The introduction of the Goods and Services Tax in India marked one of the most significant reforms in the country’s fiscal history. The earlier system of indirect taxes was fragmented and complex, with multiple levies applied at different stages of economic activity. Excise duty was charged on manufacture, service tax on the provision of services, and sales tax or value-added tax on the transfer of ownership of goods. Each of these levies operated with its own set of rules, exemptions, valuation mechanisms, and compliance structures. This created not only administrative inefficiency but also a cascading effect, where tax was levied on tax.
The implementation of GST replaced this multitude of taxes with a single, unified system. The most remarkable aspect of this transformation was the shift from taxing separate events such as manufacture, sale, or service, to identifying supply as the single taxable event. This shift aligned Indian indirect taxation with the global model of value-added taxation, where the focus is on consumption and transfer rather than isolated stages of economic activity.
Evolution of Taxable Events Prior to GST
The earlier indirect tax regime in India was governed by a patchwork of central and state-level laws, each with its own charging section and scope.
Excise duty was imposed under the Central Excise Act, 1944, and the taxable event was manufactured. Even though the liability arose at the point of manufacture, the duty was collected when goods were removed from the factory. This led to disputes over the meaning of manufacture, particularly in cases involving processes such as assembly, labeling, or repackaging.
Service tax was introduced in 1994 through the Finance Act, with an initial focus on a limited number of services. Over time, its scope was expanded to include a large range of activities. The levy was triggered by the provision of taxable services for consideration, but frequent amendments and changes in classification created uncertainty for businesses.
Sales tax, and later VAT, were levied by the States on transactions involving transfer of property in goods. Since each State enacted its own VAT law, the rates, procedures, and compliance varied widely across jurisdictions. Additionally, central sales tax applied to inter-State sales, adding another layer of complexity.
These fragmented levies resulted in disputes, overlapping jurisdiction, and significant compliance burdens. More importantly, they created a cascading effect, since input tax credit across these levies was limited or not allowed. For example, service tax paid on input services could not be adjusted against VAT liability on sales. The GST system was designed to eliminate these inefficiencies by consolidating all these taxes into a single framework, based on the event of supply.
Charging Sections under GST
The legal foundation of GST rests on two key charging provisions. Section 9 of the Central Goods and Services Tax Act, 2017, authorizes the levy and collection of GST on all intra-State supplies of goods and services. Similarly, Section 5 of the Integrated Goods and Services Tax Act, 2017, provides for the levy of integrated tax on inter-State supplies. These charging sections reflect the dual model of GST in India, where both the Union and the States retain taxation powers.
By focusing on supply as the taxable event, these provisions created a uniform basis for levy. Whether the transaction involves goods, services, or a combination, the single criterion is whether it qualifies as supply. This simplification, while conceptually straightforward, required a detailed statutory framework to define the scope and meaning of supply.
Definition of Supply under Section 7
Section 7 of the CGST Act provides the statutory definition of supply. It adopts an inclusive approach, meaning that it does not restrict itself to an exhaustive list of activities but expands the scope to cover any transaction resembling supply in nature. The provision states that supply includes all forms of supply of goods or services or both, made for consideration, in the course or furtherance of business. The forms of supply explicitly mentioned include sale, transfer, barter, exchange, license, rental, lease, and disposal.
A distinctive feature of this provision is the inclusion of import of services. Unlike goods, which are subject to customs duties, services imported from outside India could escape taxation under the earlier regime. Section 7 now provides that import of services is deemed supply, even if made without consideration and whether or not it is in the course of business. This ensures comprehensive coverage and prevents revenue leakage.
The use of the word includes is deliberate and significant. Judicial interpretations in Indian tax law, such as in Commissioner of Income Tax v. Taj Mahal Hotel, have established that an inclusive definition expands the scope of a term beyond its natural meaning. Applied to GST, this principle means that supply is not confined to conventional transactions of sale or service but extends to any economic activity that transfers value.
Role of Schedules in Defining Supply
To provide clarity and avoid disputes, the legislature supplemented the general definition with three schedules appended to the Act.
Schedule I
This schedule lists activities that are treated as supply even in the absence of consideration. Examples include permanent transfer or disposal of business assets where input tax credit has been availed, supply of goods or services between related persons in the course of business, and import of services from related persons for business purposes. By including these activities, the law ensures that certain economic transfers are taxed even when no monetary exchange occurs.
Schedule II
The purpose of this schedule is to determine whether a particular activity is to be treated as a supply of goods or of services. For instance, transfer of business assets is considered supply of goods, while renting of immovable property is classified as supply of services. Works contracts, which previously created disputes over whether they should be taxed as sale or as service, are explicitly classified as services. This categorization provides clarity for rate determination, place of supply rules, and valuation.
Schedule III
This schedule specifies activities that are not treated as supply. These include services rendered by an employee to the employer in the course of employment, functions performed by Members of Parliament and State Legislatures, duties of constitutional posts, and transactions in money and securities. By excluding these, the law recognizes the boundary between economic activities subject to taxation and functions that fall outside the scope of commerce.
Supply Without Consideration
An important dimension of GST law is that certain transactions qualify as supply even if no consideration is involved. This departs from traditional contract principles, where consideration is essential for enforceability. In GST, the focus is on the transfer of value rather than contractual reciprocity.
For instance, when a company transfers stock from its factory in one State to a depot in another State, there is no sale in the legal sense. Yet, it is deemed a supply because the goods are destined for consumption in another jurisdiction. The government is also empowered to notify additional activities that will be treated as supply without consideration. This flexibility allows the tax framework to adapt to evolving business practices and prevent tax avoidance through non-monetary arrangements.
Clarification on Classification of Activities
Section 7(1A), introduced from July 2017, clarified that the activities or transactions specified in Schedule II shall be treated as supply of goods or supply of services as the case may be.
This amendment resolved interpretational disputes by ensuring that Schedule II functions only as a classification tool, not as an independent source of levy. For example, leasing of property is classified as a service, which then determines how tax is applied.
Activities Not Treated as Supply
Section 7(2) provides that activities or transactions specified in Schedule III, or notified by the government, shall not be considered as supply. This statutory exclusion ensures that certain sovereign, employment-related, or financial activities are kept outside the ambit of GST. It also reflects the principle that taxation should focus on market-based economic exchanges rather than governmental or constitutional functions.
Composite and Mixed Supplies under Section 8
The modern economy often involves bundled transactions, where goods and services are provided together. Section 8 of the CGST Act deals with such cases through the concepts of composite and mixed supplies.
A composite supply refers to two or more supplies that are naturally bundled and supplied together in the ordinary course of business, with one supply serving as the principal supply. The tax treatment is determined by the rate applicable to the principal supply. For example, when goods are transported with insurance and packing, the principal supply is transportation, and the ancillary elements follow its tax rate.
A mixed supply, on the other hand, occurs when two or more supplies are provided together for a single price, but they are not naturally bundled. In such cases, the law requires taxation at the highest rate applicable to any of the constituent supplies. A common example is a festive hamper containing chocolates, soft drinks, and perfumes sold for a single price. Since these items are not naturally bundled, the entire hamper is taxed at the highest rate applicable among them.
Comparative Perspective: Supply in Other Jurisdictions
The breadth of the definition of supply in Indian GST law reflects international practices. The Australian GST Act, for instance, defines supply broadly to include goods, services, rights, obligations, financial supplies, and property interests. Similarly, the European Union VAT Directive provides for a wide understanding of supply of goods and services.
This comparative perspective shows that India’s adoption of supply as the single taxable event is not unique but consistent with global trends in indirect taxation.
Scope of Supply and Principles of Taxability under GST
After understanding the statutory definition of supply and the legislative framework , it is essential to explore the broader scope of supply under the Goods and Services Tax regime. The central feature of GST lies in treating supply as the taxable event, rather than focusing on manufacture, sale, or provision of services. This approach requires a deeper examination of what constitutes supply, how its scope is determined, and the principles guiding its interpretation.
The scope of supply under GST is intentionally wide to prevent revenue leakage and ensure that all forms of economic activity involving transfer of value are captured. At the same time, the law balances this expansiveness with certain exclusions, such as activities listed in Schedule III and government notifications. We analyze the inclusive definition of supply, its implications, and the guiding principles for applying GST in different situations.
Inclusive Nature of the Definition
One of the most important characteristics of Section 7 of the CGST Act is that it employs an inclusive definition. The provision states that supply includes certain specified activities, rather than confining itself to an exhaustive list. This approach ensures flexibility and allows the tax system to adapt to new business models, transactions, and commercial arrangements.
The significance of the word includes has been explained in judicial precedents, most notably in the case of Commissioner of Income Tax v. Taj Mahal Hotel (1971). The Supreme Court held that the term enlarges the scope of a definition, covering not only what is expressly mentioned but also activities of similar nature. Applied to GST, this means that even if a transaction is not explicitly listed in Section 7 or the schedules, it may still qualify as supply if it shares the essential characteristics of economic transfer.
This inclusive nature provides the authorities with the capacity to bring within the tax net transactions that might otherwise escape taxation due to technicalities. For example, the rise of digital platforms and e-commerce created new types of arrangements where services are rendered electronically across borders. The inclusive definition ensures that such supplies do not remain outside the GST framework.
All Forms of Supply are Taxable
The law emphasizes that all forms of supply of goods or services are potentially taxable. The examples listed in Section 7, such as sale, transfer, barter, exchange, license, rental, lease, and disposal, cover a wide range of economic activities. Each of these forms has a specific commercial meaning, yet under GST they are unified under the concept of supply.
Supplier and Recipient
Every supply must have a supplier, and normally a recipient. The supplier is the person who makes the supply and bears responsibility for tax compliance. The recipient is the person who receives the supply and is generally liable to pay consideration. However, in certain cases such as reverse charge, the liability shifts to the recipient. Even in cases of self-supply, such as stock transfers between units in different States, the law deems a supply to exist to ensure taxability.
Nature of Supplies
Supplies may involve goods, services, or a combination of both. For instance, the sale of a machine is a supply of goods, while annual maintenance of the same machine is a supply of services. In certain cases, a single transaction may involve multiple supplies, requiring classification as composite or mixed supply. The wide scope ensures that no form of transfer of value escapes the ambit of taxation.
Examples of Composite Supply
A practical example of composite supply is when goods are transported with packing and insurance. In this scenario, transportation is the principal supply, while packing and insurance are ancillary. The entire bundle is taxed at the rate applicable to transportation. Another example is travel by Rajdhani Express, where transport, meals, and bedrolls are provided together. Since transportation is the main supply, the whole package is taxed accordingly.
Mixed Supply Illustration
An illustration of mixed supply can be seen in festive gift hampers. Suppose a hamper contains chocolates, soft drinks, and perfumes, all sold for a single price. Since these items are not naturally bundled, the entire supply is taxed at the highest rate among them, which in this case would be the rate applicable to perfumes.
Key Principles Governing Supply
The application of GST to real-life transactions requires certain guiding principles. These principles are derived from the statutory provisions, schedules, and judicial interpretations.
Principle of Consideration
In general, a supply must involve consideration, whether monetary or non-monetary. Consideration may include payment in money, transfer of value in kind, or exchange of obligations. However, as explained earlier, certain activities are deemed supply even without consideration, such as permanent transfer of business assets or supplies between related persons.
Principle of Business Connection
For an activity to qualify as supply, it must usually be made in the course or furtherance of business. This requirement ensures that personal or private transfers remain outside the tax net. For example, if an individual sells his personal car, the transaction is not subject to GST, since it is not in the course of business. On the other hand, if a car dealer sells a vehicle, the same transaction constitutes supply.
Import of Services
The law explicitly covers import of services within the scope of supply, even without consideration, if they are received in the course of business. For example, when an Indian subsidiary receives management consultancy from its foreign parent company without charging any fee, it is still deemed a taxable supply. This provision aligns with the principle of destination-based taxation, where consumption in India should attract GST.
Principle of Economic Substance
The emphasis in GST law is on the substance of the transaction rather than its legal form. If an arrangement results in transfer of economic value, it may be treated as supply even if parties attempt to structure it otherwise. For instance, barter arrangements, where goods or services are exchanged without money, are still considered supply because there is mutual transfer of value.
Supply in Special Situations
The wide scope of supply requires special consideration in unique circumstances.
Illegal Activities
A controversial area is whether illegal activities fall within the scope of supply. The general principle is that if the law prohibits an activity altogether, such as trafficking in narcotics, it cannot be considered a valid supply under GST. However, once goods are in circulation, even if originally acquired illegally, their subsequent sale may be subject to GST. For example, if a stolen car is resold in the market, the resale constitutes supply, since it is a commercial transaction involving transfer of ownership.
Facilities Provided by Recipient
In some situations, the recipient of goods or services may provide certain facilities, such as office space or stationery, to the supplier. The mere provision of such facilities without any contractual obligation may not amount to supply. The principle here is that supply must involve an act of the supplier in transferring goods or services, not merely the recipient’s passive role.
Services by Liquidator
When a liquidator is appointed to manage the winding up of a company, the services provided in connection with valuation, tendering, and sale of assets are treated as supply. These services attract GST, since they involve provision of professional expertise for consideration.
Compulsory Acquisition by Government
Another special situation arises when property is vested in the government by compulsory acquisition. If the owner is compelled by law to transfer property without any voluntary act, the transaction may not qualify as supply. However, if the owner takes steps to facilitate transfer, such as executing conveyance documents, the transaction can be treated as supply.
Barter Transactions
Barter is a classic example of supply without monetary consideration. For instance, when a construction company agrees to build property for a landowner in exchange for ownership rights in a portion of the land, both parties are making supplies. Each side is liable to GST on the value of the supply received. This ensures that even non-monetary transactions are brought under the tax framework.
Judicial Guidance and Interpretative Challenges
The interpretation of supply has already given rise to disputes and judicial scrutiny. Courts and tribunals have consistently emphasized that the focus should be on the substance of the transaction. For example, in earlier regimes, courts had to decide whether leasing of goods was a sale or a service. Under GST, such disputes are minimized because both goods and services are included within the single concept of supply.
However, challenges remain, especially in complex arrangements involving digital transactions, cross-border supplies, or bundled services. The judiciary is expected to play a crucial role in clarifying the scope of supply and ensuring consistent application of the law.
International Perspectives
A comparative view demonstrates that the Indian definition of supply is broadly aligned with global practices. In the European Union, supply of goods refers to the transfer of the right to dispose of tangible property, while supply of services covers all other transactions.
Australia takes an even broader view, treating supply as any form of provision, obligation, or grant of rights. These international models confirm that India’s expansive approach is consistent with the principle of taxing consumption at the point of destination.
Composite Supply under GST
Definition and Characteristics
Composite supply refers to two or more taxable supplies that are naturally bundled and supplied together in the ordinary course of business. The key feature is that one supply is the principal supply, while the others are ancillary or incidental. Under Section 8 of the CGST Act, a composite supply is treated as the supply of the principal supply for taxation purposes.
This provision ensures that businesses do not face multiple tax rates on a single transaction that is essentially one economic activity. It also reflects commercial reality, where customers often expect a package of services or goods rather than isolated elements.
Examples of Composite Supply
- A contract for supply of machinery along with installation and training. Here, the principal supply is the machinery, while installation and training are ancillary. The entire supply is taxed as supply of machinery.
- A travel package that includes flight transport and in-flight catering. The principal supply is transportation, so the whole package is taxed accordingly.
- Leasing of a building along with maintenance and security services. The principal supply is leasing, and other services follow its tax rate.
Practical Implications
The classification as composite supply avoids disputes about splitting transactions artificially. Businesses must carefully analyze contracts to determine whether supplies are naturally bundled. In practice, this requires examining whether customers expect the supplies together, whether they are marketed as a package, and whether they are inseparable without losing commercial value.
Mixed Supply under GST
Definition and Characteristics
Mixed supply refers to two or more independent supplies combined and offered together for a single price, where such supplies are not naturally bundled. In this case, Section 8 specifies that the entire supply is taxed at the highest rate applicable to any individual item in the bundle.
The rationale is to prevent businesses from artificially grouping high-tax goods with low-tax goods and selling them at a composite price to reduce tax liability.
Examples of Mixed Supply
- A Diwali gift hamper containing chocolates, perfumes, and dry fruits sold for one price. Since perfumes attract the highest GST rate among the items, the whole hamper is taxed at that rate.
- A promotional package offering mobile phones with free earphones and covers. As the items are not naturally bundled, the tax rate of the highest item applies.
- A package containing toiletries, cosmetics, and snacks sold as a single unit. The highest tax rate among them governs the entire supply.
Practical Implications
Businesses must distinguish between composite and mixed supply to apply the correct rate of tax. The classification depends on whether the supplies are naturally bundled or merely packaged together for convenience or marketing. Documentation and contracts play a vital role in establishing this distinction during audits or assessments.
Valuation of Supply
General Valuation Rule
Under Section 15 of the CGST Act, the value of supply is the transaction value, which is the price actually paid or payable when the supplier and recipient are unrelated, and the price is the sole consideration. This principle ensures that GST is levied on the real value exchanged between the parties.
Inclusions in Value
Certain elements must be included in the value of supply, such as:
- Taxes, duties, fees, and charges other than GST itself if charged separately
- Amounts payable by the recipient that are not included in the price but are the supplier’s liability
- Incidental expenses like commission, packing, or insurance
- Interest, late fee, or penalty for delayed payment
- Subsidies directly linked to the price, except those provided by the government
Exclusions in Value
Discounts given before or at the time of supply, provided they are recorded in the invoice, can be excluded from the value. Post-supply discounts may also be excluded if they are established in agreement before supply and linked to specific invoices.
Valuation in Special Cases
- Related Party Transactions: When supplier and recipient are related, valuation is based on open market value or the value of similar supplies.
- Supplies through Agents: The value is the price charged by the agent to the recipient or the open market value.
- Vouchers and Redeemable Instruments: Valuation is based on the money value of goods or services redeemable.
- Imports of Goods and Services: Customs valuation principles or notified valuation rules apply.
Levy and Collection of GST
Levy of GST on Intra-State Supply
Section 9 of the CGST Act provides that GST shall be levied on all intra-State supplies of goods or services, except alcoholic liquor for human consumption. The levy is on the value determined under Section 15, and the tax rate is notified by the government on the recommendation of the GST Council.
The tax is collected in two components, Central GST (CGST) and State GST (SGST), both charged on the same transaction value.
Levy of GST on Inter-State Supply
Section 5 of the IGST Act provides for the levy of Integrated GST (IGST) on all inter-State supplies of goods and services. The rate of IGST is equal to the combined rates of CGST and SGST. This ensures that revenue is shared between the Centre and the State where consumption occurs.
Levy on Imports
Imports of goods are subject to IGST under the Customs Tariff Act in addition to customs duties. Imports of services are taxed under reverse charge, meaning the recipient is liable to pay IGST. This aligns with the principle that GST should apply at the place of consumption, which in the case of imports is India.
Reverse Charge Mechanism
Normally, the supplier is liable to pay GST, but under reverse charge, the recipient is required to discharge tax liability. This applies in cases such as:
- Notified categories of goods and services like legal services, goods transport, or imports
- Supplies received from unregistered persons in specific cases
The reverse charge mechanism ensures tax collection from transactions where compliance from the supplier is difficult or impractical.
Place of Supply Rules
Importance of Place of Supply
Determining whether a supply is intra-State or inter-State requires identifying the place of supply. The rules differ for goods and services. Correct determination is crucial for deciding whether CGST and SGST or IGST applies.
Place of Supply for Goods
- For goods involving movement, the place of supply is the location where movement terminates for delivery.
- For goods not involving movement, the place of supply is the location of goods at the time of delivery.
- For imports, the place of supply is the location of the importer.
- For exports, the place of supply is outside India.
Place of Supply for Services
- When services are supplied to a registered person, the place of supply is the recipient’s location.
- When supplied to an unregistered person, the place of supply is the recipient’s address; if not available, then the supplier’s location.
- Special rules apply to services related to immovable property, events, transportation, and electronic commerce.
Practical Implications for Businesses
Contract Structuring
Businesses must structure contracts clearly to demonstrate whether supplies are composite or mixed. Ambiguities may lead to disputes and higher tax liability.
Pricing Policies
Since valuation rules include incidental expenses and subsidies, businesses need to design pricing policies that minimize disputes during assessments. Discounts must be documented properly to qualify for exclusion from taxable value.
Compliance with Reverse Charge
Organizations must identify supplies falling under reverse charge and ensure timely tax payment, as failure leads to interest and penalties. Reverse charge also requires registration in cases where recipients would otherwise not be liable.
Cross-Border Transactions
For companies engaged in international trade, correct determination of place of supply ensures that IGST is applied consistently with global practices. Misclassification may lead to denial of input tax credit or double taxation.
Audit and Litigation Risks
Due to the wide definition of supply, businesses may face audits scrutinizing whether transactions qualify as supply, whether they are intra-State or inter-State, and whether valuation rules have been followed. Proper documentation and proactive compliance reduce risks of litigation.
International Perspectives on Composite and Mixed Supplies
European Union
In the European Union VAT system, the concept of single supply and multiple supplies closely parallels composite and mixed supply. Courts apply a substance-over-form test, examining whether elements are ancillary to a main supply. For example, hotel accommodation with breakfast is treated as a single supply, while a holiday package with separately identifiable elements may be treated as multiple supplies.
Australia
Australia’s GST law also adopts the idea of bundled supplies. The Australian Taxation Office issues detailed guidance to distinguish between mixed supplies and composite supplies, emphasizing customer perception and commercial unity of the transaction.
Canada
In Canada’s GST system, the term single supply is used, with rules similar to India. Where multiple elements form part of a single overall supply, the tax treatment of the dominant element applies.
These international practices show that India’s approach to composite and mixed supplies aligns with global standards and reflects the challenges of modern commerce.
Conclusion
The introduction of Goods and Services Tax marked a paradigm shift in the framework of indirect taxation by creating a unified, consumption-based system that rests on the concept of supply. Unlike the earlier regime that relied on multiple taxable events such as manufacture, sale, or provision of services, GST recognizes supply as the sole taxable event, thereby simplifying the law and aligning it with international practices.
The inclusive definition of supply under Section 7 of the CGST Act ensures that a wide range of transactions, including barter, exchange, lease, import of services, and certain activities without consideration, come within its scope. The schedules to the Act further clarify what qualifies as supply and what does not, reducing ambiguity and providing legislative guidance.
The framework also introduces clarity in classifying transactions through the concepts of composite supply and mixed supply. By recognizing naturally bundled transactions as composite supply and taxing them according to the principal element, the law prevents unnecessary fragmentation of economic activity. At the same time, mixed supply provisions prevent tax avoidance strategies where disparate items are bundled for a single price.
Valuation rules under Section 15 and related provisions ensure that GST is levied on a transparent and fair transaction value, inclusive of incidental costs and linked subsidies, while providing mechanisms for special cases such as related party transactions and imports. This ensures the integrity of the tax base and aligns with the principle of taxation at the point of consumption.
The levy of GST under Sections 9 and 5 of the CGST and IGST Acts, coupled with place of supply provisions, establishes the territorial jurisdiction of tax and avoids overlaps between central and state authorities. The use of IGST for inter-State trade ensures seamless flow of input tax credit and prevents cascading, fulfilling one of the primary objectives of GST.
Reverse charge provisions, though a departure from the general principle that the supplier pays the tax, serve an important role in ensuring tax compliance where the supplier may be unregistered or located outside India. These provisions, along with detailed compliance requirements, place responsibility on businesses to remain vigilant and adopt proper systems of documentation and reporting.
From a broader perspective, the GST law reflects a balance between comprehensiveness and specificity. Its wide scope ensures that most economic transactions are covered, while detailed rules on valuation, classification, and place of supply provide operational clarity. The alignment of India’s approach with international jurisdictions such as the European Union, Australia, and Canada shows that GST is not merely a domestic reform but part of a global movement toward harmonized indirect taxation.
For businesses, the law emphasizes the importance of contract structuring, pricing policies, and compliance systems. The wide definition of supply, combined with the nuances of composite and mixed supplies, creates both opportunities for efficiency and risks of misclassification. Proper documentation, proactive compliance, and professional interpretation of the law are therefore essential for minimizing disputes and ensuring smooth operations.
Overall, GST has transformed the indirect tax landscape by unifying the tax base, broadening the definition of supply, and aligning taxation with consumption. While its scope and levy provisions present challenges in interpretation and compliance, they also provide a robust, transparent, and fair system that is designed to evolve with the complexities of modern commerce.