.

- Branch Transfers

After lot of deliberations, discussions, speeches and conferences now all are aware that in GST even the branch transfers will be taxable. The branch supplying will pay the tax and the recipient branch will be eligible to take the credit. Valuation also shall not be an issue. This provision is otherwise revenue neutral on one hand tax is being paid and on the other hand credit being taken. Only issue is requirement of working capital will increase and the funds will get blocked.

- Free supplies on goods and/or services

The general perception is that the free supplies will be separately valued and will get taxed in the hands of the consumer. Under the GST regime nothings comes for free. We will have to include the value of free supplies, either a sample or for any other purpose, in the value of taxable supply. And the onus, however, would be on the taxpayer to prove that the cost of free supplies has already been included in the transaction value and corresponding GST has been discharged.

Section 15(1) pertaining to value of taxable supplies provides for the determination of value of taxable supply which shall be the transaction value i.e. the price actually paid or payable and the price is the sole consideration for such transaction. Also they shall not be related persons. Therefore, in this situation the actual transaction value shall be ZERO and hence the GST also on the same will be zero.

Conclusion:

The sum and substance of this discussion is that the term " supply" should be properly defined and made as exhaustive as possible to avoid potential disputes.