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Meaning of SUPPLY under GST -decoded

GST is said to be levied on ‘supply’ in legal words taxable event is ‘supply’ thereby dispensing with the existing different taxable events for different levies of duties/taxes like ‘Manufacture’ for levy of excise duty, ‘sale’ for levy of VAT/sales tax etc., Therefore understanding of the expression ‘supply’ is highly important.

The Section 3 of draft GST law exclusively deals with the meaning & scope of ‘supply’. In this article, an attempt has been made to decode the said section and understand its coverage. The said section is defined in various parts covering different scenarios and also comprising of two schedules.

The most criticized & problematic part is definition is only inclusive and does not have means part i.e. what it actually means. This is one of deviation from the accepted international GST/VAT laws.


“(1) Supply includes

(a) all forms of supply of goods and/or services 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;


  • It covers all the regular transactions of sale or services.

  • There are 8 forms of transaction specified as supply however these are only illustrative and not exhaustive owing to use of the wordings ‘such as’.

  • The expressions of all 8 forms of transactions were not defined in the draft law.

  • The 8 specified transactions are interlinked or constitute ingredients of its precedent transactions. For instance to constitute ‘sale’ the mandatory requirement is ‘transfer’ and similarly the expressions ‘lease’ & ‘rental’ are closely related sometimes interchangeable also.

  • The criteria of ‘for consideration’ will be continued to make it as supply. However, this is subjected to other part of definition wherein certain transactions even without consideration are deemed as supply.

  • The concept of one person to another (two persons) is no more relevant now. The main effect is that transactions between two units of same company may liable to tax.

  • The same should be in the course or furtherance of business.

  • Business is widely defined u/s. 2(17) (here again only inclusive manner).

  • ‘In the course of business’ implies a period of time during which business is in progress and also the connected relation with it.

  • ‘Furtherance of business’ can be commonly understood as ‘helping, forwarding, promoting, advancement, or progress etc., of business’


(b) importation of service, whether or not for a consideration and whether or not in the course or furtherance of business, and


  • Services imported are liable for IGST.

  • Section 2(52) of draft law specifies the conditions to construe ‘import of service’.

  • One of condition laid down in the aforesaid section [i.e. clause (d)] is that supplier and receiver shall not be merely establishment of distinct person. On Conjoint construction of Explanation I & II to that section shows that branch/agency or representational office in any other territory will be treated as establishment of distinct person.

  • The benefit (may be unintentional) of this clause is that payments made by Indian head office to its foreign branch/agency are not subjected to GST (expenses incurred for running of branch there).

  • The very similar condition is there presently in service tax law and specifically disallows the export benefits for the transactions between Indian Head office and its foreign branch offices.

  • However Revenue officers used above deeming distinction to demand service tax on the payments/reimbursements made by Indian head offices to its foreign branches but said demand were set aside by Tribunal in case of Torrent Pharmaceuticals Ltd. v. CST 2015 (39) S.T.R. 97 (Tri. - Ahmd.) holding that deeming fiction is only to identify the place of service consumption and not to levy tax on mere payments/reimbursements made to foreign branch. Same was view further elaborated in case of Tech Mahindra Ltd. v CCE (2016- TIOL-709-CESTAT-MUM).

  • Consideration is not mandatory to attract GST i.e. free services received from outside India liable. The main effect can be seen in case of free transactions between foreign parent and Indian subsidiary company or vice versa.

  • In the course or furtherance of business also not mandatory thereby personal services were also liable however it was provided in the law that there would be threshold limit exempting the services imported for personal use.


(c) a supply specified in Schedule I, made or agreed to be made without a consideration.”


  • In terms of clause (a) of Section 3(1) when there is no consideration then there is no supply. However this is general provision.

  • The above clause i.e. (c) deems that transactions specified in schedule I as ‘supply’ even though there is no consideration. Therefore specified transactions are liable for GST irrespective of consideration.

  • However the problem arises with the heading of ‘schedule I’ which reads “matters to be treated as supply without consideration”. The literal meaning of this heading is that specified transactions are treated as made without consideration. The consequence follows that even though said transactions are made with consideration then same would be deemed as ‘without consideration’ and valuation rules may have to be applied (since transaction value fails). However this may not be the intention of law can be a drafting error which we can expect to be rectified in final law.

  • Clause (c) is applied only when the specified transactions are made without consideration that is to say if the same are made with consideration same would fall under first clause i.e. (a) of Section 3(1) and not under this clause. Now the question arises what is the benefit of falling u/c (a) or (c).

  • The benefit can be seen is that if the transaction is falling under clause (a) then it should in the course or furtherance of business. If this condition fails then same is not ‘supply’ since transaction does not fall under clause (c) for the reason that there is consideration and simultaneously does not fall under clause (a) for the reason that it is not in the course or furtherance of business.

  • Application of business assets to private/non-business use is deemed as supply in schedule I similar services for private/non business use. The tracing out these transactions has many practical challenges and may lead to litigation.

  • There was widespread belief that stock transfers are liable for GST in terms of clause (5) of schedule I, which says supply by a taxable person to another taxable/non-taxable person and the expression ‘taxable person’ can be understood from section 9 r/w schedule III deals with registration (state wise or business vertical wise). Here the question arises whether registration aspect can itself suffice to deem two units of same person as ‘different’ persons and GST can be levied? Therefore issue of taxing stock transfers is not clear and allows ambiguity.

  • All cases of free samples, 1+1 offers cases etc., are subjected to GST.

  • Activities undertaken as part of statutory requirement like CSR activities are also subjected to GST.


(2) Schedule II, in respect of matters mentioned therein, shall apply for determining what is, or is to be treated as a supply of goods or a supply of services.


  • The each clause of schedule II has history of disputing whether it is goods or services.

  • This sub-section is to specify the certain transactions as ‘supply of goods’ or ‘supply of services’. This is resolve the existing disputes on whether those specified transactions are goods or services.

  • This distinction is more relevant in application of provisions which are different for goods and services like place of supply, time of supply etc.,

  • Subject to the schedule II, Sub-section (3) gives further powers to Government (Central/State) to notify as supply of goods or supply of services etc.,


“(2A) Where a person acting as an agent who, for an agreed commission or brokerage, either supplies or receives any goods and/or services on behalf of any principal, the transaction between such principal and agent shall be deemed to be a supply.”


  • This subsection deems transaction between principal and agent as supply. This deeming fiction only for the transactions between principal and his agent and not in case of transactions with the third person.

  • And the taxability of transactions between agent (acting on behalf of his principal) and third person will continue to be supply by third person to the principal and not to the agent. All legal consequences/rights/liabilities under GST like availing input tax credit, adding mismatched credit to recipient liability, reverse charge liability etc.,

  • Further this deeming fiction is to tax the movement of goods/services between principal and agent and not for commission or brokerage that being paid by principal and agent, which anyways liable even without this deeming fiction.


“(4) Notwithstanding anything contained in sub-section (1), the supply of any branded service by an aggregator, as defined in section 43B, under a brand name or trade name owned by him shall be deemed to be a supply of the said service by the said aggregator.”


  • This subsection intends to specify that transaction involving ‘aggregator’ as supply in the hands of ‘aggregator’.

  • While providing so, it says that branded service will be deemed as supply by the aggregator so as to tax the whole transaction of ‘branded service’ in the hands of ‘aggregator’.

  • Then the immediate requirement is that actual supplier of such branded service shall get immunity from tax liability as entire supply is being already taxed in the hands of ‘aggregator’. However there is no provision in the entire draft model law providing such immunity to the actual service provider. This may lead to double taxation.

  • Hence express provision to exclude actual service provider from the GST compliance is recommended and similarly 'turnover' made under the model of 'aggregator' shall be excluded from 'turnover' limits specified for registration, other areas.

  • Further what is deems is supply of ‘branded service’ which was defined u/s 43B to mean that electronic commerce operator (E-commerce operator). There seems to be lack of synchronization here since tax compliance for aggregator and E-commerce operator is quite different.

  • Be that as it may, E-Commerce Operator is defined u/s. 43B in such a manner that it would even cover an aggregator. Issue that may be of concern for an aggregator would be if they are also governed by the provision of collecting tax at source even when full GST is to be discharged by them on the same supplies. If yes, then in this situation also there is going to be a double taxation on the single transaction and credit accumulation in the hands of service providers. Moreover, other critical issues relating to registrations and payment of such tax collected at source would also require immediate attention.

The above commentary is solely based on the draft GST law. However, the above provisions may undergo many changes by the time of passing of final GST Act as many representations are filing with the Government for amendments.

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