FEBRUARY 14, 2018

By Shubham Vijay

SUPPLY, which is the taxable event in GST has been inclusively defined so as to cover all forms of supply 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. Therefore, presence of consideration is necessary so as to qualify as supply. The only exception is Schedule I which considers activities mentioned therein as supply even if same are made without consideration. The term "supply" as defined in the Act also includes "activities to be treated as supply of goods or supply of services" as referred to in Schedule II.

It is a matter of common knowledge that pre-GST indirect tax regime was full of disputes relating to state/centre's power to levy taxes on a particular transaction. Courts across the country have heard such disputes on issues like whether software is goods or service, whether works contract involves a service element or not, whether right to use goods attracts VAT or not, whether service tax can be levied on restaurant services or not, etc. Both Central and State government were taxing such transactions by deeming such transactions as services and goods respectively.

GST being a tax levied concurrently by both Central and States' Government, helped in overcoming the problem of double taxation on such transactions. Further, Schedule II of the CGST Act ("Act") has specifically declared many of these activities either as goods or service.

We can see from the above table that Schedule II is a welcome move and it has put to rest many controversies relating to treatment of various activities as goods or services. However, Schedule II has also created further problems which has far reaching implications.

Under GST, Schedule II has been included in the definition of supply. This is a deviation from the Model GST Law, where Schedule II was not included in the definition of supply and the section defining supply only provided that the Schedule II shall apply for determining what is, or is to be treated as a supply of goods or a supply of services.

The implication of the same is that now Schedule II may also create taxability in addition to the specifying treatment of activities specified therein. Further, condition of consideration for qualifying as supply may not apply to Schedule II as well.

Clause 4(a) of Schedule II considers transfer or disposal of business assets whether or not for a consideration, as supply of goods. Similarly, Clause 4(b) of the Schedule II considers private use of business assets or use for any purpose other than a purpose of the business, whether or not for a consideration, as supply of service.

It can be seen that Schedule II considers transfer or disposal of business assets whether or not for a consideration, as supply of goods. However, Schedule I only treats "permanent transfer or disposal of business assets where input tax credit has been availed on such assets" as supply. What is surprising is that Schedule II istreating disposal/transfer of business without consideration as supply even if input tax credit has not been availed on such assets. If the intention is to tax such transaction as well, then why it was not covered by Schedule I itself in the first place.

Further, Schedule II also considers private use of business assets or use for any purpose other than a purpose of the business, whether or not for a consideration, as supply of service. If such activity is to be treated as a supply, then why there is a requirement to reverse input tax credit on private use of business assets (rules 42/43 of CGST Rules, 2017 refers). The requirement of reversing input tax credit on private use of business assets, itself shows that intention is not to tax such activity separately.

In the view of the author, the purpose of Schedule II was only to classify a particular activity as goods or service and not to make something as supply which is not a supply otherwise. Further, if Schedule II treats something as supply without consideration then what will be the relevance of having Schedule I in the Act. It seems that the purpose of inclusion of Schedule II in the definition of supply, is only to ensure taxability in the manner specified in Schedule II and not to create taxability on its own.

Nevertheless, considering inclusion of Schedule II in the definition of supply, disputes regarding taxability of above-mentioned activities are possible, if not certain.

(The author is an Associate with Lakshmi kumaran & Sridharan, Gurgaon and the views expressed are strictly personal.)