In a layman language, anything that changes the possession, custody or ownership of goods or services would be treated as taxable event for levy of GST.
Goods & Service Tax (GST) would change the face of Indirect Taxation in India. The concept of origin-based taxation in Indirect Taxes will now be converted into destination based taxation in line with global practices. The taxable event in GST regime is ‘supply’ of goods as well as services. It is an established principal that the taxable event in any legislation is imperative to trigger the tax liability or is the only barometer to levy the tax. In such a scenario, it is essential to decode the terminology ‘supply’ to understand its widespread impact on every business transaction.
Presently, varied taxable events are prescribed in present Indirect tax legislations such as manufacture, sale and provision of service for Central Excise, Value Added Tax / Sales Tax and Service Tax respectively. These taxable events gets triggers at different point of time in the value chain and requires constant monitoring for compliance.
Section 3 of Model GST Law (‘model law’) specifies the meaning and scope of term supply. From review of model GST law, we can observe that the scope of supply is an inclusive one which covers all forms of supply of goods / services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for consideration in the course of or furtherance of business. The scope further encompasses deemed supplies as well as supplies without consideration. From the bare reading of the provision, it appears that the scope is extremely wide and intends to cover almost all kinds of transactions. Accordingly, it is essential to decipher the provisions to understand the widespread impact of amended taxable event.
The first and foremost critical point to be noted is usage of term ‘includes’ in the definition of supply. The term ‘include’ in the statutory definition is generally used to enlarge the meaning of the preceding words and it is by way of extension, and not with restriction. Accordingly, it is easy to understand that the term supply is not limited to forms given in the definition. In a layman language, anything that changes the possession, custody or ownership of goods or services would be treated as taxable event for levy of GST. This implies that any activity having these characteristics can be contemplated as supply even if not envisaged by the legislation. This leads to the question whether similar provisions are prevailing in other countries such as Malaysia, Canada etc. From public domain, we understand that the definition of supply given in Malaysian GST as well as Canadian GST uses the term ‘means’ in the definition. The relevant extract of the definition is reproduced here under for easy reference.
Malaysia Goods & Service Tax
“4. (1) subject to subsections (2) and (3), “supply” means all forms of supply, including supply of imported services, done for a consideration and anything which is not a supply of goods but is done for a consideration is a supply of services.
Canadian Goods & Service Tax
“supply means, subject to sections 133 and 134, the provision of property or a service in any manner, including sale, transfer, barter, exchange, license, rental, lease, gift or disposition;”
It is clearly notable that the terminology used in the aforementioned legislations is ‘means’ which covers limited activities within its ambit. In our view, the term ‘means’ is an exhaustive one and cannot be stretched to anything not envisaged by the legislation. In view of this, it can be observed that the definition of supply is having a wide coverage and will allow the tax authorities to cover within its scope variety of transactions that are either not envisaged or are not taxed at present. This can be understood with a scenario whereby relinquishment of assets or extinguishment of right would form part of supply which is explained hereunder: A buyer has placed an order with foreign vendor. The goods arrived in India but before removal for home consumption, the buyer inspected the goods and found them not up to the mark. Accordingly, the buyer decided not to import goods and remove it for home consumption. Therefore, he relinquished the right over the goods. The goods remain at the same place but now the Government of India has right to deal with the goods as they deem appropriate. This leads to the question whether the rights relinquished by the person in the course of or furtherance to business can be contemplated as supply so as to levy GST. At this juncture, there is no requisite clarity on such transactions since the scope of the term ‘supply’ intends to tax all types of transactions.
In addition to above, the definition of supply stipulates the matters to be treated as supply even without consideration in Schedule I. The matters have been reproduced as under for easy reference.
i. Permanent transfer/disposal of business assets.
ii. Temporary application of business assets to a private or non-business use.
iii. Services put to a private or non-business use.
iv. Assets retained after deregistration.
v. Supply of goods and / or services by a taxable person to another taxable or non-taxable person in the course or furtherance of business.
From perusal of the above, it appears that the Government does not intend to leave any page unturned or any kind of transaction to be left out of the tax regime. However, the trade & industry is wondering how government official would administer such transactions like in case of temporary application of business assets to a private or non-business use or the services that are put to private or non-business use as it may not be feasible to tax certain activities practically. Let us take help of following example to understand this.
A company provides laptops to its employees for official purposes. If the employees use the laptop to watch movies or surf social websites such as YouTube, Facebook etc. for personal recreational activity, then whether the same would be covered with the activity of temporary application of business asset to a private use? If yes, whether the Government and/or the trade is having the mechanism to administer the same. Issues in the nature of valuation, creditability etc. would also be required to be thought through.
Similar, complexities are involved in case of services put to private or non-business use. Imagine a situations wherein Chartered Accountant is filing Income Tax returns of his family member or hotelier is using his banquets for his family function. In such types of scenarios, transaction administration would be critical point for consideration. Moreover, one would be compelled to ponder upon the aspect of levying tax on assets retained after deregistration even in absence of any supply. The answers to these questions are in the womb of future when GST become the reality.
It is difficult to understand the rationale behind introducing these types of provisions. In our view, the term which defines the taxable event should be specific & any possibilities of expansion or vagueness will create the rooms for unwarranted litigation. Such provisions may fail to serve the motive of ease of doing business.
In light of above discussion, the trade & industry expects the legislators to make the taxable event specific. It is further expected to keep in mind the mischief & menace prevailing in present regime and to stay away from any kind of absurdity or redundancy. Ultimately, this would help the nation in achieving the objective of ‘less of litigation and more of governance’.
M. S. Mani is Senior Director; Hardik Shah is Senior Manager and Kumar Parekh is Deputy Manager with Deloitte Haskins & Sells LLP