Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

[Section 7(1)(c)]- Activities specified in Schedule-I, treated as Supply of Goods or Services under GST even if made without Consideration

As per Schedule I of the CGST Act, the following activities are to be treated as supply even if made without  consideration:

[Section 7(1)(c)]- Activities specified in Schedule-I,  treated as Supply of Goods or Services under GST even if made without Consideration
[Section 7(1)(c)]- Activities specified in Schedule-I, treated as Supply of Goods or Services under GST even if made without Consideration

(1) Permanent Transfer or Disposal of Business Assets where Input Tax Credit has been availed on such  Assets under GST:

Any kind of disposal or transfer of business assets made by an entity on permanent basis even though  without consideration shall be treated as supply. This clause is wide enough to cover all transfer of  business assets for nil consideration whether such transfer is from

— holding to subsidiary company,

— business use to personal use or for the use of any other person.

However, it is important to note that this provision would apply if input tax credit has been availed on  such assets.

  • The above provision shall not apply if the asset is not permanently transferred.
  • Where a business asset, on which ITC is availed, is completely destroyed by fire; it shall also be treated as supply and liable to GST.

Examples 

(i)         A dealer of air-conditioners, who has availed input tax credit on air-conditioners, permanently  transfers an air conditioner from his stock-in-trade, for personal use at his residence. Such  transaction though without a consideration shall constitute supply and be liable to GST, as it is a  permanent transfer of air-conditioner for his personal use.

(ii)        R, a supplier of professional services, purchased Desktop Computers of value Rs. 3,00,000 on  1.7.2018 and paid IGST amounting to Rs. 84,000 thereon. He availed ITC of Rs. 84,000 in his books  on the same day.

Now, suppose, after 4 years of using the computers, he wants to donate such  computers to a nearby Charitable Educational Institution when their fair market value is Rs.50,000. In  such case, R shall be liable to pay an amount under GST equivalent to:

(a)        the input tax credit availed on the said computers as reduced by the input tax credit attributable to  4 years for which asset has been used in business

Input credit availed at the time of purchase of computers  = Rs. 84,000
Useful life of the computer (See note below) 5 years
Unused period 1 years
Therefore, GST amount payable (Rs. 84,000 × 1/5) Rs. 16,800

or

(b)        the tax payable on the fair market value of such capital goods as determined under section 15, i.e.  50000 × 28% = Rs. 14,000.

whichever is higher. 

Thus, R shall be liable to pay GST amounting to Rs. 16,800 on donation of such computers.

Note:

Useful life of Capital Goods has been deemed as 5 years by Rule 44 of CGST Rules, 2017 for the  purpose of above calculation.

(2) Supply between ‘Related Persons’ or ‘Distinct Persons’ under GST

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.

However, 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.

Meaning of term ‘Related Persons’ [Clause (a) Explanation to Section 15(5) of the CGST Act, 2017]

Persons shall be deemed to be “related persons’’ if
(i) Such persons are officers or directors of one  another’s businesses; (ii) Such persons are legally recognised partners  in business;
(iii)Such persons are employer and employee; (iv) Any person directly or indirectly owns,  controls or holds 25% or more of the  outstanding voting stock or shares of both of  them;
(v) One of them directly or indirectly controls the  other; (vi) Both of them are directly or indirectly  controlled by a third person;
(vii) Together they directly or indirectly  control a third person; or; (viii) They are members of the same family

Meaning of family [Section 2(49)]: “Family”  means,—

(i) the spouse and children of the person, and

(ii) the parents, grand-parents, brothers and sisters  of the person if they are wholly or mainly  dependent on the said person;

1. 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.  [Clause (b) of the Explanation to Section 15(5) of the CGST Act, 2017]

Meaning of term Distinct Persons [Section 25(4)]:

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.

Thus, supply of goods or services or both between related person or between distinct persons in the  course or furtherance of business shall be treated as supply even if there is no consideration.

Self supplies are also taxable under GST: Inter-state self-supplies such as—

— stock transfers,

— branch transfers or

— consignment

sales  shall be taxable under IGST, even though such transactions may not involve payment of consideration.

Every supplier is liable to register under the GST law in the State or Union territory from where he makes  a taxable supply of goods or services or both in terms of section 22 of the CGST Act. However, intrastate self-supplies are not taxable. But, if the registration within the same State is separately taken for  each business vertical then stock transfer from one business vertical to another business vertical within  the same State shall be taxable under CGST and SGST/UTGST, even though such transfer is without any  consideration.

Meaning of “Business Vertical” [Section 2(18)]:

“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.

Examples 

(1)        R is engaged in supply of certain goods. He has obtained a Registration in the State of West Bengal in  respect of his Head Office. In addition, he has also obtained registration in the State of Delhi where  he is engaged in the supply of goods or services or both through his branch. In the above case, in  respect of each registration at West Bengal and Delhi, R shall be treated as distinct persons. Thus any  supply of goods or services or both between his main office in the State of West Bengal and in the  state of Delhi shall be subject to integrated tax in terms of IGST Act, even though such transaction  may not involve any payment of consideration.

(2)        Employees of a R Ltd., which is a subsidiary of G Limited, sent on deputation basis to its Holding  Company namely G Limited shall fall within the ambit of the term ‘supply’ even in the absence of  any consideration.

(3)        Transfer of goods from a unit located in Delhi to Research & Development unit located in Punjab  shall be treated as supply even in the absence of any consideration. Further, stock transfer from one  business vertical to another business vertical within the same State shall be taxable under CGST and  SGST/UTGST even though it is not for a consideration provided separate registration has been taken  for each such business vertical.

(3) Supply of Goods under GST—

(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 goods on behalf of the  principal.

1. “Principal” means a person on whose behalf an agent carries on the business of supply or receipt of  goods or services or both.

2. “Agent” means a person, including a factor, broker, commission agent, arhatia, del credere agent,  an auctioneer or any other mercantile agent, by whatever name called, who carries on the business  of supply or receipt of goods or services or both on behalf of another.

Examples 

(i) for 3(a) above 

R, the Principal located in Maharashtra supplies certain goods to his agent G, located in Punjab. G  undertakes to supply the said goods in Punjab on behalf of R. In this case, supply of goods by R to G shall  fall within the ambit of the term ‘supply’ even if made without consideration and shall be liable for  integrated tax under IGST Act.

(ii) for 3(b) above 

R works as an agent and is located in New Delhi. G is a manufacturer located in Punjab. R agrees to  purchase certain goods from New Delhi Market on behalf of G every month and supply the same to G. In  the aforesaid case, supply of goods by R to G shall fall within the ambit of term ‘supply’ even if made  without consideration. This supply of goods from R to G shall be subject to integrated tax under IGST  Act.

(4) Import of Services by a Taxable Person under GST—

— from a related person or

— from any of his other establishments outside India,

in the course or furtherance of business.

1.         Meaning of Taxable Person: “Taxable Person’’ means a person who is registered or liable to be registered  under section 22 or section 24 of the CGST Act, 2017.

2.         Meaning of related person: See above.

As a general principle, import of services without consideration will not be considered as supply under GST  in terms of section 7(1)(b). See para 2.1(B) above.

However, 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, even without consideration will be  treated as supply in terms Sl. No. 4 of Schedule I.

Taxability of Import of Services :

Examples 

  1. R Ltd, USA is the holding company of G Ltd., India. G Ltd. imports Business Consultancy Services from R Ltd. in October, 2018 in the course or furtherance of business. The aforesaid importation of services shall fall  within the ambit of term “supply” and G Ltd. shall be liable to pay integrated tax under IGST Act, 2017 even if R  Ltd. provides consultancy services without any consideration.
  2. R lives in London. His brother G is carrying on business in India. G imports technical services from R in November, 2018 in the course or furtherance of business. The said importation of service shall fall within the  ambit of term “supply” and G shall be liable to pay integrated tax under IGST Act, 2017 even if R provides  consultancy services without any consideration.

Thus, under section 7(1)(c), the presence of consideration in respect of the above transactions is not  essential whereas in the case of supply falling under section 7(1)(a) and 7(1)(b), the consideration whether in  monetary terms or non-monetary terms was essential provided the importation of services is not from any related  person or any of his establishment outside India.

Illustration :

Are the following import of services taxable services or not?  Solutions
1. Import of service from unrelated person for personal consumption with consideration Yes
2. Import of service from unrelated person for business with consideration Yes
3. Import of service from unrelated person for personal consumption without consideration No
4. Import of service from unrelated person for business without consideration No
5. Import of service from relative with consideration in the course or furtherance of business Yes
6. Import of service from relative without consideration in the course or furtherance of business Yes
7. Import of service from relative for personal consumption with consideration Yes
8. Import of service from relative for personal consumption without consideration. No
See also  [Section 64]- Clubbing of Income of an Individual with income of Spouse, Minor Child, etc.
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