Section 7 defines that taxable event under GST is supply of goods and services or both.

It means if there is no supply, then no GST will be levied.

Section 7 and 8 of CGST Act defines supply.

Unless any transaction comes under definition of supply, it shall not be taxable under GST.

Various taxable events namely manufacture, sale, rendering of service, purchase, entry into a territory of State etc. that existed prior to introduction of GST have been done away with in favour of just one event i.e. Supply.

Question & Answer

Section 7

Meaning and scope of supply

Section 8

Taxability of composite and mixed supplies

Schedule I

Activities to be treated as supply even if made without consideration

Schedule II

Activities or transactions to be treated as supply of goods or as supply of services

Schedule III

Activities or transactions which shall be treated neither as supply of goods nor as supply of services.

Section 7(1)

For the purposes of this Act, “supply” includes

(a) all forms of supply of goods or services or both

such as sale, transfer, barter, exchange, licence, rental, lease or disposal

for a consideration

by a person

in the course or furtherance of business;

[1][(aa) the activities or transactions, by a person, other than an individual,

to its members or constituents or vice-versa,

for cash, deferred payment or other valuable consideration.

Person and its member shall be deemed to be separate person

Explanation.–For this clause, it is hereby clarified that,

notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority,

the person and its members or constituents shall be deemed to be two separate persons and

the supply of activities or transactions inter se shall be deemed to take place from one such person to another]

(b) import of services

for a consideration

whether or not in course of business;

(c) Deemed Supply without consideration as specified in Schedule I

Under GST laws, supply has been defined in 4 parts

‘Supply’ as contained in section 7 is an inclusive definition and does not define the term exhaustively. This is substantiated by the use of words ‘such as’ in the definition.

Question & Answer

Section 7(1)(a)

“supply” includes

all forms of supply of goods or services or both

such as sale, transfer, barter, exchange, licence, rental, lease or disposal

for a consideration

by a person

in the course or furtherance of business;

There are 3conditions for any transactions to be supply u/s 7(1)(a)

1) Supply should be of goods and / or services.

2) Supply should be for consideration.

4) Supply should be in the course or furtherance of business.

Question & Answer

Supply of anything other than goods or services does not attract GST

e.g. Supply of Money, securities etc.

Refer section 2(52) for meaning of goods

Refer section 2(102) for meaning of services

Ex

Trading on securities are not supply as securities are excluded from definitions of goods.

Question & Answer

Supply should be made for a consideration except in case of deemed supplies in Schedule I.

Any transaction involving supply of goods and/or services without consideration or free of cost is not a supply under GST unless it is deemed supply under Schedule I.

Refer section 2(31) for meaning of consideration

Ex

Art works sent by artists to galleries for exhibition is not a supply as no consideration flows from the gallery to the artists.

Question & Answer

GST is essentially a tax only on commercial transactions. Hence, only those supplies that are in the course or furtherance of business qualify as supply under GST.

Supply should be made in the course or furtherance of business except in case of Import of Services as defined in clause (b) above.

Hence, any supplies made by an individual in his personal capacity do not come under the ambit of GST.

Refer section 2(17) for meaning of business.

Ex

Mr A buys a car for his personal use and after a year sells it to a car dealer. Sale of car by Mr A to car dealer is not a supply under CGST Act because said supply is not made by Mr A in the course or furtherance of business

Manikarnika sold her old gold bangles and earrings to ‘Aabhushan Jewellers’. Sale of old gold jewellery by an individual to a jeweller will not constitute supply as the same cannot be said to be in the course or furtherance of business of the individual

In view of definition of business, it is also possible to take a view in the above examples that sale of car by Rishabh and sale of old gold jewellery by Manikarnika have been made in the course or furtherance of business and thus will constitute a supply. Since ‘business’ includes vocation, therefore sale of goods or service as a vocation is also a supply under GST.

Question & Answer

Every person carries out certain activities regularly for running existing trade or commerce.

Ex

[ICMA-F-Ch2-Ex1] [ICMA-I-Ch2-Ex1]

CMA Ram a practicing Cost Accountant carries out the activity of Accounting, Auditing, Filing returns, certifying documents and so on so forth. These activities can be considered as performed in the course of business.

Every business person use to think how to develop his business or carrying out new activities. Such activities called as furtherance of business.

Ex

[ICMA-F-Ch2-Ex2] [ICMA-I-Ch2-Ex2]

M/s X Ltd. manufacturing of motor cars. Company use to sell more number of cars in Southern India. In view of demand in Southern India, company intends to establish manufacturing unit in Chennai. M/s X Ltd. appointed Mr. Y as a consultant for searching, evaluating and shorting places for prospective targets. Finally company decided to establish unit at Ambattur Industrial Estate Chennai. Hence, Mr. Y carried out various activities is in furtherance of business of M/s X Ltd.

Various forms of supply contemplated in Section 7(1)(a) are sale, transfer, barter, exchange, licence, rental, lease or disposal.  However, none of these terms have been defined under the Act.

Various taxable events namely manufacture, sale, rendering of service, purchase, entry into a territory of State etc. have been done away with in favour of just one event i.e. Supply.

a)

Sale

Under GST laws definition of sale is not given.

The dictionary meaning of term ‘sale’ is the act of selling, specifically the transfer of ownership of and title to property from one person to another for a price.

As per the Sale of Goods Act, 1930, a contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price.

Further, the term ‘transfer’ has been defined in the Black’s Law dictionary as to convey or remove from one place, person, etc., to another; pass or hand over from one to another; specifically, to make over the possession or control of.

“Sale” involves transfer of property in goods from one person to another person for consideration.

Ex

[ICMA-F-Ch2-Ex3] [ICMA-I-Ch2-Ex3]

Mr. X sold laptop worth Rs.1,00,000 and issued invoice in favour of Mr. Y. Now ownership in laptop transferred to Mr. Y. Such transaction shall be covered in sale. It is treated as supply of goods under GST.

b)

“Transfer” means, where the ownership may not be transferred but the right in the goods is transferred.

Ex

[ICMA-F-Ch2-Ex8] [ICMA-I-Ch2-Ex8]

Mr. A is the owner of Xerox machine. He transferred the right to operate the Xerox machine to Mr. B for a consideration of Rs.10,000 per month for four months. Hence, ownership of the machine is not transferred but the right in the machine is transferred. It is treated as supply of services under GST.

Question & Answer

a)

The dictionary meaning of term ‘barter’ is to exchange goods or services for other goods or services instead of using money.

Black’s Law dictionary defines the term ‘exchange’ as an act of giving or taking one thing for another.

“Barter” deals with a transaction which only includes an exchange of goods/services,

Exchange may cover a situation where the goods are paid for partly in goods and partly in money. When there is a barter of goods or services, same activity constitutes supply as well as consideration.

Ex

[ICMA-F-Ch2-Ex9] [ICMA-I-Ch2-Ex9]

Mr. C, a practicing Cost Accountant provided services to M/s A Ltd., dealer of laptops. In return M/s A Ltd., given to Mr. C two laptops. Here, two-way supply takes place. Mr. C is making taxable supply of service and M/s A Ltd., is making taxable supply of goods. Hence, tax is payable by both.

a)

The dictionary meaning of the term ‘licence’ is a permission granted by competent authority to engage in a business or occupation or in an activity otherwise unlawful.

Black’s law dictionary defines disposal as the sale, pledge, giving away, use, consumption or any other disposition of a thing.

“Licence” where one person grants to another, or to a definite number of other persons, a right to do or continue to do in or upon the immovable property of the granter, the right is called a licence.

Ex

[ICMA-F-Ch2-Ex13] [CMA-I-Ch2-Ex13] License

Mr. X, a developer of information technology software and holder of licence thereon. License to use software was given to different clients: hence, Mr. X is liable to pay GST whether he transfer such right permanently or temporarily as the case may be.

b)

Rental: Periodical payment for use of another’s property. The dictionary meaning of ‘rental’ is an arrangement to rent something, or the amount of money that you pay to rent something5 and that of ‘lease’ is to make a legal agreement by which money is paid in order to use land, a building, a vehicle, or a piece of equipment for an agreed period of time6.

Ex

[ICMA-F-Ch2-Ex15] [ICMA-I-Ch2-Ex15]

Mr. A owns a residential building in a prime commercial locality. Large vacant land in the backyard is given on rent of Rs.1,80,000 per month to a parking contractor, Mr. B who has set up a parking facility on the said land. It is a taxable supply of service and hence, Mr. A is liable to pay GST.

[ICMA-F-Ch2-Ex16] [ICMA-I-Ch2-Ex16]

Mr. X, the owner of a residential building in a commercial locality, Ground Floor is given on rent to Mr. Y for a monthly rent of Rs.60,000. Mr. Y uses the same as his residence. It is a supply of service.

c)

Lease: A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. A lease may be financial lease or operating lease.

Ex

[ICMA-F-Ch2-Ex17] [ICMA-I-Ch2-Ex17]

M/s M Bank Ltd., given an asset under financial lease to M/s N Ltd. Repayment of financial lease made by the customer to the bank Rs.80 lakhs which includes a principal amount of Rs.50 lakhs. Financial leases shall be taxed as supply of services. M/s M Bank Ltd., is liable to pay GST.

d)

Disposal: Disposal normally considered as selling of assets when the organization is about to close down and various assets are required to be disposed of. Such transactions will also be considered as supply of liable to tax under GST Law.

Circular No. 116/35/2019-GST dt 11-10-2019

Issue

Whether GST is applicable on donations or gifts received from individual donors by charitable organisations involved in advancement of religion, spirituality or yoga which is acknowledged by them by placing name plates in the name of the individual donor.

Clarifications

2.

Individual donors provide financial help or any other support in the form of donation or gift to religious institutions, charitable organisations, schools, hospitals, orphanages, old age homes etc.

The recipient place a name plate or similar such acknowledgement in their premises to express the gratitude.

When the name of the donor is displayed in recipient institution premises, in such a manner, which can be said to be an expression of gratitude and public recognition of donor’s act of philanthropy and is not aimed at giving publicity to the donor in such manner that it would be an advertising or promotion of his business,

then it can be said that there is no supply of service for a consideration (in the form of donation). There is no obligation (quid pro quo) on part of recipient of the donation or gift to do anything (supply a service). Therefore, there is no GST liability on consideration.

Donations received by the charitable institutions from individual donors are treated as consideration only if there exists, quid pro quo, i.e., there is an obligation on part of recipient of the donation or gift to do anything.

2.1

Some examples of cases where there would be no taxable supply are as follows:-

(a) “Good wishes from Mr. Rajesh” printed underneath a digital blackboard donated by Mr. Rajesh to a charitable Yoga institution.

(b) “Donated by Smt. Malati Devi in the memory of her father” written on the door or floor of a room or any part of a temple complex which was constructed from such donation.

2.2

In each of these examples, it may be noticed that there is no reference or mention of any business activity of the donor which otherwise would have got advertised.

Thus where all the three conditions are satisfied namely the gift or donation is made to a charitable organization, the payment has the character of gift or donation and the purpose is philanthropic (i.e. it leads to no commercial gain) and not advertisement, GST is not leviable.

Question & Answer

Section [3][7(1)(aa)

For the purposes of this Act, “supply” includes

the activities or transactions, by a person, other than an individual,

to its members or constituents or vice-versa,

for cash, deferred payment or other valuable consideration.

Explanation.–For this clause, it is hereby clarified that, notwithstanding anything contained in any other law for the time being in force or any judgment, decree or order of any Court, tribunal or authority, the person and its members or constituents shall be deemed to be two separate persons and the supply of activities or transactions inter se shall be deemed to take place from one such person to another]

The purpose of above section is to constitute activities or transactions between an association, club or similar entities and its members or constituents as ‘supply’.

For the purpose of taxability, the members and the entity shall be deemed to be two distinct persons.

Ex

[ICMAI-F-Ch2-84] [ICMAI-I-Ch2-87]

(a) A club has opened up a shop. The members can purchase various goods from such sops. It is a supply of goods.

(b) A local association supplies tea and snacks to its members during its meeting for a nominal payment. It is also called as supply of goods.

RE : IIT Madras Alumni Association (IIMAA) [2020 (42) G.S.T.L. 564 (A.A.R. - GST - T.N.)]

Query: Whether collecting money by IITMAA from its members and receiving donations/grants/subsidies/ budgetary support from IIT, Madras to defray expenses incurred towards administering the association and other expenses related to its engagement activities initiated by members themselves amounts to supply or not. Consequently, whether there is any liability to comply with GST law including registration and payment of tax.

Held: There should be a supply of goods or service, recipient, provides consideration, in the course or for furtherance of business.

In the instant case it is evident from the Bye-laws/MOA submitted by the applicant that the mission of IITMAA is to provide a forum for its members and to facilitate professional networking among alumni, students, faculty for mutual benefit in academic, professional, and business areas and to facilitate alumni to contribute to IIT Madras by raising funds, sharing knowledge/expertise, research, academic support, technical collaboration etc. the objectives also include helping alumni families and needy alumni and mobilize funds to manage the association affairs.

The applicant collects membership fee from the members and also collects charges for various events, activities which include conducting seminars, holding meetings, organizing events, publishing magazines and newsletters, maintaining websites, and technology infrastructure for the benefit of its members. Thus, the supply of the services of these activities by the applicant to its members for consideration either in form of membership fee or additional charges collected for specific activities constitute a ‘supply of service’ under Section 7(l)(a) as it is in the course of furtherance of business of the applicant as per Section 2(17) of the Act.

Circular No. 35/09/2018-GST dt. 05-03-2018

1.

In the Service Tax regime, CBEC vide Circular No. 179/5/2014 –ST dt. 24-09-2014 had clarified that if cash calls are merely transaction in money, then they are excluded from the definition of service provided in Section 65B (44) of the Finance Act, 1994.

The Circular clarified that cash calls, sometimes, could be in the nature of advance payments made by members towards taxable services received from JV and that payments made out of cash calls pooled by a JV towards taxable services received from a member or a third party is in the nature of consideration and hence attracts Service Tax.

2.

In the Service Tax Law, service was defined as an activity carried out by a person for another for consideration [Section 65B(44) of the Finance Act 1994].

Explanation 3 to the said definition stated than an unincorporated association or a body of persons as the case may be, and a member thereof shall be treated as distinct persons.

3.

Reference of section 7 of the CGST Act state that

“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, and includes activities specified in Schedule II to the CGST Act, 2017.

“Business” defined in section 2(17) of CGST Act states that “business” includes 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.

“Person” defined in section 2(84) of the CGST Act, 2017 includes an association of persons or a body of individuals, whether incorporated or not, in India or outside India.

Further, Para 7 of Schedule II of CGST Act,2017 states that supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration shall be treated as supply of goods.

A conjoint reading of the above provisions of the law implies that supply of services by an unincorporated association or body of persons (AOP) to a member thereof for cash, deferred payment or other valuable consideration shall be treated as supply of services.

The above entry in Schedule II is analogous to and draws strength from the provision in Article 366(29A)(e) of the Constitution according to which a tax on the sale or purchase of goods includes a tax on the supply of goods by any unincorporated association or body of persons to a member thereof or cash, deferred payment or other valuable consideration.

4.

Joint Venture

Therefore, the law with regard to levy of GST on service supplied by member of an unincorporated JV to the JV or to other members of the JV, or by JV to the members, essentially remains the same as it was under service tax law.

Thus, it is clarified that the clarification given vide Board Circular No. 179/5/2014 –ST dt. 24-09-2014 ibid in the context of service tax is applicable for the purpose of levy of GST also.

It is reiterated that the question whether cash calls are taxable or not will entirely depend on the facts and circumstances of each case. ‘Cash calls’ are raised by an operating member of the JV on other members in proportion to their participating interests in the JV (unincorporated) to meet the expenditure on the operations to be carried out as per the approved work programme and budget. Taxability of cash calls can be further explained by the following illustrations:

llustration A: There are 4 members in the JV including the operating member and each one contributes Rs 100 as part of their share. A total amount of Rs 400 is collected. The operating member purchases machinery for Rs 400 for the JV to be used in oil production.

Illustration A will not be the subject matter of ‘ST/GST’ for the reason that the operating member is not carrying out an activity for another for consideration. In Illustration A, the money paid for purchase of machinery is merely in the nature of capital contribution and is therefore a transaction in money.

Illustration B: There are 4 members in the JV including the operating member and each one contributes Rs 100 as part of their share. A total amount of Rs 400 is collected. The operating member thereafter uses its own machine and performs exploration and production activities on behalf of the JV.

In Illustration B, the operating member uses its own machinery and is therefore providing ‘service’ within the scope of supply of CGST Act, 2017. This is because in this scenario, the operating member is recovering the cost appropriated towards machinery and services from the other JV members in their participating interest ratio.

Section 7(1)(b)

“supply” includes import of services for a consideration whether or not in course of business

Refer section 2(11) of IGST Act for meaning of Import of services

Import of Services may or may not be in the course or furtherance of business.

Import of services for personal or business purpose is supply u/s 7(1)(b).

Import of goods for personal purpose is not a supply under GST.

On Import of Service, IGST has to be paid u/s 21 of the IGST Act, 2017.

Ex

Ramaiyaa, a proprietor, has received the architect services for his house from an architect located in New York at an agreed consideration of $ 5,000. The import of services by Ramaiyaa is supply u/S 7(1)(b) though it is not in course or furtherance of business.

Question & Answer

Section 7(1)(c)

the activities specified in Schedule I, made or agreed to be made without a consideration;

Even certain activities or transactions are considered as supply without consideration under Sch I

Refer complete guide on Deemed Supply without consideration under Schedule I

Extract of Circular No. 92/11/2019 - GST dated 07-03-2019

A

A. Free samples without consideration are not supply u/s 7(1)(a)

It is a common practice among 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 section 7(1)(a), 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.

B

Buy one get one free offer is a mixed or composite supply and ITC is available on same

i. 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 section 7(1)(a), 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 section 8.

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.

Question & Answer

Extract of Circular No. 22/22/2017 - GST dated 21-12-2017

Issue: In case of art work, if the art work is selected by the buyer, then the supplier issues a tax invoice only at the time of supply. It has been represented that the artists give their work of art to galleries where it is exhibited for supply. There seems to be confusion regarding the treatment of this activity whether it is taxable in the hands of the artist when the same is given to the art gallery or at the time of actual supply by the gallery.

5.

It is clarified that in case of supply by artists through galleries, there is no consideration flowing from the gallery to the artist when the art works are sent to the gallery for exhibition and therefore, the same is not a supply.

It is only when the buyer selects a particular art work displayed at the gallery, that the actual supply takes place and applicable GST would be payable at the time of such supply.

[4][Section 7(1A)

where transactions constitute a supply as per sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II

Need of Schedule II

The matters listed out in Schedule II are primarily those which had been entangled in litigation in the earlier regime owing to their complex nature and susceptibility to double taxation.

Ex: Under earlier laws, the restaurants used to charge both service tax and VAT on the value of food served. This so because both sale of goods and provision of service were involved and therefore taxable event under both the Statutes i.e. respective VAT law and service tax law got triggered.

But under GST, the supply by a restaurant is treated as supply of service as per Schedule II.

Reason of amendments

The objective to amend Section 7 of the Act is to clarify the scope of supply; It Inserts a new sub-section (1A) in section 7(1)(d).

Now, first an activity has to be “supply” as per Sch(1) only then it will be tested as per Schedule II. The recent AAR whereby supply of canteen services by employer to employee is a supply and hence taxable as per Sch II, clause No 6 (b), will be tested now

Refer complete guide on Schedule II.

Section 7(2)

Notwithstanding anything contained in sub-section (1),–

(a) activities or transactions specified in Schedule III; or

(b) such activities or transactions undertaken by CG, a SG or any local authority in which they are engaged as public authorities, as may be notified by the Government,

shall be treated neither as a supply of goods nor a supply of services

Section 7(2) can be termed as negative list as it overrules section 7(1) and (1A) and states that following activities/transactions even they are supply within the meaning of section 7(1) but shall not be treated as supplies of goods and services

(a) transaction specified in Schedule III; or

(b) transaction undertaken by CG, a SG or any local authority in which they are engaged as public authorities, as may be notified by the Government,

Refer complete guide on Schedule III which is not supply under GST Laws.

Refer notified activities/transaction u/s 7(2)(b) which is not supply under GST laws.

Question & Answer

Through various circulars, following activities were clarified as non gst supply.

Circular No. 01/01/2017-IGST dt. 07-07-2017

The issue relating to levy of IGST exemption on inter-state movement of various modes of conveyance, carrying goods or passengers or for repairs and maintenance,

between distinct persons as specified in section 25(4)

carrying goods or passengers or both; or for repairs and maintenance, [except in cases where such movement is for further supply of the same conveyance] has been examined.

2.

In the above context, following legal provisions in GST laws are as under:

a) Compulsory registration u/s 24(1)(i), persons making any inter-State taxable supply is required to be registered under this Act.

b) Distinct person u/s 25(4)

c) Supply without consideration between related or distinct person under Para 2 of Schedule I

d) Non GST supply u/s 7(2)(a)

3 & 4

Based on above provisions, inter-state movement of various modes of conveyance, between distinct persons not involving further supply of such conveyance, including

i. Trains, ii. Buses, iii. Trucks, iv. Tankers, v. Trailers, vi. Vessels, vii. Containers, viii. Aircrafts,

(a) for carrying goods or passengers or both; or

(b) for repairs and maintenance,

shall be treated ‘neither as a supply of goods or supply of service’ and therefore not be leviable to IGST.

5.

However, applicable CGST/SGST/IGST, shall be leviable on repairs and maintenance done for such conveyance.

Inter-State movement of vehicles are treated as supply if it is meant for further supply.

Circular No. 21/21-2017-CGST dt. 22-11-2017

1.

The issue of IGST exemption on inter-state movement of various modes of conveyance, between distinct persons as specified in section 25(4) of the Central Goods and Services Tax Act, 2017, carrying goods or passengers or both; or for repairs and maintenance, [except in cases where such movement is for further supply of the same conveyance] was examined and a circular 1/1/2017-IGST dated 7.7.2017, was issued clarifying that such interstate movement shall be treated “neither as a supply of goods nor supply of service” and therefore would not be leviable to IGST.

2.

The issue pertaining to inter-state movement of rigs, tools and spares, and all goods on wheels [like cranes] was discussed in GST Council’s meeting held on 10th November, 2017 and the Council recommended that the circular 1/1/2017-IGST shall mutatis mutandis apply to inter-state movement of such goods, and except in cases where movement of such goods is for further supply of the same goods, such inter-state movement shall be treated ‘neither as a supply of goods or supply of service,’ and consequently no IGST would be applicable on such movements.

3.

In this context, it is also reiterated that applicable CGST/SGST/IGST, as the case maybe, is leviable on repairs and maintenance done for such goods.

Question & Answer

Section 7(3)

Subject to the provisions of [5][sub-sections (1), (1A) and (2)],

Government may specify, by notification, the transactions that are to be treated as

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

(b) a supply of services and not as a supply of goods.

. Circular No. 195/07/2023-GST dated 17-07-2023

Issue-1

Whether GST would be payable on replacement of parts or supply of repair services by original equipment manufacturer, without any consideration from the customer, as part of warranty?

Clarification

The value of original supply of goods (provided along with warranty) by the manufacturer to the customer includes the likely cost of replacement of parts and / or repair services to be incurred during the warranty period, on which tax would have already been paid at the time of original supply of goods.

As such, where the manufacturer provides replacement of parts and/ or repair services to the customer during the warranty period, without separately charging any consideration at the time of such replacement/ repair services, no further GST is chargeable on such replacement of parts and/ or repair service during warranty period.

However, if any additional consideration is charged by the manufacturer from the customer, either for replacement of any part or for any service, then GST will be payable on such supply with respect to such additional consideration.

Issue-3

Whether GST would be payable on replacement of parts and/ or repair services provided by a distributor without any consideration from the customer, as part of warranty on behalf of the manufacturer?

Clarification

Where a distributor of a company provides replacement of parts and/ or repair services to the customer as part of warranty on behalf of the manufacturer and no separate consideration is charged by such distributor in respect of the said replacement and/ or repair services from the customer.

In such cases, as no consideration is being charged by the distributor from the customer, no GST would be payable by the distributor on the said activity of providing replacement of parts and/ or repair services to the customer.

However, if any additional consideration is charged by the distributor from the customer, either for replacement of any part or for any service, then GST will be payable on such supply with respect to such additional consideration.

Issue-4

Where the distributor provides replacement of parts to the customer as part of warranty on behalf of the manufacturer, whether any supply is involved between the distributor and the manufacturer and whether the distributor would be required to reverse the ITC in respect of such replacement of parts?

Clarification

(a) where the distributor replaces the part(s) to the customer under warranty either by using his stock or by purchasing from a third party and charges the consideration for the part(s) so replaced from the manufacturer, by issuance of a tax invoice, for the said supply made by him to the manufacturer. In such a case, GST would be payable by the distributor on the said supply by him to the manufacturer and the manufacturer would be entitled to avail the ITC of the same, subject to other conditions of CGST Act. In such case, no reversal of ITC by the distributor is required in respect of the same.

(b) Where the distributor raises a requisition to the manufacturer for the part(s) to be replaced by him under warranty and the manufacturer then provides the said part(s) to the distributor for the purpose of such replacement to the customer as part of warranty. In such a case, where the manufacturer is providing such part(s) to the distributor for replacement to the customer during the warranty period, without separately charging any consideration at the time of such replacement, no GST is payable on such replacement of parts by the manufacturer. Further, no reversal of ITC is required to be made by the manufacturer in respect of the parts so replaced by the distributor under warranty.

(c) Where the distributor replaces the part(s) to the customer under warranty out of the supply already received by him from the manufacturer and the manufacturer issues a credit note in respect of the parts so replaced subject to provisions of sub-section (2) of section 34 of the CGST Act. Accordingly, the tax liability may be adjusted by the manufacturer, subject to the condition that the said distributor has reversed the ITC availed against the parts so replaced

Issue-5

Where the distributor provides repair service, in addition to replacement of parts or otherwise, to the customer without any consideration, as part of warranty, on behalf of the manufacturer but charges the manufacturer for such repair services either by way of issue of tax invoice or a debit note, whether GST would be payable on such activity by the distributor?

Clarification

In such scenario, there is a supply of service by the distributor and the manufacturer is the recipient of such supply of repair services as per provisions of clause 2(93)(a) of the CGST Act.

Hence, GST would be payable on such provision of service by the distributor to the manufacturer and the manufacturer would be entitled to avail the ITC of the same, subject to other conditions of CGST Act.

Issue-6

Sometimes companies provide offers of Extended warranty to the customers which can be availed at the time of original supply or just before the expiry of the standard warranty period. Whether GST would be payable in both the cases?

Clarification

(a) If a customer enters in to an agreement of extended warranty with the manufacturer at the time of original supply, then the consideration for such extended warranty becomes part of the value of the composite supply, the principal supply being the supply of goods, and GST would be payable accordingly

(b) However, in case where a consumer enters into an agreement of extended warranty at any time after the original supply, then the same is a separate contract and GST would be payable by the service provider, whether manufacturer or the distributor or any third party, depending on the nature of the contract (i.e. whether the extended warranty is only for goods or for services or for composite supply involving goods and services)

Question & Answer