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Supply without consideration is not a supply- some thoughts

APRIL 19, 2017

By Abhijit Saha

GST is imposed on supply of goods and services. Like any other tax laws, the charging section determines the taxable event and is the beginning of the entire process of taxation under a given tax law. Section 9 of the CGST Act is the charging section which stipulates that the supply is the taxable event. Hence it is very important to understand as to what constitutes supply under GST. Section 7 defines ‘supply' which is reproduced below:

7. (1) For the purposes of this Act, the expression "supply" includes -

(a) 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;

(b) import of services for a consideration whether or not in the course or furtherance of business;

(c) the activities specified in Schedule I, made or agreed to be made without a consideration ; and

(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

(2) Notwithstanding anything contained in sub-section ( 1),-

(a) activities or transactions specified in Schedule III; or

(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.

(3) Subject to the provisions of sub-sections ( 1) and ( 2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to betreated 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.

In view of the above definition of "supply" it may be stated that in order to qualify as "supply" following conditions are broadly to be fulfilled:

(i) All forms of supply for a consideration in course or furtherance of business

(ii) Import of service for a consideration

(iii) Activities specified in Schedule-I without any consideration

It may be seen from the definition of "supply" that the said definition is not exhaustive. It is an inclusive definition. However, it may be stated by logical interpretation and permissible inference that when there is an inclusion to a definition, it may be presumed that such inclusion is in addition to the main definition (which does not exist in the GST law). In other words, the activities which are included in the definition is not there in the main definition and that is why such addition is made to the definition to extend the scope of the definition. If it is argued that the main definition already contains what is included therein, then that would be a very unreasonable and unacceptable interpretation of law. Hence my understanding based upon permissible inference is that the inclusive portion of the definition is only to explain the scope of supply and does not add anything extra to the scope of the definition of supply.

The big question is whether the main definition of supply which is implicit contains supply without any consideration? My view is that if the main definition of supply (which is absent in the law) includes supply without consideration as well, then the inclusion of supply without consideration for activities mentioned in Schedule-I should not have been specified in the definition itself because that would be repetition of the main definition and would result into duplication which cannot be the intention of the legislator and top of it such repetition does not make any legal sense.

Moreover, if the supply without consideration is in the implicit part of the main definition then, any other supply without consideration other than what is contained in Schedule –I would have been declared as exempted under Section 11 of the CGST Act. However, the legislation is drafted in the other way round. The supply without consideration is defined in the charging section 7 only selectively to the extent of activities covered by Schedule-I and any other supply without consideration is outside the purview of the definition of supply. This means that the definition of supply cannot include supply without consideration. The only exception is activities under Schedule – I which has been mentioned in the charging section as exception to the scope of the supply.

In this respect it is pertinent to mention that the CGST Act in the Statement of Objects & Reasons under Notes on Clauses has clarified that Clause 7 provides the scope of supply. This clause provides for activities to be treated as supply. This clause further provides that certain activities , specified in Schedule I of the proposed Act, even made or agreed to be made without a consideration shall be treated as supply . This clause also provides activities which are neither supply of goods nor supply of services.

In view of the above it may be stated that the supply without consideration is an exception to the definition of supply for a consideration. This means that without the exception the supply without consideration is not within the fold of the definition of supply. Hence the supply without consideration, other than the exception specified in Schedule-I, activities do not qualify as supply.

Non-taxable supply is defined in Section 2(78) of the CGST Act as follows:

2 (78) "non-taxable supply" means a supply of goods or services or both which is

not leviable to tax under this Act or under the Integrated Goods and Services Tax Act;

In view of the above definition, it may be stated that non-taxable supply is a supply on which there is no levy of GST. The best example of non-taxable supplies are activities mentioned in Schedule-III which are treated as neither a supply of goods nor a supply of service. It may be noted that all those activities are economic activities and with consideration. There is not a single activity which has been mentioned as activity without consideration. This is because of the fact that the supply without consideration is not ‘supply' other than the exception specified in Schedule-I which is categorically spelt out to manifest that it is an exception to law. Hence it may be submitted that non-taxable supply are supplies for consideration on which there is no levy of GST . Supply without consideration is outside the scope of supply itself and hence the same does not qualify as non-taxable supply and the question of levy on such supply is not possible without consideration (whether actual or deemed).

In the Valuation Rules also, the foundation of the said Rules is the value of supply of goods and service where the consideration is not wholly in money. Hence it may be submitted that supply without consideration has no scope in the valuation rules. Even for the exceptional supplies without consideration, as per section 15 of the CGST Act read with Valuation Rules, it may be deemed that there is a consideration not in money and the deemed value has been imputed on such free supplies on that basis. Hence it may be submitted that in order to qualify as non-taxable supply it has to have a consideration, whether actual or deemed, under the purview of section 15 of the CGST Act read with the Valuation Rules. Such deemed valuation is made only for the supplies specified in Schedule –I. Valuation Rules has no jurisdiction to impute any deemed value on supply without consideration other than Schedule-I supplies. Accordingly, a view can be taken that the supply without consideration is not a not-taxable supplies and the said supply without consideration is not within the purview of the definition of supply.

(The views expressed are strictly personal.)

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