Schedule I of CGST Act: Deeming Fictions

“Taxable Event” is the soul of every taxation regime. Taxable Event decides whether any transaction shall be subject to levy of tax or not. Since taxable event acts as a trigger event, it becomes imperative to determine the accurate taxable event. 

Prior to the introduction of GST, there were multiple taxable events under different taxation regimes namely, Manufacture, Sale, Removal, Provision of Service, Payment etc. Since GST was introduced in replacement to multiple taxation laws, setting up an appropriate taxable event was of utmost importance. 

On the basic reading of supply as contained in section 7 of the Act, it can be derived that GST shall be levied on a transaction carried out in the course of furtherance of business for consideration. But, the Act also specifies certain transactions which shall be DEEMED to be a supply for the purpose of levy of GST. These Deemed supplies have been collated in Schedule-I in GST Act,2017. The entry wise explanation for each of the clause is elaborated hereunder: –

  • Permanent transfer or disposal of business assets where input tax credit has been availed on such assets.

The word transfer/disposal is not defined under the Act, According to general trade parlance: transfer means “Any transfer of goods or right in goods or of undivided share in goods without the transfer of title thereof” and disposal means ”to pass or into the control of someone else; to alienate, bestow, or part with.”

This clause, therefore, covers the scenario where any business assets (on which ITC was once availed) are transferred/disposed of permanently without any consideration. 

Since neither transfer nor disposal is defined in the Act, the next terminology to be unveiled is “Business Assets”. The term ‘Business Asset’ also has not been defined anywhere in the GST Act. As per accounting concepts, if some future benefits are expected to flow from a tangible or intangible item, it can be treated as an ‘asset’. However, there is a slight difference between incurring expenditures and generating an asset. While generating the asset, the primary intention which exists is to obtain future benefits for multiple years, while at the time of incurring expenditures, such intention is for a much shorter period, i.e. normally not more than one year. One observation which requires attention is that the word used in this entry is “business assets”, instead of “goods”. Had it been ‘goods’, then the transfer of every type of item would have got covered under this. But the legislature has intentionally kept this word as “Business Assets” so that only those items get covered here, where the element of future benefits exists. 

One more concern which may arise is the value on which GST shall be subject to the levy. Section 9 of the CGST Act, clearly states that GST shall be levied on the value determined u/s 15. Section 15 states that the value of goods/services supplied shall be the transaction value. Therefore, GST shall be levied on the transaction value.

  • Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business; 

    Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.

On the perusal of the above entry it can be derived that following are the key terms which seek attention: –

  • Related Persons
  • Distinct Persons
  • Gift

To avoid any confusions and resultant litigations later on, ‘related persons’ and ‘distinct persons’ are defined in the act itself.

The term ‘gift’ has not been defined in the GST law. However, press release dated 10.07.2017 clarified that “In common parlance, the gift is made without consideration, is voluntary in nature and is made occasionally. It cannot be demanded as a matter of right by the employee and the employee cannot move a court of law for obtaining a gift.”

Further, according to Transfer of Property Act “Gift is the transfer of certain existing movable or immovable property made voluntarily and without consideration, by one person to another, “

On the examination of the above key terminologies, we can conclude the following:-

Stock Transfers within the entity amongst separate GSTINs

Transactions between different locations (with separate GST registrations) of the same legal entity (e.g., stock transfers or branch transfers) will qualify as ‘supply’ under GST because the movement of goods in the course or furtherance of a business without any consideration to a distinct person shall be considered as a deemed supply.

Supply of goods or services or both between an employer and employee:

By virtue of the definition of the related person given above, employer and employee are 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 a supply of services by virtue of Schedule III of CGST Act.

But, any of the goods or services supplied by the employer to the employee (in the course or furtherance of business) will be covered under the scope of the term “supply” although it is supplied without consideration.

Gifts by the employer to an employee : 

Schedule I provides that 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. However, gifts of value more than Rs. 50,000 made without consideration are subject to GST when made in the course or furtherance of business. [If gifts of Rs. 55,000 per employee are given then GST will be levied on entire Rs. 55,000]

One ongoing disparity which is presently prevailing in the industry is that whether essential supplies ( such as masks, sanitizers etc.) made to the employees on account of COVID-19 shall constitute a gift under this entry or not. In the present case, the Company is incurring such expenses in pursuant to a statutory obligation, and not ‘voluntarily’, Therefore, such supplies shall not constitute a supply under this clause.

  • Supply of goods
    • 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.

Supplies amongst Principal and Agent have always been a hot topic to be talked about. A Clarification regarding Scope of Principal-agent relationship in the context of Schedule I of the CGST Act was also issued on 04.09.2018. 

  • 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.

This clause has been inserted in the schedule to capture those transactions which are entered between related parties across the borders of the countries since these transactions are otherwise not captured in any of the above clauses. The Act even contains special Time of Supply Provisions for aforementioned transactions to be earlier of Date of entry in the Books of Account or Date of Payment.

It is worth to mention that this entry covers only those scenarios where import is in the course or furtherance of business. On the Conjoint reading of Section 7(1) (b) and the aforementioned entry, the following matrix can be derived: –

Import of Service

Whether in the course or furtherance of business

Whether a Taxable Supply?

For Consideration

In the Course or Furtherance of Business

Yes

Not in the Course or Furtherance of Business

Yes

Without Consideration

In the Course or Furtherance of Business

 

(a)   Transactions between Related Persons/ any of his other establishment outside India

Yes

(b)   Other cases

No

Not in the Course or Furtherance of Business

No

Through Schedule-I the government aims to capture those scenarios where there might be leakage of taxes. While the GST Act is actually a compendium of the Tri-Schedules serving different purposes whereby it actually aims to clear those scenarios which were subject to dispute in the earlier regime whether it be taxability of software as goods or services or whether it be the recovery of notice pay subject to tax. Schedule-I is one such crucial Ace in the pack of cards for the Government when it comes to revenue collection and may be used to bring any such transaction without consideration into the tax net.



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