GST is just round the corner, with the Government targeting 1st April, 2017 as the official kick-in date. Finance Ministry seems to be working over time to get all the blocks in place before the new tax is rolled out. A draft law is already in public domain. To understand GST, therefore, one needs to understand the concept behind the tax and the levy as envisaged by the Model GST law:


GST or Goods and Services Tax is an value-added tax to be levied on supply of goods and services and is directed towards taxing final consumption. As an indirect tax, it is something which would be levied on the supplier who will pass on the duty incidence to the recipient of the supply. Tax which is collected from me by the one who sold goods or provided services to me can ordinarily be set-off against the tax which is payable by me on the goods and services which I supply. The tax paid on earlier transaction is taken as input tax credit or set-off against the tax payable on the next transaction. Reduced to an example:

“If A sells goods worth &#8377 100 (basic price) to B on which GST leviable is 10% (say), then A will charge &#8377 110 to B. A will keep &#8377 100 with himself and remit &#8377 10 (GST collected from B) to the Government. When B sells those goods to C for &#8377 140 (basic price), the total GST-inclusive price will be &#8377 154 [&#8377 140 (Basic Price) + &#8377 14 (GST 10%)]. B will then take set-off of &#8377 10 which was the GST collected from him on the earlier transaction of purchase and pay only &#8377 4 as tax.”

Our GST laws are inspired by the VAT and GST laws of a host of countries, but more particularly by that of New Zealand. The New Zealand GST system has long been hailed as a more broad-based, efficient and neutral system than other comparable systems. The broad sweep of the levy, narrow list of exemptions and an efficient set-off mechanism ensures that business does not bear the tax and everything is passed on to the consumer as far as possible. As the Supreme Court of New Zealand has said in Glenharrow Holdings (NZSC 116 SC 59) “Because of the credit-offset mechanism for inputs, sales between registered persons are tax neutral. So are sales between unregistered persons because the regime does not apply to them”


Now, GST in India will be levied under Article 246A of the Constitution. The Union will levy its own Central GST (“CGST” ) applicable on all “intra-State”  supplies throughout India. The various States will levy their own State GST (“SGST” ) which will cover all “intra-State”  supplies in the State. On all inter-State supplies, the Union can levy Integrated GST (“IGST” ) and the States are constitutionally barred from taxing inter-State transactions.

What is this “intra-state”  and “inter-state”  supply? These concepts have been explained in the the Model IGST law. Very broadly, an “intra-state”  supply is a supply which originates as well as is consumed within a state. An “inter-state”  supply is a supply which originates in one State, but is consumed in some other State. Under our Constitution, Parliament has the sole authority to determine which sale is “intra-state”  and which sale is “inter-state” , “in course of import”  or “in course of export”. This has been done to avoid the pre-Constitution fiasco where Provinces would try to tax a sale based on any remote nexus that it enjoyed with that Province. That situation was recounted vividly by the Supreme Court in the celebrated Bengal Immunity Company case [(1955) 2 SCR 605]

“In exercise of the legislative power conferred upon them in substantially similar terms by the Government of India Act, 1935, the Provincial Legislatures enacted sales-tax laws for their respective Provinces, acting on the principle of territorial nexus referred to above; that is to say, they picked out one or more of the ingredients constituting a sale and made them the basis of their sales-tax legislation. Assam and Bengal made among other things the actual existence of the goods in the Province at the time of the contract of sale the test of taxability. In Bihar the production or manufacture of the goods in the Province was made an additional ground. A net of the widest range perhaps was laid in Central Provinces and Berar where it was sufficient if the goods were actually ‘found’ in the Province at any time after the contract of sale or purchase in respect thereof was made. Whether the territorial nexus put forward as the basis of the taxing power in each case would be sustained as sufficient was a matter of doubt not having been tested in a Court of law. And such claims to taxing power led to multiple taxation of the same transaction by different Provinces and cumulation of the burden falling ultimately on the consuming public. This situation posed to the Constitution makers the problem of restricting the taxing power on sales or purchases involving inter-State elements, and alleviating the tax burden on the consumer”.

The GST regime also seeks to ensure that only one State can tax a supply as far as SGST is concerned. To that end, only one legislature, that is Parliament, controls the law defining inter-State supplies.


GST is levied on “supply of goods and services”  within the State (Section 7 Model CGST law). “Goods”  and “services”  are defined in the Model law itself. “Goods”  are defined in Section 2(48) as follows:

“2(48) “goods”  means every kind of movable property other than actionable claim and money but not includes securities, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under the contract of supply;

Explanation: For the purpose of this clause, the term ‘movable’ property shall not include any intangible property”

Section 2(48) borrows the definition of “goods”  from the Sale of Goods Act, 1930 and thus also includes “securities”. This is in contrast with similar definition under the Sales tax laws which used the Sale of Goods Act, 1930 definition but consciously excluded “securities”. Securities were of course kept out since the policy was that transactions in securities should not be subjected to State laws to avoid burdening the markets. This policy has now been departed with.

The definition of goods and services, is important since primarily the place and time of supply rules differ for goods and services. The inclusion of securities in the definition of goods will create problems in case of demat securities when place of supply rules are sought to be applied to it. The GST place of supply rules for goods follow the old “movement”  and “location”  pattern of sales tax. Thus, where goods do not move, the place of supply is where the goods are located at the time of delivery and that State gets the right to tax. In case of demat securities, this is bound to cause problems.

The “movement”  and “location”  conundrum under sales tax has also led to a welcome change in the GST regime. All intangible property has been put outside the remit of the term “goods”  and within “services”. Sales Tax Laws also allowed states to tax intra-State sales and Parliament would tax inter-State sales. An inter-state sale, under sales tax, would ordinarily arise if the sale occasioned “movement”  of goods etc. across state frontiers. If there was no movement across state frontiers, then the state where goods are located would get the right to tax. Inter-State sales carried a much lesser rate of tax and import and export were not subject to sales tax. The criteria to determine if a sale is in course of import or export also followed the “movement”  pattern similar to inter-State sales. In cases of intangibles like trademark, copyright and patent, the claim of inter-State, import or export sale was not accepted by the sales tax authorities in some States like Maharashtra on the basis that a trademark, a copyright or a patent could not move and therefore even if a assignment takes place anywhere in the world, the same was liable to be taxed in India. So far so good. A further question would then arise as to which State can tax the sale, a copyright, patent and trademark being present throughout India at the same time and whether all 29 states can tax the entire sale consideration or whether the sale consideration was to be apportioned and what should be the basis of such apportionment. We will thankfully be spared this nightmare under the GST law. All intangible property will be classified as a service whose place of supply rules are better suited for things like copyright, patent and trademark.


Moving on, “services”  is defined in section 2(88) as:

“2(88) “services”  means anything other than goods

Explanation: Services include intangible property and actionable claim but does include money”

Services is defined in a rather expansive manner. The definition of service “anything other than goods”  has been borrowed from the New Zealand GST law. But as held in New Zealand in Case S65 (1996) 17 NZTC 7408, howsoever wide the definition of service may seem, it has its limitation. In that case, payments made under an order of a disciplinary tribunal to reimburse the costs and expenses of the winning party were held not to be consideration for supply of any “services”  since ordinarily a supply of services has to be for the benefit of the recipient and not against him.

The definitions of “goods”  as well as “services”  exclude “money”. It is one of the fundamental principles of all VAT/GST jurisdictions that supply of money is not to be taxed. This exclusion makes sure that when monetary consideration is supplied for the supply of goods and services, that consideration itself is not to be taxed as supply of money.

The definitions of “goods”  excludes “actionable claim”. Sales tax law also excluded actionable claim from definition of “goods”. But the definition of “services” here covers “actionable claim”  specifically, whereas the service tax law excluded “actionable claim”  from definition of “services”  in that law. Actionable claim is defined in Section 2(1) of the Model CGST law. Assignment of a debt is thus a service, debt being an actionable claim.

There is one more snag in the definition of “service”. It seems wide enough to cover immovable property even though we have been always told that real estate will be kept outside the scope of GST. I expect some clarification one way or the other from the Empowered Committee on this in the coming weeks.


Before we proceed to the meaning of the term “supply” , it is important to go through the definition of business. All supplies have not been brought to tax under this Act, only those supplies which are “in the course of or furtherance of business”  are taxed.

“Business”  is defined in Section 2(17) of the Model CGST law as:

“(17) “business”  includes –

(a) any trade, commerce, manufacture, profession, vocation or any other similar activity, whether or not it is for a pecuniary benefit;

(b) any transaction in connection with or incidental or ancillary to (a) above;

(c) any transaction in the nature of (a) above, whether or not there is volume, frequency, continuity or regularity of such transaction;

(d) supply or acquisition of goods including capital assets and services in connection with commencement or closure of business;

(e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members, as the case may be;

(f) admission, for a consideration, of persons to any premises; and

(g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation.”

“Business”  under this Act includes trade, commerce, manufacture, vocation, profession as well as any other similar activity. Sub-clause (a) makes pecuniary benefit irrelevant to the enquiry. “Pecuniary”  is anything which is money or whose value can be expressed in monetary terms. The concept of pecuniary benefit is similar to that of “profit motive”  in income tax and sales tax. Just like sales tax, “profit motive”  has been made irrelevant even here.

A transaction which is incidental or ancillary to a trade, commerce, manufacture, profession, vocation or other similar activity will be covered by sub-clause (b). Similarly, an isolated transaction which is in nature of trade, commerce, manufacture, profession, vocation or any other similar activity will be covered by sub-clause (c). In cases covered by sub-clause (b) and (c), pecuniary benefit will again be irrelevant due to the reference to sub- clause (a).

Sub-clauses (d) to (g) deal with special situations which otherwise may not have been considered business.


Now, the definition of “supply” , which is exclusively dealt with by Section 3, says:

“3. Meaning and scope of supply

(1) Supply includes

(a) all forms of supply of goods and/or services such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business,

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

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

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

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

(3) Subject to sub-section (2), the Central or a State Government may, upon recommendation of the Council, specify, by notification, the transactions that are to be treated as—

(i) a supply of goods and not as a supply of services; or

(ii) a supply of services and not as a supply of goods; or

(iii) neither a supply of goods nor a supply of services.

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

All forms of supply are covered by sub-clause (1)(a), whether sale, barter, exchange, licence, rental, lease or disposal. The tax is on “supplies of goods and services”  which are “made for consideration”. The “supply for consideration”  formula is also used in the EU VAT directive, New Zealand, Australian and Canadian GST laws. “Supply for consideration”  postulates a link between “supply”  and “consideration”  which is a sufficient nexus as opposed to remote, imaginary or fantastic nexus.

Sub-clause (b) declares importation of services as “supply”. For importation of services to be treated as supply, it is not necessary that the supply has to be for consideration or that it has to be in course of or furtherance of business.

Schedule I supplies are deemed to be supplies irrespective of whether the same are made or agreed to be made for consideration. Schedule I lists the following supplies:


1. Permanent transfer/disposal of business assets

2. Temporary application of business assets to a private or non-business use

3. Services put to a private or non-business use

4. Assets retained after de-registration

5. Supply of goods and/or services by a taxable person to another taxable or non-taxable person in the course or furtherance of business

Provided that the supply of goods by a registered taxable person to a job-worker in terms of section 43A shall not be treated as supply of goods.”

Clause 5 of this Schedule I should be of some interest, because it makes the requirement of consideration irrelevant for all supplies. This Schedule I has been borrowed from the UK VAT Act, but in the UK the requirement of consideration is the norm and the Government has to specifically notify a supply for the purpose of taking away the requirement of consideration. As such, clause 5 conflicts directly with the provisions of section 3(1)(a).

Sub-clause (2) of section 3 speaks of a Schedule II which classifies a supply as either a supply of goods or of services. This would be important since the place and time of supply rules for goods as well as services differ.

Sub-clause (3) empowers the Central Government (State Government in case of SGST) to notify whether a particular supply is a supply of goods or services or neither.


“Consideration”  which is defined in Section 2(28) of the Model CGST law:

“(28) “consideration”  in relation to the supply of goods and/or services to any person, includes

(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods and/or services, whether by the said person or by any other person;

(b) the monetary value of any act or forbearance, whether or not voluntary, in respect of, in response to, or for the inducement of, the supply of goods and/or services, whether by the said person or by any other person:

Provided that a deposit, whether refundable or not, given in respect of the supply of goods and/or services shall not be considered as payment made for the supply unless the supplier applies the deposit as consideration for the supply.”

Consideration is very widely defined. It can be either monetary or non-monetary in form. Apart from payments, consideration can take the form of an act or forbearance (Forbearance here would mean a party refraining from exercising their rights for consideration). It is not necessary that consideration be provided voluntarily. The consideration has to be “in respect of, in response to, or for the inducement of”  a supply. These words, borrowed from New Zealand, have been held there to imply that some binding obligation (even if not enforceable in Court) is created between the supplier and the recipient and the the obligations of supply and consideration are reciprocal in nature.

Consideration can move from the supply recipient or “any other person”. Thus third party consideration is sufficient consideration.

Proviso to Section 2(28) of the Model GST law speaks about deposits which are given in respect of supply of goods and services. Such deposits, whether refundable or not, are not to be treated as consideration till the supplier applies them as consideration for the supply.

Comments are closed.