The Goods and Services Tax (GST) regime in India replaced a number of indirect taxes, including excise duty, service tax, and value-added tax (VAT). Previously, excise duty was imposed on the manufacture of goods and payable at the time of removal from the factory, service tax was imposed on the rendering of services, and VAT was charged when the property in goods was transferred from one person to another. Under the GST law, the taxable event is now the occurrence of a “supply” rather than the events mentioned above.
As per section 9 of the Central Goods and Services Tax (CGST) Act, GST is levied on the intra-state supply of goods or services. Section 5 of the Integrated Goods and Services Tax (IGST) Act provides for the imposition of IGST on the inter-state supply of goods or services. Hence, the concept of supply becomes the core of GST implementation, and understanding it is essential for determining tax liability.
Statutory Provisions Related to Supply
The legal definition of supply is contained in section 7 of the CGST Act. Additionally, Schedule I outlines activities that are considered supplies even when performed without consideration. Schedule II provides clarification on whether an activity constitutes the supply of goods or the supply of services.
Inclusive Definition of Supply
The word supply is defined inclusively in section 7 of the GST Act. According to the definition, supply includes all forms of supply of goods or services or both, 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. Import of services for consideration, whether or not in the course or furtherance of business, is also included under the scope of supply.
Furthermore, activities listed in Schedule I are considered supplies even when performed without consideration. Subsection (1A) of section 7 provides that transactions specified in Schedule II are for determining whether a transaction is a supply of goods or services. Subsection (2) empowers the government to notify certain activities of the Central Government, State Government, or Local Authorities performed as public authorities that will not be considered a supply of goods or services. Schedule III lists activities that are not considered supplies.
Supply Without Consideration
Section 7(1)(c) of the GST Act states that activities mentioned in Schedule I are deemed to be supplies even when made without consideration. Subsection (3) allows the government, on the recommendation of the GST Council, to notify any transaction to be treated as a supply of goods or services or neither.
Classification into Goods or Services
Section 7(1)(d) of the GST Act was omitted from July 1, 2017. In its place, section 7(1A) was introduced, clarifying that activities listed in Schedule II should be treated as a supply of goods or services as specified therein. This amendment guides the interpretation of mixed transactions.
Transactions Excluded from Supply
Section 7(2) provides that activities or transactions specified in Schedule III, or those notified by the government, shall not be treated as a supply of goods or services. Chapter 6 of the relevant text provides further explanation of such transactions.
Composite and Mixed Supplies
As per section 8 of the GST Act, tax liability for a composite or mixed supply is determined as follows:
A composite supply involving two or more supplies, where one is a principal supply, is treated as the supply of such principal supply. A mixed supply comprising two or more supplies is treated as the supply that attracts the highest rate of tax.
This approach simplifies the determination of tax liability where goods or services are bundled together.
International Definitions of Supply
In many countries, the term supply is defined in a broad and inclusive manner under their respective GST or VAT legislation. For example, the Australian GST Act under sections 9 and 10 defines supply to include any form of supply. This includes supply of goods, services, advice, real property rights, financial supply, and obligations. The Act clarifies that even passive activities such as refraining from doing something or tolerating an act can constitute a supply. However, supply does not include the mere provision of money unless it is given in exchange for something else.
The Australian government provides guidance through GST Rulings that help clarify the wide range of transactions that may be considered as supplies. These international approaches help demonstrate how inclusive and extensive the term supply can be under modern GST frameworks.
General Scope of Supply Under GST
To fully understand the meaning and scope of supply, the various expressions used in the definition should be examined. These include the inclusivity of the definition, the nature of different forms of supply, and specific characteristics required for a transaction to qualify as a supply.
Supply encompasses various forms such as sale, transfer, barter, exchange, license, rental, lease, or disposal. These must be made for consideration and in the course or furtherance of business by a taxable person. Even supplies made without consideration can be taxable if covered under Schedule I. Import of services, whether or not for business, also falls within the scope of supply.
Nature of Inclusive Definition
The use of the term “includes” in the statutory definition makes it clear that the definition is not exhaustive. As noted by the Supreme Court in the case of CIT v. Taj Mahal Hotel, the word “includes” in a statute expands the scope of the definition. It means that in addition to the specifically listed items, the definition also covers other unlisted activities that fall within the natural and ordinary meaning of supply.
For example, the Australian GST law mentions the provision of advice, assignment of real property rights, and other such actions as supplies. These may not be explicitly mentioned in section 7(1) of the Indian GST Act, but would still fall within the scope due to the inclusive nature of the definition.
All Forms of Supply Are Taxable
Section 7(1)(a) clarifies that all forms of supply are subject to GST. This includes goods, services, and combinations of both. Every supply must involve a supplier and usually a recipient. However, in some cases such as self-supply, tax can be imposed even in the absence of a conventional recipient.
Further, section 8 of the Act provides the framework for determining tax liability on composite and mixed supplies. Composite supplies are naturally bundled supplies delivered in the ordinary course of business and are treated as a supply of the principal supply. In contrast, mixed supplies are combinations of supplies not naturally bundled and taxed at the highest applicable rate.
An example of a composite supply is a Rajdhani Express train ticket, which includes the supply of transport, food, and bedrolls. The principal supply is transportation, and therefore the entire supply is taxed accordingly. Similarly, in hotel accommodation, ancillary services such as air conditioning or telephone access are considered part of the main accommodation supply.
Role of Activity in Supply
For a supply to occur, the supplier must do something. This could be providing goods or services or refraining from an act. Simply being passive is not sufficient unless the act of refraining itself is a service. For example, a wholesaler who stores goods and then sells them performs an activity constituting supply.
This concept was clarified by a New Zealand court, which held that supply must involve doing something for the recipient and not against them. Activities such as imposing a fine or stealing goods would not be treated as supply since there is no consensual transaction or benefit conferred on the recipient.
Single Supplier Requirement
A supply can be made only by a single person. There must be a clear identification of the person making the supply as the liability to pay tax falls on that person. Multiple persons cannot collectively be regarded as the supplier of a single supply.
Illegal Activities and Supply
The legality of the activity is not relevant to its classification as a supply under GST. If an item is sold illegally, such as a stolen car, the sale still constitutes supply under GST law. However, where an activity is completely prohibited, such as the sale of illegal drugs, no supply exists. This position has been confirmed by courts in other jurisdictions such as the European Court of Justice.
Goods or Services Provided by the Recipient
Sometimes, the recipient may provide goods or facilities to the supplier to aid in delivering the supply. Such provisions by the recipient do not necessarily constitute a separate supply. The facts and circumstances of each transaction determine whether a supply has been made by the recipient.
For instance, if a supplier is allowed to use the recipient’s computer and stationery to provide a service, this usage may simply form part of the context of the original supply rather than being a separate supply from the recipient.
Services by Liquidator
When a court appoints a liquidator to sell company assets and distribute proceeds among creditors, the liquidator provides a service. These services include appointment of valuers, tendering, evaluating bids, and asset sales. Such activities are treated as taxable supplies. Although mandated by law, the liquidator receives consideration for these services and thus performs a taxable activity.
Compulsory Acquisition by Government
When the government compulsorily acquires property through a gazette notification, the ownership vests with the government without any voluntary act on the part of the previous owner. In such cases, there may be no supply since the owner has not performed any act constituting supply. Merely accepting compensation does not indicate supply. However, if the owner undertakes any act facilitating the transfer, it may amount to supply.
Barter Transactions and Two-Way Supply
In a barter, each party provides something in return. For example, if a lawyer provides services in exchange for a share in the client’s property, there are two supplies—legal services and property rights. Both parties must pay GST on their respective supplies and can claim input tax credit if eligible.
Nature of Composite Supply
A composite supply under GST consists of two or more taxable supplies of goods or services or both, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business. One of the supplies must be a principal supply, and the entire transaction is taxed according to the principal supply.
For example, when a company sells a mobile phone along with a charger, the charger is ancillary to the main product—the phone. Since both are supplied together as part of a single package in the ordinary course of business, it constitutes a composite supply. The applicable GST rate is that of the principal supply, i.e., the mobile phone.
Another common example is the supply of goods with insurance and freight services. When goods are sold with insurance and freight as part of the same agreement, it is a composite supply, and the supply of goods is considered the principal supply. The entire supply is taxed as a supply of goods.
Principal Supply and Its Determination
Section 2(90) of the CGST Act defines principal supply as the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary.
The determination of the principal supply is a matter of fact. Factors such as customer expectations, supplier intention, nature of the contract, and the economic significance of each component must be considered. Courts have generally held that the principal supply is the supply without which the recipient would not have entered into the contract.
If a business provides a hotel room with breakfast included in the tariff, the principal supply is accommodation, and breakfast is incidental. Therefore, the entire transaction is taxed as accommodation services.
Nature of Mixed Supply
A mixed supply consists of two or more individual supplies of goods or services, or any combination thereof, made together for a single price, which do not constitute a composite supply. In this case, the supply that attracts the highest rate of tax determines the GST applicable to the entire supply.
An example of a mixed supply is a gift basket containing chocolates, dry fruits, and a bottle of wine sold for a single price. Each item has a different GST rate, and since these items are not naturally bundled, the entire supply is taxed at the highest rate applicable to any one of the items in the basket.
Mixed supply provisions are anti-avoidance in nature. They prevent businesses from reducing tax liability by clubbing high-rated and low-rated items together and selling them at a single price.
Distinction Between Composite and Mixed Supplies
The key distinction between composite and mixed supply lies in whether the supplies are naturally bundled in the ordinary course of business. In composite supplies, there is a clear principal supply with one or more ancillary supplies. The entire transaction is taxed based on the principal supply.
In contrast, a mixed supply does not have a principal supply, and the components are not naturally bundled. The whole package is taxed at the highest applicable rate among the individual supplies.
Determining whether a supply is composite or mixed requires close scrutiny of the transaction, contractual terms, and the intention of the parties. Classification errors may result in penalties or disputes with tax authorities.
Consideration as a Component of Supply
A valid supply under GST law generally requires consideration, which is defined under section 2(31) of the CGST Act. Consideration includes any payment made or to be made in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services.
Consideration can be monetary or non-monetary and can even be provided by a third party. It includes payments made voluntarily or as per contractual obligations. Deposits that are adjusted as payments at the time of supply also qualify as consideration.
The law provides that certain activities are deemed to be supply even without consideration, as specified in Schedule I. These include permanent transfer or disposal of business assets, supply between related persons or between distinct persons (branches of the same entity in different states), and gifts exceeding Rs. 50,000 by an employer to an employee.
Import of Services
Import of services for a consideration, whether or not in the course or furtherance of business, is treated as a supply under section 7(1)(b) of the CGST Act. Therefore, even private individuals importing services such as online software subscriptions, foreign coaching, or streaming services are liable to pay GST under reverse charge mechanism (RCM), provided the service falls under taxable categories.
However, if a person imports services from a related person or from a business establishment located outside India without consideration, it is deemed to be a supply under Schedule I, provided it is in the course or furtherance of business. This provision captures situations such as free services provided by a foreign head office to an Indian branch.
Supplies Between Distinct Persons
Supplies between different registrations of the same entity in different states or union territories are considered supplies under the GST Act, even if made without consideration. These are known as supplies between distinct persons.
For example, if a company transfers goods from its factory in Maharashtra to its depot in Gujarat, it is considered a taxable supply, and IGST is payable. Input tax credit is available to the recipient unit subject to eligibility conditions.
Even services such as administrative support, IT services, or HR services provided by one unit to another are considered as supplies and attract GST. Businesses need to raise tax invoices and pay tax on such inter-branch transactions, even if no money changes hands.
Self-Supply
Self-supply refers to situations where a person supplies goods or services to themselves in another capacity. Such transactions are taxable under Schedule I. For example, when a registered business person uses business assets for personal purposes, it is treated as a supply.
Similarly, if a company gives away goods as free samples or promotional gifts, it is considered a supply if input tax credit has been availed on such goods. The law ensures that input tax credit is reversed if goods are not used for business purposes.
Stock Transfers
Stock transfers between different units of the same entity in different states are considered inter-state supplies. Even though there is no sale or consideration, tax is payable. However, stock transfers within the same state between units with the same GSTIN are not considered supplies and are not taxable.
Businesses must maintain accurate documentation such as delivery challans, e-way bills, and internal stock transfer records to ensure compliance. Failure to treat such transfers correctly may result in penalties or denial of input tax credit.
Transactions Without Consideration
As per Schedule I, the following transactions are treated as supplies even without consideration:
Permanent transfer or disposal of business assets where input tax credit has been claimed. Supply between related persons or between distinct persons as defined in section 25, when made in the course or furtherance of business. Supply of goods by a principal to his agent or by an agent to his principal. Import of services by a taxable person from a related person or from any of his establishments outside India, in the course or furtherance of business.
These provisions ensure that GST applies to transactions where a benefit is conferred without formal payment, preventing revenue leakage.
Treatment of Gifts and Perquisites
Gifts not exceeding Rs. 50,000 in value per employee per financial year by an employer are not treated as supply. However, if the value exceeds this threshold, the entire gift is taxable. Gifts are considered voluntary transfers made without consideration.
Perquisites provided in terms of the contract of employment are not treated as supply. However, benefits provided to employees that are not part of the employment contract may be subject to GST.
For instance, providing a mobile phone to an employee for official use may not be taxable, but giving a car for personal use may attract GST unless accounted for appropriately.
Levy and Collection of GST
Section 9 of the CGST Act deals with the levy and collection of GST on intra-state supplies. GST is levied on the supply of goods or services or both, except on the supply of alcoholic liquor for human consumption. The tax is payable by the taxable person at the specified rates on the value of supply determined under section 15.
The government, on the recommendation of the GST Council, may notify categories of goods or services on which tax is payable on reverse charge basis. Additionally, registered persons receiving supplies from unregistered persons are liable to pay tax under reverse charge in specified cases.
Composition scheme under section 10 allows eligible suppliers to pay tax at a prescribed lower rate based on turnover, subject to conditions.
Levy of IGST
Section 5 of the IGST Act provides for the levy and collection of integrated tax on inter-state supplies of goods or services or both. It applies to imports and exports, as well as supplies to and from SEZ units. The tax is levied at the specified rates not exceeding 40 percent.
The tax is payable by the supplier, except in cases where reverse charge applies. The IGST collected is apportioned between the central and state governments as per formulae approved by the GST Council.
Reverse Charge Mechanism
Reverse charge mechanism (RCM) refers to the situation where the recipient of goods or services is liable to pay GST instead of the supplier. RCM applies in the following cases:
Specified goods and services notified by the government, such as legal services, goods transport agency (GTA) services, and services supplied by an e-commerce operator. Import of services for a consideration. Supplies from unregistered persons to registered persons in specified cases.
RCM ensures tax compliance in sectors where the supplier base is unorganized or located outside India. The recipient is required to issue a payment voucher and self-invoice, pay tax, and claim input tax credit, if eligible.
Judicial Interpretation of Supply
Indian courts and tribunals have played a key role in interpreting the scope of supply under GST. Given the expansive and inclusive nature of the definition, judicial authorities have examined various cases to determine whether a transaction amounts to supply. Courts often rely on established principles from pre-GST indirect tax jurisprudence, such as the doctrine of mutuality, the test of commerciality, and the nature of consideration.
For instance, the Authority for Advance Rulings (AAR) has clarified in several cases whether free supplies of goods or promotional schemes qualify as supplies under Schedule I. Similarly, appellate authorities have looked into whether services provided by holding companies to subsidiaries without consideration constitute taxable supply.
Supplies Involving Clubs and Associations
A controversial area has been the treatment of supplies made by clubs or associations to their members. Traditionally, the doctrine of mutuality exempted such transactions from taxation. However, the GST regime has attempted to override this principle by deeming members and associations as distinct persons under Explanation to section 8 of the CGST Act.
The Supreme Court, in its pre-GST judgment in the Calcutta Club case, held that mutuality still applies under earlier laws. Post-GST, tax authorities have attempted to levy GST on services like gym access, mess facilities, or common area maintenance provided by residents’ welfare associations (RWAs). Courts have begun to interpret these scenarios based on whether contributions constitute consideration and whether a supply exists under Schedule II.
Taxability of Liquidated Damages
Another debated issue is the GST treatment of liquidated damages, penalties, and compensation for breach of contract. The question is whether such payments are consideration for any supply. The Delhi AAR held that liquidated damages paid by a contractor to a developer for delay in project execution are not a consideration for any supply and hence not subject to GST.
However, tax authorities have argued that tolerating an act, under an obligation, constitutes supply of services under Schedule II. If the payment is made in exchange for allowing the breach or delay, it may be taxable. Judicial interpretation depends on the facts of each case—whether the payment is punitive or contractually agreed compensation.
GST on Employee Secondment
Employee secondment arrangements have drawn scrutiny under GST. In some arrangements, employees are deputed from one company to another, with the original employer continuing to pay salaries and being reimbursed by the host entity. AARs have ruled inconsistently—some holding that no supply exists if the employee remains under the control of the original employer, while others have ruled that such reimbursement constitutes consideration for a supply of manpower services.
In such cases, determining the “employer” becomes critical. If the host company exercises supervision and control, GST may apply under manpower supply provisions. If the deputed employee remains an employee of the original company, and the host company only reimburses salary, GST may not be payable.
Clarification Through Circulars
The GST Council and the Central Board of Indirect Taxes and Customs (CBIC) issue circulars to clarify the scope of supply in complex scenarios. For example, Circular No. 177/09/2022-GST clarified taxability of liquidated damages, compensation, and late payment charges. According to the circular, if such payments are linked to a contractually agreed obligation to tolerate an act or situation, they are taxable.
Similarly, CBIC has issued clarifications regarding GST on inter-office services, cross charges, and donations. While circulars are binding on tax officers, courts may overrule them if they contradict statutory provisions.
Schedule II: Classification Between Goods and Services
Schedule II of the CGST Act plays a crucial role in determining whether a transaction constitutes a supply of goods or services. While it does not expand the scope of supply, it clarifies classification for specific transactions. This is essential for determining the applicable rate, place of supply, and time of supply.
Examples of activities treated as supply of goods include:
Transfer of title in goods. Transfer of goods forming part of business assets on cessation of business. Supply of goods by or to an agent.
Activities treated as a supply of services include:
Transfer of right to use goods without transfer of title. Leasing or licensing of land or building. Treatment or process applied to another’s goods. Agreeing to an obligation to refrain from an act or to tolerate an act. Works contracts and restaurant services.
This classification assists taxpayers in proper invoicing, rate application, and compliance.
Schedule III: Transactions Not Considered Supply
Schedule III of the CGST Act lists transactions that are not considered as supply of goods or services. These include:
Services by an employee to an employer in the course of employment. Services by any court or tribunal. Duties performed by Members of Parliament, Panchayats, or municipalities. Sale of land and completed buildings. Actionable claims, other than lottery, betting, and gambling. Functions performed by constitutional authorities.
These exclusions are crucial for delineating the scope of GST and avoiding tax on sovereign and employment-related functions. Amendments have been made from time to time to expand Schedule III. For example, transactions in securities and actionable claims (except lottery, betting, and gambling) are excluded to maintain alignment with financial sector norms.
Valuation of Supply
Valuation of supply is governed by section 15 of the CGST Act. The transaction value, which is the price paid or payable for the supply of goods or services, forms the basis of valuation. The transaction value must be between unrelated parties and the price must be the sole consideration for supply.
Section 15(2) lists inclusions in the value of supply, such as:
Taxes and duties other than GST. Amounts paid by the recipient on behalf of the supplier. Incidental expenses like packing, freight, and commission. Interest or late fee for delayed payment. Subsidies are directly linked to the price.
Section 15(3) lists permissible exclusions from the transaction value:
Discounts given before or at the time of supply. Post-supply discounts are established through agreement and linked to specific invoices.
Rules 27 to 35 of the CGST Rules provide methods for valuation where transaction value is not available, including open market value, cost-based valuation, and residual method.
Place of Supply and Levy Determination
The place of supply is critical in determining whether a transaction is intra-state or inter-state, and hence whether CGST/SGST or IGST is applicable. The IGST Act, under sections 10 to 13, lays down detailed provisions for determining place of supply for goods and services.
For goods, the general rule is that supply is interstate if the location of the supplier and place of supply are in different states. For services, the rules vary depending on whether the supply is to a registered person, whether it’s related to immovable property, performance-based, or linked to location of recipient.
Place of supply rules are especially significant in cross-border and e-commerce transactions. Incorrect determination can result in wrong tax collection and ineligibility for input tax credit.
Taxability of Intermediary Services
Intermediary services, such as those provided by commission agents and brokers, have special treatment under the place of supply rules. As per section 13(8)(b) of the IGST Act, the place of supply of intermediary services is the location of the supplier.
This means that even if services are provided to a recipient located outside India, they are not treated as exports and do not qualify for zero rating. This provision has been challenged as being ultra vires the Constitution, as it leads to taxation of transactions with foreign recipients. Several high courts are hearing petitions on this issue.
Zero-Rated Supply and Exports
Exports of goods or services and supplies to Special Economic Zones (SEZs) are treated as zero-rated supplies under section 16 of the IGST Act. Zero rating means that the supply is taxable, but the tax rate is zero, and input tax credit is allowed.
Taxpayers can make zero-rated supplies under two options:
Supply without payment of IGST under bond or Letter of Undertaking (LUT), and claim refund of unutilized input tax credit. Supply with payment of IGST and claim refund of the IGST paid.
Zero-rated supplies are distinct from exempt supplies, where input tax credit is not allowed. Proper documentation and compliance with export procedures are essential to claim refunds and avoid litigation.
Composite and Mixed Supply Disputes
Litigation has arisen regarding classification of bundled supplies. Businesses often struggle to determine whether a transaction is a composite or mixed supply, especially in cases involving packages, offers, or loyalty programs.
For example, if a hotel offers a package including stay, meals, sightseeing, and transportation for one price, the classification depends on whether the components are naturally bundled. Tax authorities may argue that different elements should be taxed separately or as mixed supply if not bundled in the ordinary course of business.
AARs have held divergent views in such cases, requiring businesses to carefully examine contractual terms, marketing materials, and industry practices.
Exempt Supplies and Impact on Input Tax Credit
Exempt supplies are those that attract a nil rate of tax or are wholly exempt by a notification. Supplies not taxable under GST, such as alcoholic liquor, petroleum crude, and electricity, are also treated as exempt for the purpose of input tax credit restrictions.
Section 17(2) of the CGST Act provides that input tax credit is not allowed in respect of inputs or input services used for making exempt supplies. Businesses making both taxable and exempt supplies must apply proportionate reversal of credit as per Rule 42 and 43.
Even zero-rated supplies are not exempt supplies, and input tax credit is fully allowed. However, care must be taken in accounting for exempt turnover in annual returns and GSTR-3B.
Government and Sovereign Activities
Activities performed by the government in its sovereign capacity are excluded from the scope of supply. This includes functions like law enforcement, issuance of passports, and regulation of trade. However, when the government provides services like renting of immovable property or conducting commercial activities like tendering, it is treated as a taxable supply.
The distinction between sovereign and business activities is important for municipal corporations, development authorities, and public sector undertakings. Notifications have been issued exempting certain services, such as water supply and solid waste management, provided by local authorities.
Donations and Philanthropy
Donations received by charitable organizations without any obligation to provide goods or services are not considered supplies. However, if donations are linked to promotional benefits, such as advertising or event sponsorship, GST may be applicable.
For example, if a donor pays to have their logo displayed at a charity event, it constitutes consideration for advertisement services. Similarly, sale of goods like calendars or souvenirs by a charitable trust is taxable, even if profits are used for charity.
Exemptions are provided for specific activities by entities registered under section 12AA or 12AB of the Income Tax Act, subject to conditions. These include healthcare, education, and advancement of religion.
Input Tax Credit and Supply Nexus
Eligibility for input tax credit depends on whether the supply is used or intended to be used in the course or furtherance of business. Section 16 of the CGST Act lays down this condition. Supplies used for personal consumption, exempt supplies, or blocked credit items under section 17(5) are not eligible for credit.
Establishing a nexus between input and output supplies is essential. For example, if goods are used for both taxable and non-taxable purposes, proportionate credit must be claimed. Input services like security, legal, and audit services are generally eligible, while motor vehicles, outdoor catering, and club memberships are restricted unless specific exceptions apply.
Penalties and Enforcement for Supply Misclassification
Under GST law, misclassification of a transaction—such as treating a taxable supply as exempt or failing to declare a supply—can lead to substantial penalties, interest, and denial of input tax credit. Sections 73 and 74 of the CGST Act deal with recovery of tax not paid or short paid due to reasons other than fraud, and due to fraud or willful misstatement, respectively. Incorrect classification of composite and mixed supplies can result in differential tax liability, which the authorities can recover along with interest under section 50. Additionally, section 122 prescribes a general penalty of Rs. 10,000 or the amount of tax evaded, whichever is higher, for each such offence. Multiple penalties may be imposed if the same misclassification leads to underpayment of tax across multiple returns or reporting periods.
GST Audit and Assessment of Supply Transactions
GST authorities can audit a taxpayer’s books under section 65 to verify the correctness of declared supplies, input tax credit claimed, and payment of tax. Auditors check whether supplies have been properly disclosed in GSTR-1 and GSTR-3B, and whether the taxable value and rate of GST have been correctly applied. Assessment proceedings under sections 61, 62, or 63 may be initiated if discrepancies are noticed. Authorities look for signs of undervaluation, unreported outward supplies, failure to reverse input tax credit on exempt or non-GST supplies, and misapplication of zero-rated or exempt supply treatment. In many cases, show cause notices are issued for failing to report supplies between branches, related parties, or in-kind transactions that fall under Schedule I. Taxpayers are given the opportunity to respond with explanations and documentary evidence before any tax demand is finalized.
Recent Changes in the Definition of Supply
Over time, amendments have been made to refine the definition of supply and exclude specific activities to reduce litigation. For example, an amendment was made to exclude high-sea sales and bonded warehouse transactions from the scope of supply. Later, Schedule III was amended to include such exclusions. Similarly, services provided by courts, duties performed by Members of Parliament, and actions of constitutional authorities were always excluded but later made explicit through amendments. The definition of supply was also revised through section 7(1A) to clarify that Schedule II does not expand but only classifies transactions already deemed to be supplies. The substitution of section 7(1) and insertion of section 7(1A) were significant in aligning the law with judicial interpretations and administrative needs. These changes help taxpayers by bringing more clarity to classification and coverage.
Impact of Digital Economy on Supply
The rise of digital services has significantly broadened the landscape of taxable supplies. E-commerce, software-as-a-service (SaaS), and digital content delivery all fall within the scope of GST when provided for a consideration. The GST law defines Online Information and Database Access or Retrieval (OIDAR) services and imposes tax on cross-border digital services provided to Indian consumers. Non-resident service providers, such as foreign streaming platforms, are required to register under GST if they provide services to unregistered persons in India. Such foreign service providers are considered as making a taxable supply even though they may not have a physical presence in the country. Moreover, online marketplaces facilitating third-party supplies are required to collect tax at source (TCS) and ensure proper compliance by vendors. Platform-based services such as ride-sharing, food delivery, and freelance marketplaces have created complex supply chains. Determining whether the platform, vendor, or delivery partner is making the supply can influence the applicable tax rate and compliance requirements.
Supply Through E-Commerce Operators
Section 9(5) of the CGST Act empowers the government to notify certain services on which tax is payable by the e-commerce operator. For example, passenger transport by radio-taxi and accommodation services by non-registered entities through platforms like Oyo or Airbnb are subject to GST in the hands of the platform. E-commerce operators must maintain accurate records of such supplies, pay tax on behalf of unregistered suppliers, and ensure compliance with reverse charge obligations. Failure to discharge such liability may result in penalties and disqualification from providing services. Tax authorities have begun scrutinizing e-commerce transactions for underreporting, incorrect classification, and evasion using multiple GSTINs. Integration of GSTN with income tax, TDS, and banking data has improved enforcement capacity.
Valuation Challenges in Digital and Barter Transactions
Digital and non-monetary transactions often pose challenges in valuation. For example, barter transactions involving the exchange of services without money, such as online barters or promotional collaborations, need to be valued based on open market value, or the value of similar supplies. Rule 27 of the CGST Rules prescribes valuation methods when consideration is not wholly in money. Open market value is preferred; if unavailable, the value of similar supplies or cost-based valuation may be used. In influencer marketing, where goods are sent to a content creator in exchange for promotion, it is essential to determine whether the content creator is receiving consideration and if the transaction qualifies as a supply. If yes, GST would apply on both the product and the service, with each party acting as supplier and recipient. Such issues are complex and require careful examination of contracts, invoice value, and flow of benefits.
Practical Issues in Determining the Scope of Supply
In practice, many businesses struggle to determine whether a transaction is a supply or not. Free samples, employee reimbursements, inter-office services, and cost-sharing arrangements frequently raise doubts. Often, documentation does not indicate that the transaction is for consideration or whether the supply is in the course or furtherance of business. For example, reimbursements without markup are typically not considered supplies if there is no underlying provision of service. However, where a markup or service is involved, the transaction may attract GST. Similarly, employee recoveries for food, uniforms, or welfare activities may or may not qualify as supplies depending on whether there is a contractual obligation and profit element. Businesses are advised to maintain proper documentation such as contracts, board resolutions, internal memos, and accounting entries to support their position in case of audit or litigation.
Composite Supply vs. Works Contract
In the infrastructure and construction industries, a common area of confusion is the distinction between a composite supply and works contract. As per section 2(119) of the CGST Act, a works contract means a contract for building, construction, repair, etc., of immovable property wherein transfer of property in goods is involved. Such contracts are treated as a supply of services under Schedule II, even if they involve goods and services bundled together. Works contracts attract a uniform rate of 18 percent in most cases, unless specifically exempt. Composite supplies involving only movable goods and services are treated differently, with tax applied based on the principal supply. Misclassification may lead to incorrect application of rates, denial of input credit, or audit objections.
Circular Trading and Artificial Supplies
The GST regime has introduced safeguards against circular trading and artificial creation of supplies for availing ineligible input tax credit. Transactions lacking genuine economic substance, such as issuing invoices without movement of goods or repeated supply and return of the same goods, are being closely monitored. Authorities use e-way bill tracking, transporter data, and input-output norms to detect fictitious supplies. Section 122 penalizes the issuance of fake invoices, while Section 132 criminalizes intentional evasion. Taxpayers must ensure that every supply is backed by actual movement, delivery, and evidence of business purpose. Mere invoice generation without real supply may lead to cancellation of registration and blacklisting.
Advance Rulings on Scope of Supply
Advance Rulings under sections 95 to 106 provide clarity to taxpayers on classification, rate, place of supply, and input tax credit eligibility. Several AARs have ruled on whether certain activities constitute supply under GST. For instance, whether employee secondment amounts to manpower supply, whether liquidated damages are taxable, or whether free tickets given by movie halls are taxable supplies. However, the rulings are binding only on the applicant and jurisdictional officer, and different AARs have given conflicting decisions. Appellate Advance Rulings and High Courts are increasingly being approached to resolve inconsistencies. Taxpayers should monitor rulings for guidance, but must assess the facts of their own case carefully before applying any precedent.
Transitional Supplies and Legacy Contracts
Supplies under contracts entered before GST but executed afterward posed unique challenges. The transitional provisions under section 142 of the CGST Act provide for the treatment of such transactions. If goods were removed or services rendered before July 1, 2017, but invoicing or payment happened later, specific rules determine whether GST or old taxes apply. For ongoing contracts, revised invoicing and tax computation were required. Taxpayers also had to reconcile VAT/service tax input credit carried forward under GST with supplies made under legacy contracts. Errors in this transition led to disputes over double taxation or denial of credit. Authorities issued clarificatory circulars and FAQs to assist businesses in applying transitional rules.
Unregistered Dealers and Supply Provisions
GST places compliance obligations on registered recipients even in transactions with unregistered dealers. In some cases, the reverse charge mechanism applies, and tax must be paid by the recipient. Small unregistered suppliers may avoid the compliance burden, but they limit the ability of buyers to claim input tax credit. As a result, large businesses often encourage or require their vendors to register. Unregistered suppliers are also ineligible to issue tax invoices or collect GST, which can affect their competitiveness. The government has relaxed some RCM provisions, but care must be taken to identify situations where mandatory reverse charge still applies.
Anti-Profiteering and Supply Valuation
Section 171 of the CGST Act mandates that any reduction in tax rate or benefit of input tax credit must be passed on to the recipient by way of a commensurate reduction in price. This anti-profiteering provision applies to all supplies of goods or services. The National Anti-Profiteering Authority (NAA), and now the Competition Commission of India (CCI), investigate complaints regarding non-passing of benefits. Businesses must document how tax reductions or input credit benefits are reflected in pricing. This includes revising price lists, customer communications, and accounting systems. Failure to do so may result in orders for refund to customers and penalties.
Conclusion
The scope of supply under GST is intentionally broad to capture all commercial and business activities that involve transfer of goods or services. The definition includes various forms of consideration, covers domestic and cross-border supplies, and applies to both monetary and non-monetary exchanges. Through judicial interpretations, circulars, and amendments, the understanding of supply continues to evolve, especially in the context of digital services, e-commerce, and composite transactions. Businesses must remain vigilant in classifying transactions, determining consideration, and ensuring compliance. Proper documentation, internal controls, and understanding of legal provisions are essential to minimize tax exposure and avoid litigation. With continuous changes in technology and business models, the law on supply is expected to adapt further. Regular updates, professional advice, and proactive risk assessment remain vital in navigating the GST framework effectively.