Meaning of “supply” in CGST Act, 2017

Section 7 – Meaning and scope of supply with analysis of Schedule I, II, and III.

Generic meaning of Supply

Supply includes—

1. (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.

Deemed Supply

b) Importation of services, for a consideration whether or not in the course or furtherance of business.

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

Clarification on “Supply”

d) The activity is to be treated as a supply of goods or a supply of services as referred in schedule II.

Negative List of “Supply”

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

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

(b) activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, shall be treated neither as a supply of goods nor a supply of services.

Clarification through Notification by Government.

(3) Subject to sub-section (1) and 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—

(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.

Dictionary Meaning of “Supply”

The amount of goods produced or available at the given price. “Black’s Law Dictionary”.

Make (something needed or wanted) available to someone. “Oxford Dictionary”.

To make (something) available to be used. “Medical Dictionary”.

Q 1 : Whether One person can make supply himself .

Ans. Schedule-I of CGST ACT, has provide the situations where the personal use of goods is treated as supply. But In case of personal use of goods the Input tax credit has not allowed u/s 17 of CGST Act, 2017, therefore Input tax credit has been required to be reverse.

Q 2. Whether provision of service or goods by a club or association or society to its members will be treated as supply or not?

Ans. Yes. Provision of facilities by a club, association, society or any such body to its members shall be treated as supply. This is included in the definition of ‘business’ in section 2(17) of CGST/ SGST Act.

Deemed Supply ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION SCHEDULE-I

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

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

3. Supply of goods—

(a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal,

(b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.

4. Importation of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business.

Analysis of schedule I;

1. Permanent Transfer/disposal of business assets

Para 1 of schedule I read with schedule II & sec 17 (5) (h)

Schedule I

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

Schedule II

(a) where goods forming part of the assets of a business are transferred or disposed of by or under the directions of the person carrying on the business so as no longer to form part of those assets, whether or not for a consideration, such transfer or disposal is a supply of goods by the person;

 Sec 17(5) (h) of CGST ACT, 2017

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples;

Conclusion; The general principal is that where input tax credit has been availed then transfer/ disposal of business assets without consideration is treated as supply of goods. Goods destroyed/ stolen/ written off/ Gift / free sample will not be subjected to GST but input tax credit will have to be reverse.

Transfer/disposal to Personal use of goods

Para 1 of schedule I read with schedule II & sec 17 (5) (g)

Schedule I

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

Schedule II

(b) Goods are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, Whether or not for a consideration, the usage or making available of such goods is a supply of services;

Sec 17(5) (h) of CGST ACT, 2017

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:

(g) goods or services or both used for personal consumption

The general principal is that where input tax credit has been availed then transfer/ disposal of business assets for personal use, without consideration is treated as supply of service.

Treatment; ; Personal use of goods will not be subjected to GST but input tax credit will have to be reverse.

Transfer/ Disposal of goods as going concern

Para 1 of schedule I read with schedule II

Schedule I

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

Schedule II

(c) where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—

(i) the business is transferred as a going concern to another person; or

(ii) the business is carried on by a personal representative who is deemed to be a taxable person.

Conclusion; where input tax credit has been availed then transfer/ disposal of business assets as going concern is  not treated as supply.

2. Related party Transaction

Para 2 of schedule I read with sec 25 and sec 15 of CGST Act, 2017

Para 2 of schedule I. Supply of goods or services 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.

Explanation to sec 15 of CGST, ACT, 2017

A persons shall be deemed to be “related persons” if––

(a) (i) such persons are officers or directors of one another’s businesses; (ii) such persons are legally recognized partners in business; (iii) such persons are employer and employee; (iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them; (v) one of them directly or indirectly controls the other; (vi) both of them are directly or indirectly controlled by a third person; (vii) together they directly or indirectly control a third person; or (viii) they are members of the same family;

(b) the term “person” also includes legal persons;

(c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, howsoever described, of the other, shall be deemed to be related.

Sec 25 of CGST ACT, 2017

(4) A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.

(5) Where 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 establishments shall be treated as establishments of distinct persons for the purposes of this Act.

The transfer of goods/ service to related person and distinct person without consideration (branch transfer) shall be liable to GST. 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.

3.Transaction between principle or agent

(a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal,

(b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.

4. Importation of services

Para 4 of schedule I read with Section 2(26) of IGST Act

Para 4 of schedule I-Importation of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business

The word ‘supply’ includes importation of a service, made for a consideration (as defined in Section 2(28)) and whether or not in the course or furtherance of business. This implies that import of services even for personal consumption would qualify as ‘supply’ and therefore would be liable to tax. This would not be subject to the threshold limit as tax is expected to be payable on reverse charge basis, and the threshold limits do not apply in case of supplies attracting tax on reverse charge basis.

Importation of services is included within the meaning of ‘supply’ under the CGST/ SGST Acts. However, it would be liable to IGST since it would not be an intra- State supply. In fact, Section 2(26) of IGST Act has adopted the meaning of ‘supply’ from CGST/ SGST Act.

Analysis of Schedule II

Schedule II specified those activity which is already a supply under generic meaning of supply, schedule II only clarify that these activity to be treated as supply of goods or supply of service, for removal of dispute arise whether the activity is a supply of service or good.

What is the logic behind the inclusion of “explanatory provisions” in main definition, the intention may be that if there is any dispute arise whether the activity mention in schedule II, is supply? Then schedule II will be refer for that and activity specified in schedule II will be treated as supply.

Second is the judgment of Ranchi High court in which it was held that “explanation” cannot override the main provision of section. Therefore activity specified in schedule II include in meaning of supply and not provide as explanation.

The Activity specified in schedule II, shall be treated either supply of goods or service even if it is a “composite supply”.

 “Activity” to be treated as supply of goods

  • any transfer of the title in goods is a supply of goods;
  • any transfer of title in goods under an agreement which stipulates that property in goods shall pass at a future date upon payment of full consideration as agreed, is a supply of goods.
  • where goods forming part of the assets of a business are transferred or disposed of whether or not for a consideration, such transfer or disposal is a supply of goods by the person.
  • Supply of goodsby any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration.
  • where any person ceases to be a taxable person, any goods forming part of the assets of any business carried on by him shall be deemed to be supplied by him in the course or furtherance of his business immediately before he ceases to be a taxable person, unless—(i) the business is transferred as a goingconcern to another person; or (ii) the business is carried on by a personal representative who is deemed to be a taxable person.

“Activity” to be treated as supply of service

  • Any transfer of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services;
  • Any treatment or process which is applied to another person’s goods is a supply of services.(JOB WORK)
  • Goods are put to any private use or are used, or made available to any person for use, for any purpose other than a purpose of the business, whether or not for a consideration, the usage or making available of such goods is a supply of services;
  • renting of immovable property; (commercial, industrial or residential complex for business or commerce)
  • construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier
  • temporary transfer or permitting the use or enjoyment of any intellectual property right;
  • development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software;
  • agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; and
  • works contract as defined in clause (119) of section 2;
  • Supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.

Negative List of supply ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES –SCHEDULE III

1. Services by an employee to the employer in the course of or in relation to his employment.

2. Services by any court or Tribunal established under any law for the time being in force.

3. (a) the functions performed by the Members of Parliament, Members of State Legislature, Members of Panchayats, Members of Municipalities and Members of other local authorities;

(b) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or

(c) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or a State Government or local authority and who is not deemed as an employee before the commencement of this clause

4. Services of funeral, burial, crematorium or mortuary including transportation of the deceased

5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

6. Actionable claims, other than lottery, betting and gambling.

Types of Supply

Taxable supply means [sec 2(108)] :

  • A supply of goods and/or services
  • Which is chargeable to tax under this Act

Non-taxable supply means [sec 2(78)] :

  • A supply of goods or services or both
  • Which is not chargeable to tax under this Act and under IGST Act

Exempt Supply means [sec 2(47)]:

  • Supply of any goods and / or services or both
    • which attract nil rate ; or
    • which may be wholly exempt u/s 11 or u/s 6 of IGST and
    • Include non taxable supply.

Zero Rated Supply (Sec 16 of IGST ACT) means any of the following taxable supply of goods and/ or services –

  • Export of goods and/ or services; or
  • Supply of goods and/ or services to a SEZ developeror an SEZ unit
  • Subject to provisions of sub section (5) of section 17 of the CGST Act, credit of input tax may be availed for making zero rated supplies, even if that supply is an exempt supply

Composite Supply-Sec 2(30)
“Composite supply” means a supply made by a taxable person to a recipient consisting two or more supplies of goods or services, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Section 2(90)

“Principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary.

Example:
Indian Airlines provides passenger transportation service. They also supply food on board to passengers. Supply of transportation services would be the principal supply and the service as a whole would qualify as composite supply.

Example

 

Mixed Supply Section 2(74)

“Mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply

Examples: Supply of soap bars where soap boxes are given free of cost; supply of wheat for which a bottle of honey is given free of cost. In the above example of honey being supplied with wheat, both wheat and honey will be taxed at the rate of tax applicable for honey (being commodity taxed at higher rate).

Mixed Supply

Taxation of Composite and Mixed supply; Sec 8 of CGST Act, 

The tax liability on a composite or a mixed supply shall be determined in the following manner —
(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply;
(b) a mixed supply comprising two or more supplies shall be treated as supply of that particular supply which attracts the highest rate of tax.

Intra state Vs. Inter -state supply

Intra State-Inter State

 Conclusion: Supply has been define in inclusive manner which provide it wide import, and include the personal consumption/ permanent disposal of goods where credit has been availed. Supply also cover the transaction between related party and distinct person having separate registration. To constitute a supply the GST scheme will be as, where taxable person, has made supply, in the taxable territory, of goods or service or both, for a consideration, in the course or furtherance of business.

Taxation of Composite and works contract under GST ACT, 2017

1. The works contract (Including any transfer of property in goods in the execution of contract) related to immovable property shall be treated as supply of service. Works contract as well as sale of under construction apartment shall be subjected to GST. Currently service tax charge on 40% of project value, thus the effective service tax rate is 6%, similarly effective vat rate around 1% charge on project value in different state. In GST work contract service shall be taxable @ 18%.

2. The sale of under constructed property shall be liable to GST @ 12 %.( including value of land). Presently tax effective tax rate is 4.5% (15% of 30% value of project including land).

3. On other hand full credit of input tax is allowed comparing to current regime where input credit is not allowed, therefore it seem beneficial to real estate industries.

4. Now, question arises in mind what will be treatment of composite contract related to movable property, the concept of composite supply and mix supply has been insert in GST Bill, 2017.

5. Once it is clear that work contract will be tax in GST as service, the distinction between goods and service is relevant only for Place of supply and Point of Taxation.

6. The transaction of sale/ purchase of immovable property shall be constitutionally outside the ambit of GST and shall be liable to stamp duty and property tax under state law.

Transition Provision under GST

A transaction of works contract, is now, sometimes, taxed twice; firstly as sale by the State Government and secondly as service by the Central Government.

Works contracts can straddle two taxable activities as per the current law. There is of course supply of goods. Then, due to the very nature of the contract, there is supply of services.

As of now, the supply of goods is taxable in the form of Value Added Tax (VAT), while the services element is taxable as service tax.

In law, there have been differing views of the Supreme Court and the High Court’s on the applicability of this theory. The final word of the Apex court in BSNL and Others Vs. Union of India (SC 2006) was that the aspects doctrine pertains to legislative competence and not the application of taxation on the same components of a transaction.

Recently the judgment of Delhi High Court Judgment in case of Suresh Kumar Bansal Vs UOI & others in 2016 has come which struck down the levy of service tax on work contract where land is also transfer, in lack of valuation provision and Supreme court of India in case of L&T, 2017 in which it was held that that composite contract/ work contracts was not taxable prior to 01.06. 2007.

At present, State VAT laws have specific provisions for taxing works contracts. To avoid taxing the services element, these laws and associated rules provide for either separation of labor and materials or percentage deductions in transaction value. Another method is of prescription of a lower rate of tax in a composition/ lump-sum scheme for works contracts. The service tax law has also provided for similar treatment to avoid taxation of sale of goods as part of a works contract.

The overarching concept in a GST is one of supply which subsumes the concepts of sale of goods, provision of services and manufacture. In GST Model, goods as well as services will be taxed on a uniform rate.  Therefore the dispute whether a transaction is subjected to VAT or Service tax comes to end.

After article 246 of the Constitution, the following article shall be inserted, namely:—

“246A. (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State.

(2) Parliament has exclusive power to make laws with respect to goods and services tax where the supply of goods, or of services, or both takes place in the course of inter-State trade or commerce.

In article 366 of the Constitution,—

(i) after clause (12), the following clause shall be inserted, namely:—

‘(12A) “goods and services tax” means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption;’;

All supply of goods or services or both will attract CGST (to be levied by Centre) and SGST (to be levied by State) unless kept out of purview of GST. GST will be applicable even when the transaction involves supply of both (goods and services). In effect, woks contracts will also attract GST. As GST will be applicable on supply ‘the erstwhile taxable events such as manufacture‘, sale‘, provision of services etc. will lose their relevance.

For taxing a transaction in GST, two things are important one is supply and other is goods or service or both

GST Supply

Section 7

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 services, for a consideration whether or not in the course or furtherance of business, and

(c) An activity specified in Schedule I, made or agreed to be made without a consideration and

(d) The activity is to be treated as a supply of goods or a supply of services as referred in schedule II.

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

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

(b) activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, shall be treated neither as a supply of goods nor a supply of services.

(3) Subject to sub-section (1) and 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—

(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.

 (a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply;

(b) a mixed supply comprising two or more supplies shall be treated as supply of that particular supply which attracts the highest rate of tax.

Section 2(56)

“Goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;

Section 2(102)

“Services’’ means anything other than goods, money and securities but Includes activity relating to use of money/ conversion by cash/ any other mode from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.

GST Scheme in relation to Composite contracts as follow;

GST Scheme- Composite contracts

Section 2(30)

Composite supply” means a supply made by a taxable person to a recipient consisting two or more supplies of goods or services, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply;

Section 2(90)

Principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary.Principal supply under GSTExample: Indian Airlines provides passenger transportation service. They also supply food on board to passengers. Supply of transportation services would be the principal supply and the service as a whole would qualify as composite supply.

Section 2(74)

Mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply

Mixed supply under GST

Examples: Supply of soap bars where soap boxes are given free of cost; supply of wheat for which a bottle of honey is given free of cost.

In the above example of honey being supplied with wheat, both wheat and honey will be taxed at the rate of tax applicable for honey (being commodity taxed at higher rate).

Job Work under GSTread sec 2(68) with schedule II

2(68) “job work” means any treatment or process undertaken by a person on goods belonging to another registered person and the expression “job worker” shall be construed accordingly;

Schedule II

ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES

3. Treatment or process

Any treatment or process which is applied to another person’s goods is a supply of services.

Note: Job work always be taxable as a service even if it is a composite contract as specified in schedule II.

The provision of declared service continue without any modification, in GST law also, for removing any ambiguity of taxation of work contract, the work contract and sale of under constructed property shall be subjected to tax as service under GST. Schedule II define the matters to be treated as supply of goods or service and Sec 2(119) defines the work contract.

Schedule II

MATTERS TO BE TREATED AS SUPPLY OF GOODS OR SERVICES

5. The following shall be treated as “supply of service”

(a)……………….

(b) Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or before its first occupation, whichever is earlier.

Explanation.- For the purposes of this clause-(1) the expression “competent authority” means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:–

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression “construction” includes additions, alterations, replacements or remodeling of any existing civil structure;

6. Composite supply

The following composite supplies shall be treated as a supply of services, namely:—

(a) works contract as defined in clause (119) of section 2; and

(b) supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.

Schedule III

ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES

5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

Section 2 ((119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;

The work contract as well as sale of under construction property shall be taxable as Supply of service, which also include the value of goods which is transfer in execution of work contract. Schedule II specifies that works contracts will be treated as supply of services and accordingly, provisions of time of supply and place of supply of services shall apply to works contract transactions.

Contract for Work Vs Contract of Sale

It shall be notable that if we constructed immovable property on its own and later on sale to other person then it is a contract for sale of immovable property and not work contract and shall be out of GST ambit, constitutionally sale and purchase of property, subject to clause (b) of para 5 of schedule II, shall be matter of state and liable to stamp duty and property tax.

Now it is very clear from the Schedule III paragraph 5, that sale of constructed property shall not be liable for GST.

Negative List of Credit;

Sec 17(4) notwithstanding anything contained in sub-section (1) of section 16 and subsection (1), (2), (3) and (4) of section 18, input tax credit shall not be available in respect of the following:

(a) …………………

(b)………………

(c) Works contract services when supplied for construction of immovable property, other than plant and machinery, except where it is an input service for further supply of works contract service;

(d) goods or services received by a taxable person for construction of an immovable property on his own account, other than plant and machinery, even when used in course or furtherance of business;

Explanation 1.- For the purpose of this clause, the word “construction” includes re- construction, renovation, additions or alterations or repairs, to the extent of capitalization, to the said immovable property.

Explanation 2.- ‘Plant and Machinery’ means apparatus, equipment, machinery, pipelines, telecommunication tower fixed to earth by foundation or structural support that are used for making outward supply and includes such foundation and structural supports but excludes land, building or any other civil structures.

Construction of building on his own account

Note: Construction of building on his own account include the case where building has construct by builder for own purpose.i.e not intended for sale.

Note: Credit has been block at end point, this is also logical as NO GST applicable on sale of immovable property, therefore no ITC allowed.

Conclusion:

By treating work contract as service provide the complete solution of continues dispute arise in past between goods or service.  Once it is clear that work contract will be tax in GST as service, the distinction between goods and service is relevant only for Place of supply and Point of Taxation.

GST Impact on SME Sector & Composition Scheme in GST ACT, 2017

GST Impact on SME Sector and composition schemes under GST, 2017

1. SME Sector has to face big competition with giant market player

Presently the SME manufacture has not liable to pay excise up to a turnover of Rs. 150 Lacks but in GST scenario he has to pay GST where his turnover has exceed the Rs. 20 lacks. The SME manufacturer has face huge competition with the big player of the market which already has a reputed share of market demand, and a product which has a brand value.

2. Negative as well as positive effect of GST on SME Sector and Indian economy;

1. This create a huge problem with SME sector and make a huge effect on Indian economy.

2. Government revenue may increase, after implementation of GST.

3. No of Taxpayer has increase.

4. Effect adversely the government scheme of MAKE IN INDIA and START UP.

5. Adversely effect the small manufacturer, even it create a situation of shut down.

6. Adversely affect the employment and rural industries.

7. Huge compliance and filing under GST also adversely affect the SSI.

8. Will Create a Less Cash economy.

Composition Scheme in GST; 

1. Option to pay tax at a lump-sum rate instead of regular tax rate.

2. Option to withdraw from scheme also available.

1. Applicability of composition scheme

1. Sec 10. (1) Notwithstanding anything to the contrary contained in this Act but subject to the provisions of sub-sections (3) and (4) of section 9,a registered person, whose aggregate turnover in the preceding financial year did not exceed fifty lakh rupees, may opt to pay, in lieu of the tax payable by him, an amount calculated at such rate as may be prescribed, but not exceeding,––

(a) one per cent. of the turnover in State or turnover in Union territory in case of a manufacturer,

(b) two and a half per cent. of the turnover in State or turnover in Union territory in case of persons engaged in making supplies referred to in clause (b) of paragraph 6 of Schedule II, and

(c) half per cent. of the turnover in State or turnover in Union territory in case of other suppliers,

Subject to such conditions and restrictions as may be prescribed.

2. The effective rates of tax shall be 2%, 5% and 1% respectively (CGST and SGST).

3. The limit of 50 lack shall be consider for all registration under same PAN.

4. Government may, by notification, increase the said limit of fifty lakh rupees to such higher amount, not exceeding one crore rupees as may be recommended by the Council.

5. The registered person who eligible and opt for composition scheme has to pay GST on reverse charge where applicable under sub section (3) or (4) of sec 9.

2. Availability of Composition scheme option;

The registered person shall be eligible to opt under sub-section (1), if:—

(a) he is not engaged in the supply of services other than supplies referred to in clause (b) of paragraph 6 of Schedule II;

(b) he is not engaged in making any supply of goods which are not leviable to tax under this Act;

(c) he is not engaged in making any inter-State outward supplies of goods;

(d) he is not engaged in making any supply of goods through an electronic commerce operator who is required to collect tax at source under section 52; and

(e) he is not a manufacturer of such goods as may be notified by the Government on the recommendations of the Council:

(f) Casual or non- resident taxable person (rule-3)

Provided Where one person has more than one registration under same PAN has to opt scheme for all registration.

5. Conditions and restrictions for composition levy –rule 3

(1) The person exercising the option to pay tax under section 10 shall comply with the following conditions:

(a) he is neither a casual taxable person nor a non-resident taxable person;

(b) the goods held in stock by him on the appointed day have not been purchased in the course of inter-State trade or commerce or imported from a place outside India or received from his branch situated outside the State or from his agent or principal outside the State, where the option is exercised under sub-rule (1) of rule 1;

(c) the goods held in stock by him have not been purchased from an unregistered person and where purchased, he pays the tax under sub-section (4) of section 9;

(d) he shall pay tax under sub-section (3) or sub-section (4) of section 9 on inward supply of goods or services or both received from un- registered persons;

(e) he was not engaged in the manufacture of goods as notified under clause (e) of sub-section (2) of section 10, during the preceding financial year;

(f) he shall mention the words “composition taxable person, not eligible to collect tax on supplies”at the top of the bill of supply issued by him; and

(g) he shall mention the words “composition taxable person” on every notice or signboard displayed at a prominent place at his principal place of business and at every additional place or places of business.

4. Procedure for opting composition, by registered person–rule 3

Any registered person who opts to pay tax under section 10 shall electronically file an intimation in FORM GST CMP-02, duly signed, on the Common Portal, either directly or through a Facilitation Center notified by the Commissioner prior to the commencement of the financial year for which the option to pay tax under the aforesaid section is exercised

He shall furnish the statement in FORM GST ITC-3 in accordance with the provisions of sub-rule (4) of rule ITC.9 within sixty days from the commencement of the relevant financial year.

Provided that Any person who applies for registration under rule Registration.1 may give an option to pay tax under section 10 in Part B of FORM GST REG-01, which shall be considered as an intimation to pay tax under the said section.

5. Consequence of availing the scheme;

Following two prohibition shall be imposed on taxable person who opt for composition scheme;-

The taxable person shall not collect any tax from the recipient on supplies made by him.

The taxable person shall he be entitled to any credit of input tax.

The registered person shall issue the bill of supply for supply made after that day.

5. Option Lapse and its consequences;

Sec 10 (3) The option availed of by a registered person under sub-section (1) shall lapse with

effect from the day on which his aggregate turnover during a financial year exceeds the limit specified under sub-section (1).

Sec 18 of CGST Act, if a person ceases to pay tax under composition scheme he shall be entitled to take credit of input tax in respect of input held in stock, inputs contains in semi-finished goods or finished goods held in stock and on capital goods on the day immediately preceding the date from which he become liable to pay tax under normal scheme.

He shall issue Tax invoice for every taxable supply made thereafter and shall file a intimation for withdrawal from the scheme in FORM GST CMP-04 within 7 days of occurrence of such event.

The registered person shall file a statement in FORM GST ITC-01 containing the detail of stock of inputs and input contained in semi-finished or finished goods held in stock by him on the date on which the option is withdraw within 30 days from the option is withdraw.

7. Consequences of wrongly availed scheme;

Sec 10(5) If the proper officer has reasons to believe that a taxable person has paid tax under sub-section (1) despite not being eligible, such person shall, in addition to any tax that may be payable by him under any other provisions of this Act, be liable to a penalty and the provisions of section 73 or section 74 shall, mutatis mutandis, apply for determination of tax and penalty.

Proper officer may issue SCN to such person In FORM GST CMP-05 and such person shall to reply of SCN in FORM GST CMP-06 within 15 days of receipt of such notice.

The proper officer shall issue an order in FORM GST CMP-07 within 30 days of receipt of reply from registered person for accepting or denying the option.

The registered person shall file a statement in FORM GST ITC-01 containing the detail of stock of inputs and input contained in semi-finished or finished goods held in stock by him on the date on which the option is denied within 30 days from the date of order passed in FORM GST CMP-07.

8. Transitional Provisions

1. Intimation for composition, by a person who migrate –Rule 1

Any person who has been granted registration on a provisional basis under sub-rule (1) of rule Registration.16 and who opts to pay tax under section 10, shall electronically file an intimation in FORM GST CMP-01, prior to appointed day but not later than within 30 day of appointed day and He shall furnish the detail of stock, including the inward supply of goods received from unregistered person, held by him on the day preceding the date from which he opt to pay tax under composition in FORM GST CMP-03 within 60 days from which the option is exercise.

2. CREDIT OF ELIGIBLE DUTIES AND TAXES ON INPUTS HELD IN STOCK TO BE ALLOWED TO A TAXABLE PERSON SWITCHING OVER FROM COMPOSITION SCHEMEUNDER EARLIER LAW    [SECTION 140 (6) READ WITH SECTION 18(1)( c )]

1. A registered taxable person (RTP) who was either paying tax at a fixed rate or paying a fixed amount in lieu of the tax payable under the earlier law shall be entitled to take, in his electronic credit ledger, credit of eligible duties in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock on the appointed date subject to the following conditions.

2. Such inputs and / or goods are used or intended to be used for making taxable supplies under this Act.

3. RTP is not paying tax under Section 10 (i.e. composition levy)

4. RTP is eligible for input tax credit on inputs under this Act.

5. RTP is in possession of invoice and/or other prescribed documents evidencing payment of duty under the earlier law in respect of such inputs and

6. Such invoices and /or other prescribed documents were issued not earlier than twelve monthsimmediately preceding the appointed day.

Conclusion: In Many adverse situation, the composition scheme may help the small entrepreneurs to some extent and provide a huge relief to the small scale industries, but having considering the limit of RS 50 is not sufficient to overcome from these problem. In GST, abetment has also gone out in comparison to existing service tax law. We should wait and see how SME sector has come out from these difficulties. We see how SME sector plan its future strategies.