Meaning of  Supply :

In general, supply for GST purposes covers all forms of supply where goods and/or services are supplied in return for a consideration. Any transaction involving supply of goods and/or services without consideration is not a supply unless it is deemed to be a supply under law. Drawing upon the international experience, the following criteria have been identified to distinguish a transaction as supply on which GST is levied;

(i) supply of goods and / or services

(ii) supply is for a consideration

(iii) supply is made in the course or furtherance of business

(iv) supply is made in the taxable territory

(v) supply is a taxable supply, and

(vi) supply is by a taxable person.

Under certain circumstances, there can be a supply under GST even when one or more of the above criteria are not satisfied. For instance, in free of charge supply, there could be no consideration or a supply may not be in the course or furtherance of business. Such transactions could be deemed by law to be a supply for GST purposes. There may also be instances where a transaction is kept out of GST despite the existence of the above criteria e.g. services rendered by an employee to his employer in the course of employment, transfer of business as a going concern.

(i). Supply of goods and/or services;

As GST is levied on supply of goods and/or services, classification of a transaction as a supply of goods or supply of services becomes essential. A single transaction may consist of different elements of supplies that may be taxed at different rates – a portion that is taxed at standard rate and another at lower rate, or the time and place of supply provisions may apply differently for different elements of such supply. Therefore, it becomes necessary to understand what constitutes a supply of goods or supply of services.

Supply of goods is not defined in the Model GST Law. Generally, supply of goods mean the transfer of the right to dispose of the goods as owner. Ordinarily, this would mean the transfer of both title and possession ofthe goods. Transfer of goods may be effected in any of the following manner:

• Transfer of title as well as possession – In a simple sale, title as well as possession is transferred such as over the counter sale of a drug or a readymade garment;
• Transfer of possession but not title –sale on approval basis or hire purchase;
• Possession of goods is transferred but title is retained – when goods are let out on hire or lease, the transaction will be treated as supply of service.

Transfer of title to the goods may be effected with immediate effect or at a future date. Instances of immediate transfer of title include, a contract of sale, exchange or barter etc. Instances of future sale include hire purchase contract, an agreement for the sale of goods where the seller retains ownership until the goods are fully paid for, or sometimes until everything owed by the customer has been paid, conditional sale, supply on approval basis etc.

Supply of service is not specifically defined in the Model GST Law. Internationally, supply of services is defined as any supply that is not a supply of goods. A supply of service is said to be made when a person does something, or agrees to do something for a consideration. A supply of service is also said to be made when a person agrees to refrain from doing something or gives up a right for consideration which also includes grant, assignment or surrender of any right. In some situations, supply involving goods may be treated as the service. Lease/hire of goods/immovable property, transfer/sale of undivided share in title of goods, temporary application of business assets for non-business use are treated as supply of services.

(ii).Supply for a consideration;

One of the essential conditions for the supply of goods and/or services to fall within the ambit of GST is that a supply is made for a consideration. For GST purposes, consideration does not refer only to money. It covers anything which might be possibly done, given or made in exchange for something else. For example, it might be something exchanged in a barter arrangement, such as in a part exchange, or where a service is performed in return for another service or it may simply be a condition imposed upon the making of the supply.A consideration  may be monetary, non-monetary or a combination of both but it must be capable of being expressed in monetary terms. There must be a direct link between the supply and the consideration. In order to qualify as consideration for a supply, there must be at least two parties. A direct link is established between the supply made and the consideration given. A consideration need not always flow from the recipient of the supply. It could be made by a third person. Consideration refers to ‘reciprocal performance’ capable of being expressed in monetary terms.

The Model GST Law defines consideration in relation to the supply of goods and/or services to any person to include (a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods and/or services, whether by the said person or by any other person; (b) the monetary value of any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of goods and/or services, whether by the said person or by any other person. However, a deposit whether refundable or not, given in respect of the supply of goods and/or services shall not be considered as payment made for the supply unless the supplier applies the deposit as consideration for the supply.

Certain transactions made without considerations (free supply of goods and services) are deemed to be supply for GST purposes. For example, the permanent transfer /disposal of business assets, temporary application of business assets to a private or non-business needs, services put to a private or non-business use, self-supply of goods or services, assets retained after de-registration and a supply made by the same PAN based entity across different States without consideration (stock/branch transfer) shall be deemed to be taxable supplies, though no consideration may be involved.

 

(iii).Supply made in the course or furtherance of business;

A transaction made in the course or furtherance of business, alone will be treatedas a supply under GST. As the objective of GST is to tax the value addition, it would not be appropriate to tax, for instance, the sale of a car by an individual who is not in the business of supplying cars. Such transaction may otherwise be treated as a supply if the concept of business is not brought in. There is no exhaustive definition or test for  determining whether an activity is in the course or furtherance of business. Internationally, the business test has emerged through judicial decisions. Generally, whether an activity carried by a taxable person constitutes a business or not is determined by considering the whole of the activities carried on by him. If these activities are predominately concerned with the making of taxable supplies to customers for a consideration, it has to be held that the taxable person is in the business of making taxable supplies, and the taxable supplies which he makes are supplies made in the course of carrying on that business, especially if the supplies are of a kind which are made commercially by those who seek to profit from them.

However, there is no presumption that activities carried on by a taxable person cannot be business if the profit motive is absent. GST is not a tax on profit or income but on taxable supplies by taxable persons. Whether an activity is in the course of business or not is dependent on the business test. This test ensures that occasional supplies, even if made for consideration, will not be subjected to GST. For example, when a household makes a one-time sale of some paintings, if it is not in the business of selling paintings, the sale will not be a supply for GST purposes. However, a painter who sells his paintings on regular basis, even infrequently, will be liable to pay GST since he is in the business of selling paintings. The ‘business test’ requires examination of the following;

1. Is the activity, a serious undertaking earnestly pursued?

2. Is the activity is pursued with reasonable or recognisable continuity?

3. Is the activity conducted in a regular manner based on sound and recognised business principles?

4. Is the activity predominantly concerned with the making of taxable supply for consideration/profit motive?

Section 2(17) of the Model GST Law defines ‘business’ to include (a) any trade, commerce, manufacture, profession, vocation or any other similar activity, whether or not it is for a pecuniary benefit; (b) any transaction in connection with or incidental or ancillary to (a) above; (c) any transaction in the nature of (a) above, whether or not there is volume, frequency, continuity or regularity of such transaction; (d) supply or acquisition of goods including capital assets and services in connection with commencement or closure of business; (e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members, as the case may be; (f) admission, for a consideration, of persons to any premises; and (g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;

Certain supplies listed under Schedule I of the Model GST law which are made not in the course or furtherance of business are deemed as taxable supply.

(iv). Supply made in the taxable territory;

GST being a destination based consumption tax, the GST law must define the jurisdictional limit of the tax under which a transaction is proposed to be taxed. Under this principle, imports are taxed and exports are zero rated. Importation of services are taxed under the reverse charge mechanism at the hands of the recipient of the supplier . To zero rate exports, the exports are treated as taxable supply made within the country to enable an exporter to claim the input tax credit. Place of supply determines whether a supply is made within or outside the country/within or outside the state. The scope of supplies in India, whether intra or inter-State supplies are determined by the place of supply provisions. As place of supply for importof goods will not be India, GST on imports  is proposed to be levied through a specific provision in the Customs Act.

(v). Supply – a taxable supply;

Taxable supply means supply of goods and/or services that are subjected to GST. Supplies which are exempt or subjected to NIL rate of tax will not be treated as taxable supply. In the GST regime, exemptions may be provided to the specified goods or services or to a specified category of persons / entities making supply and such supplies may be treated as out of scope of GST supply. For the purpose of GST, zero rated supplies will not be treated as exempted supplies.

(vi). Supply – by a taxable person;

For GST purposes, supply is reckoned only in the context of a taxable person. A taxable person is defined in the Model GST Law to mean a person who carries on any business at any place in India/State who is registered or required to be registered under Schedule III. Such taxable person includes a public authority, a department of central or state government subject to specified exclusions. Person whose aggregate turnover during a year is below the prescribed threshold or persons making only exempted supplies may not be considered as a taxable person; however persons making interstate supplies, persons liable to pay tax under reverse charge are required to obtain registration irrespective of their turnover.