Activities treated as supply in GST even if made without consideration – Deemed supply

As per section 7 one of the conditions to be satisfied to levy GST is the supply must be for consideration. However there can be certain supplies which can be made by a taxable person without consideration in order to avoid levy of GST. Therefore, the government has listed few activities to be considered as supply even if the supplier has not received any consideration for it.

Following four activities are listed in schedule I which are treated as supply even if its made without consideration;

Permanent transfer or disposal of business assets 

In order to qualify as supply under GST law, following conditions need to be satisfied;

  • Business assets must be disposed or transfered.
  • Such transfer or disposal is permanent.
  • Input tax credit must have been availed on such business assets.

Therefore, a transaction will not be considered to be deemed as supply if input tax credit is blocked on a business asset or ITC is not available and even though the person is eligible to ITC, such person has not availed it.

As per this condition, if you are transferring business assets such as computers, air conditioners, cars or stock free of cost to employees or any other person for free, then it will be considered as supply if input tax credit has been availed on such assets. For example, If ITC has been availed on a laptop which is transferred to one of your employees then, it will qualify as supply under GST law. 

Instead of a laptop, assume for a moment that you are transferring a motor vehicle. In such case, transfer of motor vehicle will not be considered as supply as ITC on the said motor vehicle is blocked.

Supply of goods and/or services between related persons

Before getting into this provision, you need to first understand how the term related person and distinct person has been defined under GST law.

Related Person

As per the explanation to section 15, a person will be deemed as related person if;

  • Such persons are officers/directors of one another business, 
  • Such persons are legally recognised partners, 
  • Such persons are employer and employee.
  • A third person controls/own/holds directly or indirectly greater than equal to 25% voting stock/shares of both of them
  • One of them controls directly or indirectly the other
  • A third person controls directly or indirectly both of them
  • Such persons together control directly or indirectly a third person.
  • Such persons are members of the same family.
  • One of them is the sole agent/ sole distributor/ sole concessionaire of the other

Distinct person

Distinct person has been defined under sub-section 4 and 5 of section 25 of CGST Act.

As per subsection 4 of section 25, a person who has obtained or is required to obtain more than one GST registration, whether in one state or Union territory or in more than one state or Union territory shall, in respect of each such registration be treated as a distinct person.

Example

Mr XYZ & Co have taken one registration in Delhi and another in Mumbai, then both registered units will be considered as a distinct person.

AB & Co, a chartered accountant firm has obtained registration in Chennai for its head office and in Hyderabad for its branch office. In such case, AB & Co will be treated as a distinct person in respect of registration in Chennai and Hyderabad.

As per GST law, any taxable services and/or goods supplied between these two units in the course or furtherance of business even without consideration will qualify as supply. 

This means, interstate and intrastate stock transfers or branch transfer will be subject to GST if both the units have separate GST registration with the same income tax PAN.

However, transfer between two units of a registered person under single GST registration within a state, will not be considered as supply.

As per sub section 5 of section 25, a person who has obtained or is required to obtain registration in a state or Union territory in respect of an establishment has an establishment in another state or Union territory then, such establishment shall be treated as establishment of distinct persons.

As per the definition of related person, employer and employee are treated as related persons. However, services provided by an employee to the employer in the course of or in relation to his employment are not treated as supply as per schedule III of CGST Act, 2017.

Is GST to be charged on gift made by employer to employee

Gifts not exceeding Rs 50,000 in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both. Which means, if the gift value is more than 50,000 rupees made without consideration then, it will be considered as supply when made in the course or furtherance of business.

As per schedule III, services by an employee to the employer is the course of or in relation to his employment is outside the scope of GST. Which means, if any payments made by employer to employee in terms of the contract signed between them, then that transaction will not be charged to GST as per schedule III.

Goods sent by principal to agent

Supply of goods without consideration by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal; or by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal is considered as supply. 

Please note, it covers only supply of goods not supply of services. Therefore, supply of services without consideration by a principal to his agent is not considered as supply under GST law.

The first and foremost thing to identify is the relationship between the two people involved in a transaction. If the relationship is principal and agent, then only it will come under para 3 of schedule I otherwise, it’s outside the provisions of this para. The deciding factor would be how invoice for further supply of goods is issued. If such invoice is issued by the recipient (agent) on behalf of the 1st person (principal).

If invoice is issued by the agent for further supply of goods is in his own name instead of issuing in the name of principal then,  above provisions will be applicable and the supply will be charged to GST. Instead of issuing in his own name, if invoice is issued by the agent to the customer in the name of the principal then, such transaction will not fall under the above provisions.

As per circular number 57/31/2018 GST dated 04.09.2018, where goods being procured by the agent on behalf of the principal are invoiced in the name of the agent then, further provision of the said goods by the agent to the principal would be covered by para 3 of schedule I.

Del-credere agent – DCA

In commercial trade parlance, a DCA is a selling agent who is engaged by a principal to assist in supply of goods or services by contacting potential buyers on behalf of the principal. The factor that differentiates a DCAfrom other agents is that the DCA guarantees the payment to the supplier.

In such scenarios where the buyer fails to make payment to the principal by the due date, DCA makes the payment to the principal on behalf of the buyer (effectively providing an insurance against default by the buyer), and for this reason the commission paid to the DCA may be relatively higher than that paid to a normal agent. In order to guarantee timely payment to the supplier, the DCA can resort to various methods including extending short-term transaction-based loans to the buyer or paying the supplier himself and recovering the amount from the buyer with some interest at a later date. This loan is to be repaid by the buyer along with an interest to the DCA at a rate mutually agreed between DCA and buyer.

Concerns have been expressed regarding the valuation of supplies from Principal to recipient where the payment for such supply is being discharged by the recipient through the loan provided by DCA or by the DCA himself. Issues arising out of such loan arrangement have been examined and the clarifications on the same vide Circular No. 73/47/2018-GST dated 5th November, 2018 are as below:

Sl. No.IssueClarification
1Whether a DCA falls under the ambit of agent under Para 3 of Schedule I of the CGST Act?As already clarified vide circular No. 57/31/2018-GST dated 4thSeptember, 2018, whether or not the DCA will fall under the ambit of agent under Para 3 of Schedule I of the CGST Act depends on the following possible scenarios:In case where the invoice for supply of goods is issued by the supplier to the customer, either himself or through DCA, the DCA does not fall under the ambit of agent.In case where the invoice for supply of goods is issued by the DCA in his own name, the DCA would fall under the ambit of agent. 
2Whether the temporary short-term transaction based loan extended by the DCA to the recipient (buyer), for which interest is charged by the DCA, is to be included in the value of goods being supplied by the supplier (principal) where DCA is not an agent under Para 3 of Schedule I of the CGST Act?In such a scenario following activities are taking place:Supply of goods from supplier(principal)to recipient;Supply of agency services from DCA to the supplier or the recipient or both;Supply of extension of loan services by the DCA to the recipient.It is clarified that in cases where the DCA is not an agent under Para 3 of Schedule I of the CGST Act, the temporary short-term transaction based loan being provided by DCA to the buyer is a supply of service by the DCA to the recipient on Principal to Principal basis and is an independent supply.Therefore, the interest being charged by the DCA would not form part of the value of supply of goods supplied (to the buyer) by the supplier. It may be noted that vide notification No. 12/2017-Central Tax (Rate) dated 28thJune,2017(S. No. 27), services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services) has been exempted.
3.Where DCA is an agent under Para 3 of Schedule I of the CGST Act and makes payment to the principal on behalf of the buyer and charges interest to the buyer for delayed payment along with the value of goods being supplied, whether the interest will form a part of the value of supply of goods also or not?In such a scenario following activities are taking place:Supply of goods by the supplier(principal)to the DCA;Further supply of goods by the DCA to the recipient;Supply of agency services by the DCA to the supplier or the recipient or both;Extension of credit by the DCA to the recipient.It is clarified that in cases where the DCA is an agent under Para 3 of Schedule I of the CGST Act, the temporary short-term transaction based credit being provided by DCA to the buyer no longer retains its character of an independent supply and is subsumed in the supply of the goods by the DCA to the recipient. It is emphasised that the activity of extension of credit by the DCA to the recipient would not be considered as a separate supply as it is in the context of the supply of goods made by the DCA to the recipient.It is further clarified that the value of the interest charged for such credit would be required to be included in the value of supply of goods by DCA to the recipient as per clause (d) of sub-section (2) of section 15 of the CGST Act.

As per circular number 47/21/2018 dated 08.06.2018, moulds and dies owned original equipment manufacturer (OEM) that are sent free of cost to a component manufacturer (the two not being related persons or distinct persons) does not constitute a supply as there is no consideration involved.

Importation of services

Import of services by a person from a related person or from any of his other establishments outside India, in the course or furtherance of business shall be treated as supply.

For example, suppose AB & Co, a tax consultant, received legal services from its branch office in Maldives free of cost. In this case, both AB & Co and the branch office in Maldives are treated as related persons, therefore, will be treated as supply even though the branch office has not charged anything for the service.

Tax treatment of sales promotion scheme

There are several promotional schemes which are offered by taxable persons to increase sales volume and to attract new customers for their product. Based on various representations received by CBIC seeking clarification on issues with respect to tax treatment of sales promotion scheme, CBIC vide circular number Circular No. 92/11/2019-GST dated 7thMarch, 2019, has clarified followings;

Free samples and gifts

It is a common practice among certain sections of trade and industry, such as, pharmaceutical companies which often provide drug samples to their stockists, dealers, medical practitioners, etc. without charging any consideration. As per sub-clause (a) of sub-section (1) of section 7 of the said Act, the expression “supply” includes 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. Therefore, the goods or services or both which are supplied free of cost (without any consideration) shall not be treated as „supply‟ under GST (except in case of activities mentioned in Schedule I of the said Act). Accordingly, it is clarified that samples which are supplied free of cost, without any consideration, do not qualify as „supply‟ under GST, except where the activity falls within the ambit of Schedule I of the said Act.

Further, clause (h) of sub-section (5) of section 17 of the said Act provides that ITC shall not be available in respect of goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.Thus, it is clarified that input tax credit shall not be available to the supplier on the inputs, input services and capital goods to the extent they are used in relation to the gifts or free samples distributed without any consideration. However, where the activity of distribution of gifts or free samples falls within the scope of „supply‟ on account of the provisions contained in Schedule I of the said Act, the supplier would be eligible to avail of the ITC.

Buy one get one free offer

Sometimes, companies announce offers like ‘Buy One, Get One free’ For example, ‘buy one soap and get one soap free’ or ‘Get one tooth brush free along with the purchase of tooth paste’. As per sub-clause (a) of sub-section (1) of section 7 of the said Act, the goods or services which are supplied free of cost (without any consideration) shall not be treated as ‘supply’ under GST (except in case of activities mentioned in Schedule I of the said Act). It may appear at first glance that in case of offers like ‘Buy One, Get One Free’, one item is being supplied free of cost‟ without any consideration. In fact, it is not an individual supply of free goods but a case of two or more individual supplies where a single price is being charged for the entire supply. It can at best be treated as supplying two goods for the price of one.

Taxability of such supply will be dependent upon as to whether the supply is a composite supply or a mixed supply and the rate of tax shall be determined as per the provisions of section 8 of the said Act.

It is also clarified that ITC shall be available to the supplier for the inputs, input services and capital goods used in relation to supply of goods or services or both as part of such offers.

Discounts including ‘Buy more, save more’ offers

Sometimes, the supplier offers staggered discount to his customers (increase in discount rate with increase in purchase volume). For example-Get 10 % discount for purchases above Rs. 5000/-, 20% discount for purchases above Rs. 10,000/-and 30% discount for purchases above Rs. 20,000/-. Such discounts are shown on the invoice itself.

Some suppliers also offer periodic / year ending discounts to their stockists, etc. For example-Get additional discount of 1% if you purchase 10000 pieces in a year, get additional discount of 2% if you purchase 15000 pieces in a year. Such discounts are established in terms of an agreement entered into at or before the time of supply though not shown on the invoice as the actual quantum of such discounts gets determined after the supply has been effected and generally at the year end. In commercial parlance, such discounts are colloquially referred to as “volume discounts”. Such discounts are passed on by the supplier through credit notes.

It is clarified that discounts offered by the suppliers to customers (including staggered discount under ‘Buy more, save more’ scheme and post supply / volume discounts established before or at the time of supply) shall be excluded to determine the value of supply provided they satisfy the parameters laid down in sub-section (3) of section 15 of the said Act, including the reversal of ITC by the recipient of the supply as is attributable to the discount on the basis of document(s)issued by the supplier.

It is further clarified that the supplier shall be entitled to avail the ITC for such inputs, input services and capital goods used in relation to the supply of goods or services or both on such discounts.

Secondary Discounts

These are the discounts which are not known at the time of supply or are offered after the supply is already over. For example, M/s A supplies 10000 packets of biscuits to M/s B at Rs. 10/-per packet. Afterwards M/s A re-values it at Rs. 9/-per packet. Subsequently, M/s A issues credit note to M/s B for Rs. 1/-per packet.

The provisions of sub-section (1) of section 34 of the said Act provides as under: 

“Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.”

Representations have been received from the trade and industry that whether credit notes(s) under sub-section (1) of section 34 of the said Act can be issued in such cases even if the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. It is hereby clarified that financial / commercial credit note(s) can be issued by the supplier even if the conditions mentioned in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. In other words, credit note(s) can be issued as a commercial transaction between the two contracting parties.

It is further clarified that such secondary discounts shall not be excluded while determining the value of supply as such discounts are not known at the time of supply and the conditions laid down in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied.

In other words, value of supply shall not include any discount by way of issuance of credit note(s) as explained above in para 2 (D)(iii) or by any other means, except in cases where the provisions contained in clause (b) of sub-section (3) of section 15of the said Act are satisfied.

There is no impact on availability or otherwise of ITC in the hands of supplier in this case.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.