Concept of Supply -GST CS Executive Income Tax

Concept of Supply

Under GST, Supply is point of taxation/taxable event. The term supply is defined under Section 7 of CGST Act, 2017.

Scope of Supply (Section 7)
What comes under the scope of Supply? (Subsection 1)

“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; and
  • the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

Deemed Supply of Goods or Supply of Services (Subsection 1A)
Where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.

What is outside the scope of Supply? (Subsection 2)
Notwithstanding anything contained in sub-section (1),––

  • activities or transactions specified in Schedule III; or
  • such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council,

shall be treated neither as a supply of goods nor a supply of services.

Transaction which are either supply of goods or supply of services (Subsection 3)
Subject to the provisions of sub-sections (1), (1A) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as—
(a) a supply of goods and not as a supply of services; or
(b) a supply of services and not as a supply of goods.

Points to Note:

Supplies covered under Section 7(1)(a)
Every form of supply whether related to goods or services or both in whatever form

  • made or agreed to be made
  • for consideration
  • in the course or furtherance of business

These 3 conditions are mandatory for covering any supply under clause (a)

Such supply may be in the form of sale, transfer, barter, exchange, licence, rental, lease, disposal or in any other form whatsoever by whatever name.

Under Section 7(1)(a), even ‘advance’ paid for future supply (i.e. supply agreed to be made in future) of goods/ services/both is also liable to GST. 

Supplies covered under Section 7(1)(b)
Import of services (here goods are not covered)

  • whether or not in the course or furtherance of business
  • for a consideration

Here also, consideration is an essential part of the transaction.
Thus, if any service is imported in India by any person for a consideration, such service shall be covered under the scope of supply even if such service is for personal purpose.

Supplies covered under Section 7(1)(c) – Here consideration is not the essential element
Activities specified in Schedule I, made or agreed to be made without a consideration. These activities are:

  1. Permanent transfer or disposal of business assets where input tax credit has been availed on such assets
  2. Supply of goods/services/ both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business.
    • But gifts not exceeding Rs. 50,000 in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.
  3. Supply of goods
    1. by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal or
    2. by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal
  4. Import of services by a taxable person
    • from a related person or
    • from any of his other establishments outside India
      in the course or furtherance of business.

Meaning of Related Person
According to Explanation to Section 15(5) of CGST Act, 2017, persons shall be deemed to be “related persons” if –

  1. such persons are officers or directors of one another’s businesses;
  2. such persons are legally recognised partners in business;
  3. such persons are employer and employee;
  4. any person directly or indirectly owns, controls or holds 25% or more of the outstanding voting stock or shares of both of them;
  5. one of them directly or indirectly controls the other;
  6. both of them are directly or indirectly controlled by a third person;
  7. together they directly or indirectly control a third person; or
  8. they are members of the same family;

Further, persons who are associated in the business of one another in that one is the

  • sole agent or
  • sole distributor or
  • sole concessionaire, howsoever described,

of the other, shall be deemed to be related.

Thus, supply of goods/services/ both between related persons or between distinct persons is taxable even if such supply is made without consideration.

Therefore, inter-state stock transfers, branch transfers or consignment sales shall be liable to IGST even if no consideration is involved.

Meaning of Business Vertical [Section 2(18) of CGST Act, 2017]
“Business Vertical” means a distinguishable component of an enterprise that is engaged in the supply of individual goods or services or a group of related goods or services which is subject to risks and returns that are different from those of the other business verticals.

 Meaning of Distinct Person [Section 25(4) of CGST Act, 2017]
According to Section 25(4) of CGST Act, 2017, a person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.

Supplies covered under Section 7(1A) – Activities/Transactions specified in Schedule II

Activities

Description

Nature of supply

Transfer

1. any transfer of the title in goods;

Supply of goods

 2. any transfer of right in goods or of undivided share in goods without the transfer of title thereof;

Supply of services

3. any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed. (Supply of goods on hire-purchase)

Supply of goods

Land and Building

1. any lease, tenancy, easement, licence to occupy land;

Supply of services

2.  any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly;

Supply of services

Treatment or process

Any treatment or process which is applied to another person’s goods; (Job work)

Supply of services

Transfer of business assets

1.where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration

Supply of goods

2. where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration

Supply of services

3. where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—

  • the business is transferred as a going concern to another person; or
  • the business is carried on by a personal representative who is deemed to be a taxable person.

Supply of goods

Supply of services

  • renting of immovable property;

Supply of services

  • construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

Supply of services

  •  temporary transfer or permitting the use or enjoyment of any intellectual property right;

Supply of services

  • development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of Information Technology software;

Supply of services

  •  agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and

Supply of services

  •  transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration.

Supply of services

Composite supply

The following composite supplies shall be treated as a supply of services, namely:—

(a) works contract as defined in clause (119) of section 2; and

(b) supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.

According to Section 2(119), “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;

Supply of services

Supply of Goods

Supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.

Supply of Goods

Activities which are outside the scope of supply – Schedule III to CGAST Act, 2017

  1. Services by an employee to the employer in the course of or in relation to his employment.
  2. Services by any court or Tribunal established under any law for the time being in force. (The term “court” includes District Court, High Court and Supreme Court.)
  3.  
  • the functions performed by the Members of Parliament, Members of State Legislature, Members of Panchayats, Members of Municipalities and Members of other local authorities;
  • the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or
  • 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.
  1. Services of funeral, burial, crematorium or mortuary including transportation of the deceased.
  2. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.
  3. Actionable claims, other than lottery, betting and gambling.
  4. 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.
  5. Supply of warehoused goods to any person before clearance for home consumption.
  6. Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption

Further as per Section 7(2)(b), such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.

Here Central Government has notified the activities in relation to a function entrusted to a Panchayat under Article 243G of Constitution of India.

Composite and Mixed Supply

Composite Supply [Section 2(30)]
“Composite Supply” is a supply

  • made by a taxable person
  • to a recipient
  • consisting of two or more taxable supplies of goods or services or both, or any combination thereof,
    • which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Examples of Composite Supply:

  • Remote and other accessories with Television
  • Food and carriage of luggage with travelling ticket
  • Hotel room with breakfast
  • Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply;

The composite supply will be charged at the rate which is applicable to the principal supply.

Mixed Supply [Section 2(74)]
“Mixed Supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply.

Thus, mixed supply means supply of two or more individual goods or services or both which are not naturally bundled.

In case of mixed supply, the good or service which attract highest tax rate shall be considered as principal supply and complete value shall be charged at that highest rate.
Examples of Mixed Supply:

  • A gift packet containing various chocolates, sweets, drinks etc.
  • 200 gm Hair serum with 1 liter Hair Shampoo

What is Reverse Charge Mechanism?
Generally, supplier of goods/services/both is liable to pay tax to the government. But under Reverse charge the recipient of the goods and/or services is liable to pay GST instead of the supplier.

Reverse charge is applicable under Section 9(3)/(4) in following cases:

  • Supply from an Unregistered dealer to a Registered dealer
  • Services through an e-commerce operator
  • Supply of certain goods and services specified by CBEC

Composition Scheme

It is not feasible for small business to bear heavy compliances cost. The intention of government is very clear that the law should not become burden for tax payers. Thus, to make things simple and to reduce compliances, government introduced Composition Scheme for small tax payers whose aggregate annual turnover is less than Rs. 1.5 Crore.

For the states namely (i) Arunachal Pradesh (ii) Manipur, (iii) Meghalaya, (iv) Mizoram, (v) Nagaland, (vi) Sikkim, (vii)Tripura, (viii) Uttarakhand aggregate turnover limit shall be Rs. 75 lakh.

Under this scheme, a registered person is required to pay GST at a very less rate.

Tax Rates and Threshold Limits under Composite Scheme [Section 10(1) of CGST Act, 2017[]
According to Section 10(1) of CGST Act, 2017, notwithstanding anything to the contrary contained in this Act but subject to the provisions of section 9(3)/(4) (taxation on reverse charge basis),

  • a registered person, whose aggregate turnover in the preceding financial year did not exceed Rs. 50 lakh rupees,

may opt to pay, in lieu of the tax payable by him, an amount calculated at such rate as may be prescribed, but not exceeding,––

Registered Person

CGST Tax Rates

SGST/UTGST Rates

Total

Manufacturers

1% of the turnover in State or turnover in UT

1% of the turnover in State or turnover in UT

2%

Persons engaged in making supplies, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration. (Restaurant, Caterers etc.)

2.5% of the turnover in State or turnover in UT

2.5% of the turnover in State or turnover in UT

5%

Other Suppliers

0.5% of the turnover in State or turnover in UT

0.5% of the turnover in State or turnover in UT

1%

Benefit for marginal supply of services along with the supply of goods or restaurant services. Fundamentally, the composition scheme can be availed in respect of goods and only one service namely, restaurant service. However, there are cases where a manufacturer/ trader is also engaged in supply of services other than restaurant service though the percentage of such supply of services is very small as compared to the supplies of goods.

With a view to enable such taxpayers to avail of the benefit of composition scheme, second proviso to section 10(1) permits marginal supply of services [other than restaurant services] for a specified value along with the supply of goods and/or restaurant service, as the case may be. This specified value is the value not exceeding:

  • 10% of the turnover in a State/Union territory in the preceding financial year; or
  • 5 Lacs

whichever is higher.

For example: Mr. Ram is engaged in supply of goods. His aggregate turnover in preceding FY is Rs. 80 lakh. Since his aggregate turnover in the preceding FY does not exceed Rs. 1.5 crore, he is eligible for composition scheme in current FY. Further, in current FY, he can supply services [other than restaurant services] upto a value not exceeding:

(a) 10% of Rs. 80 Lacs i.e. Rs. 8 Lacs  or

(b) Rs. 5 Lacs

whichever is higher.

Thus, he can supply services upto a value of Rs. 8 lakh in current FY. If the value of services supplied exceeds Rs. 8 lakh, he becomes ineligible for the composition scheme and has to opt out of the composition scheme.

Meaning of Aggregate Turnover [Section 2(6)]
“Aggregate turnover” means the aggregate value of all

  • taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis),
  • exempt supplies,
  • exports of goods or services or both and
  • inter-State supplies

of persons having the same Permanent Account Number, to be computed on all India basis but excludes

  • central tax,
  • State tax,
  • Union territory tax,
  • integrated tax and
  • cess;

Who can opt for Composition Scheme? [Section 10(2)]|
The registered person, whose aggregate turnover in the preceding financial year does not exceed Rs. 1.5 Crore, shall be eligible to opt under sub-section (1), if:—

  • he is not engaged in the supply of services (other than supplies referred to in clause (b) of paragraph 6 of Schedule II);
  • he is not engaged in making any supply of goods which are not leviable to tax under this Act (i.e. petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas, aviation turbine fuel and alcohol for human consumption);
  • he is not engaged in making any inter-State outward supplies of goods or services;
  • he is not engaged in making any supply of goods or services through an electronic commerce operator who is required to collect tax at source under section 52;
  • he is not a manufacturer of such goods as may be notified by the Government on the recommendations of the Council; and
  • he is neither a casual taxable person nor a non-resident taxable person

According to the notification of Government, manufacturer of following goods shall not be eligible for composition scheme:

  • ice-cream and other edible ice
  • Tobacco and Tobacco substitutes
  • Pan Masala
  • Aerated Waters

Note:

  • Where more than one registered persons are having the same Permanent Account Number (issued under the Income-tax Act, 1961), the registered person shall not be eligible to opt for the scheme under sub-section (1) unless all such registered persons opt to pay tax under that sub-section.

Further, according to Rule 5 of CGST Rules, 2017, the person exercising the option to pay tax under section 10 shall comply with the following conditions, namely:

  • he is neither a casual taxable person nor a non-resident taxable person;
  • the goods held in stock by him on the appointed day have not been purchased in the course of inter-State trade or commerce or imported from a place outside India or received from his branch situated outside the State or from his agent or principal outside the State, where the option is exercised under sub-rule (1) of rule 3; (this is not relevant now – Rule 3(1) talks about provisional registration)
  • the goods held in stock by him have not been purchased from an unregistered supplier and where purchased, he pays the tax under sub-section (4) of section 9 (on reverse charge basis);
  • he shall pay tax under sub-section (3) or sub-section (4) of section 9 on inward supply of goods or services or both;
  • he was not engaged in the manufacture of goods as notified under clause (e) of sub-section (2) of section 10, during the preceding financial year (i.e. ice-cream and other edible ice, Tobacco and Tobacco substitutes and Pan Masala);
  • he shall mention the words “composition taxable person, not eligible to collect tax on supplies” at the top of the bill of supply issued by him; and
  • he shall mention the words “composition taxable person” on every notice or signboard displayed at a prominent place at his principal place of business and at every additional place or places of business.

Who are not eligible to opt Composition Scheme?|
According to Section 10(2) read with Rule 5(1) of CGST Rules, following persons are not eligible to opt Composition Scheme:

  • Service Suppliers [except persons engaged in making supplies, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.]
  • Supplier of goods which are not leviable to GST
  • Suppliers of inter-state outwards supplies
  • Suppliers of goods through electronic commerce operator
  • Manufacturer of ice-cream and other edible ice, Tobacco and Tobacco substitutes and Pan Masala
  • A casual taxable person nor a non-resident taxable person

Registration under Composition Scheme (Rule 3)

  • In case of New Registration under GST (Sub-Rule 2): Every person who applies for registration under GST may give an option to pay tax under section 10 in Part B of FORM GST REG-01, which shall be considered as an intimation to pay tax under the Composition Scheme.
  • In case of switchover from normal GST rates to Composition Scheme (Sub-Rule 3): Any registered person who opts to pay tax under section 10 shall electronically file an intimation in FORM GST CMP-02, duly signed or verified through electronic verification code, on the common portal, prior to the commencement of the financial year for which the option to pay tax under the aforesaid section is exercised and shall furnish the statement in FORM GST ITC-03 in accordance with the provisions of sub-rule (4) of rule 44 within a period of 60 days from the commencement of the relevant financial year.

Lapse of option of Composition Scheme [Section 10(3) read with Rule 6 of CGST Rules]
The option availed of by a registered person under sub-section (1) shall lapse with effect from the day on which his aggregate turnover during a financial year exceeds the limit specified under sub-section (1) i.e. Rs. 1.5 Crore.
According to Rule 6(3), the registered person who intends to withdraw from the composition scheme shall, before the date of such withdrawal, file an application in FORM GST CMP-04, duly signed or verified through electronic verification code, electronically on the common portal.

Revocation of permission under Composition Scheme [Rule 6(4)/(5)]
Where the proper officer has reasons to believe that the registered person was not eligible to pay tax under section 10 or has contravened the provisions of the Act or provisions of this Chapter, he may issue a notice to such person in FORM GST CMP-05 to show cause within 15 days of the receipt of such notice as to why the option to pay tax under section 10 shall not be denied.

Upon receipt of the reply to the show cause notice from the registered person in FORM GST CMP-06, the proper officer shall issue an order in FORM GST CMP-07 within a period of 30 days of the receipt of such reply, either accepting the reply, or denying the option to pay tax under section 10 from the date of the option or from the date of the event concerning such contravention, as the case may be.

Note: A person registered under Composition Scheme

  • cannot claim any ITC
  • cannot issue tax invoice (means can’t collect tax from consumers)

 

Form

Description

Due Date

1

GST CMP-01

Intimation to pay tax under section 10 (Only for persons registered under the existing law migrating on the appointed day)

Prior to appointed date or within 30 days of the appointed date or such further period as may be extended by the Commissioner in this behalf.

2

GST CMP-02

Intimation to pay tax under section 10 (For persons registered under the Act)

Prior to commencement of financial year for which the scheme is opted for

3

GST CMP-03

Intimation of details of stock and inward supplies from unregistered person

Within 90 days of exercise of option

4

GST CMP-04

Intimation/Application for withdrawal from composition scheme

Within 7days of occurrence of event

5

GST CMP-05

Show cause notice on contravention of rules or act by proper officer

On contravention

6

GST CMP-06

Reply to the notice to show cause

Within 15 days from service of such Notice

7

GST CMP-07

Order for acceptance / rejection of reply to show cause notice

Within 30 days

New scheme of composition is contained in Notification No. 2/2019 CT (R) dated 07.03.2019.
As we have already seen that primarily, the composition scheme is available in respect of goods and only one service namely, restaurant service. However, a person engaged exclusively in supply of services other than restaurant service is not eligible for the composition scheme.

In order to provide benefit to such suppliers, a scheme to pay tax at the concessional rate has been formulated primarily for small service providers like salon sylist, tailors etc. who are not otherwise eligible for composition scheme.

This notification provides an option to a registered person whose aggregate turnover in the preceding financial year is upto Rs. 50 Lacs and who is not eligible to pay tax under composition scheme, to pay tax @ 6% on the first supplies of goods or services or both upto an aggregate turnover of Rs. 50 Lacs made on or after the 1st day of April in any financial year subject to specified conditions which are primarily same as the conditions for availing the composition scheme.

In computing aggregate turnover in order to determine eligibility of a registered person to pay tax under any of the composition schemes the value of supply of exempt services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount, shall not be taken into account.

Once the turnover breaches the threshold, the composition levy is switched off and the normal levy is applicable.

Exemptions under GST

Power to grant exemption from tax (Section 11 of CGST Act)

General Exemptions
Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by notification, exempt generally, either absolutely or subject to such conditions as may be specified therein, goods or services or both of any specified description from the whole or any part of the tax leviable thereon with effect from such date as may be specified in such notification.

Specific/Special Exemptions
Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by special order in each case, under circumstances of an exceptional nature to be stated in such order, exempt from payment of tax any goods or services or both on which tax is leviable.

Difference b/w General Exemptions and Specific Exemptions

GENERAL EXEMPTION SECTION 11(1)

EXEMPTION BY SPECIAL ORDER SECTION 11(2)

This is granted by a notification

This is granted by a special order

This is goods/ services specific. Any supplier supplying these notified goods or services can enjoy the exemption

This is person specific and purpose specific. The goods are generally chargeable but exempted in special circumstances and hence not available to all persons generally

It may be absolute or conditional. If absolute, the supplier has to avail it and he can collect tax only at effective rates.

No such distinction

 

It may be partial or total

It is always total

Some of the key goods/services exempted under GST are:

  • Unbranded atta / besan / maida
  • Milk
  • Eggs
  • Curd
  •  Fresh vegetables
  • Health care &
  •  Education
  • Services by the Government (except Post Office, transport of goods / passengers etc.)
  • Services by RBI
  • Services by Employees’ State Insurance Corporation (ESIC)
  • Services by Employees’ Provident Fund Organisation (EPFO)
  •  Services by Insurance Regulatory and Development Authority (IRDA)
  • Securities and Exchange Board of India (SEBI)

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