Know all about Taxable Event under GST

Table of Contents

1. Meaning of taxable event
2. Business
3. Deemed supply of goods and services
4. Activities which are neither supply of goods nor supply of services
5. Tax liability in case of mixed supply and composite supply

Check out Taxmann's GST Manual with GST Law Guide & Digest of Landmark Rulings which contains a compilation of amended, updated & annotated text of CGST, IGST, UTGST Act & Rules, Forms (including Action Points), Notifications (including Rate Notifications), Circulars & Clarifications, etc. It also incorporates a 370+ Page GST Law Guide on 25+ topics (Short Commentary) & a Section-wise Digest of Landmark Rulings.

1. Meaning of taxable event

‘Taxable event’ is that on happening of which the charge is fixed. It is that event, which on its occurrence creates or attracts the liability to tax. Such liability does not accrue at any earlier or later point of time. Even though taxable event happens to be at a particular point of time, the levy and collection of such tax may be postponed for administrative convenience, to a later date – Goodyear India Ltd. v. State of Haryana (1990) 76 STC 71 (SC) = 188 ITR 402 = 1990 UPTC 198 = AIR 1990 SC 781 – – quoted with approval in State of Kerala v. Alex George 2004 AIR SCW 6552 (SC 3 member bench).

1.1 Charging section in CGST, SGST, UTGST and IGST

Section 9(1) of CGST Act is the charging section for CGST. The section reads as follows –

Subject to section 9(2) of CGST Act (which states that GST on petroleum products will be levied at a later stage), there shall be levied a tax called the Central Goods and Services Tax (CGST) on all intra-State supplies of goods or services or both, except on supply of alcoholic liquor for human consumption, on the value determined under section 15 of CGST Act and at such rates not exceeding 20% as may be notified by Central Government, on the recommendation of GST Council and collected in such manner as may be prescribed.

Thus, CGST is on –

(a) intra-State supplies

(b) of goods or services or both (except on supply of alcoholic liquor for human consumption).

Value will be as per section 15. Rate of GST will be notified by Central Government – maximum 20%.

There is parallel provision in SGST Act.

1.2 Supply as per GST law

Section 7(1) of CGST Act as amended vide CGST (Amendment) Act, 2018, but with retrospective effect from 1-7-2017, states that for the purpose of CGST Act, the expression ‘supply’ includes –

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

(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 – clause (aa) inserted vide section 108 of Finance Act, 2021 w.r.e.f. 1-7-2017.

For the purposes of this clause (aa), 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 – Explanation to section 7(1)(aa) of CGST Act inserted vide section 108 of Finance Act, 2021 w.r.e.f. 1-7-2017.

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

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

Activities or transactions to be treated as supply of goods or supply of services – Where certain activities or transactions, constitute a supply in accordance with the provisions of section 7(1) of CGST Act, they shall be treated either as supply of goods or supply of services as referred to in Schedule II of CGST Act – section 7(2A) of CGST Act inserted vide CGST (Amendment) Act, 2018, with retrospective effect from 1-7-2017.

This seems to be only correcting a drafting mistake, as what was earlier stated in section 7(1)(d) of CGST Act has now been stated separately and specifically. [section 7(1)(d) of CGST Act was reading as follow – Supply includes the activities to be treated as supply of goods or supply of services as referred to in Schedule II].

Transfer of business as going concern – Transfer of business as a going concern with assets and liabilities as slum sale is exempt from GST – Innovative Textiles Ltd. In re (2019) 73 GST 714 = 104 taxmann.com 436 (AAR-Uttarakhand).

1.3 Activities or transactions which are neither supply of goods nor supply of services

Irrespective of anything contained in section 7(1) of CGST Act, following will not be treated as supply of goods or services –

(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, as may be notified by Central Government – section 7(2) of CGST Act.

1.4 Activities or transactions that will be taxable as ‘supply’ even if no consideration

A supply specified in Schedule I, made or agreed to be made without a consideration is ‘supply’ for purpose of CGST Act- section 7(1)(c) of CGST Act.

Thus, these transactions will be subject to GST, even if there is no consideration. The valuation for purpose of GST will be as per GST Valuation Rules.

The Schedule I of CGST Act reads as follows –

Schedule I [Section 7] – Activities to be treated as supply even if made without consideration

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

(2) 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 [section 25(4) of CGST Act states that establishments of same person with distinct GST Registration Numbers will be treated as ‘distinct persons’]

(3) Supply of goods— (a) by a principal to his agent where the agent undertakes to supply such goods on behalf of the principal, or (b) by an agent to his principal where the agent undertakes to receive such goods on behalf of the principal.

(4) 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. [ * – The word was ‘taxable’. This word has been omitted vide CGST (Amendment) Act, 2018, w.e.f. 1-2-2019. Thus, import by any person from a related person outside India shall be ‘import’, but it should be in the course or furtherance of business].

Supply of service by HO or one branch/division to another – On the basis of aforesaid principle, even supply of service by one branch/division to another will be subject to GST if there are distinct GST registration numbers, as held in Cummins India Ltd. In re (2019) 73 GST 517 = 103 taxmann.com 126 (AAR-Maharashtra), where it was held that in such cases, valuation should be as per rule 30 of CGST Rules i.e. 110% of cost [really, in my view, it can be on basis of rule 31 of CGST Rules also, for which principles as applicable to distribution by Input Service Distributor can apply].

Free Samples – Free samples to unrelated persons will not be subject to GST but input tax credit will have to be reversed. However, free samples given to related persons will be subject to GST (and then ITC will be available) – Para A of CBI&C circular No. 92/11/2019-GST dated 7-3-2019.

2. Business

Section 2(17) of CGST Act defines ‘Business’ as follows—

“Business” includes –

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

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

(c) any activity or 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 goods 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.

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

(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.

(h) activities of a race club including by way of totalisator or a license to book maker or activities of a licensed book maker in such club [The words in italics substituted vide CGST (Amendment) Act, 2018, w.e.f. 1-2-2019]. Till 1-2-2019, the words were as follows – ‘services’ provided by a race club by way of totalisator or a licence to book maker in such club. In my view, this is only correcting a drafting mistake. The activities were even otherwise taxable, as the definition of ‘business’ is inclusive. Further, ‘services’ includes anything other than goods as per section 2(102) of CGST Act.

(i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.

2.1 Government activities subject to GST

Section 2(17)(i) of CGST Act states that ‘business’ includes any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities.

Thus, excluding sovereign activities of State, all activities of Government is ‘business’.

However, some of their activities as public authority will be specifically excluded from scope of GST by issuing notification under section 7(2)(b) of CGST Act on recommendation of GST Council.

Thus, unless specifically excluded by a notification, their activities will be liable to GST.

3. Deemed supply of goods and services

Section 7(1)(d) of CGST Act states that supply includes activities to be treated as supply of goods or supply of services referred to in Schedule II to CGST Act.

Thus, these are ‘deemed supply of goods’ or ‘deemed supply of service’, subject to GST.

The distinction between goods or service will also be relevant to determine place of supply and time of supply.

Schedule II of CGST Act is as follows. The comments in bracket are my comments on each entry.

Schedule II [section 7] – Activities or Transactions to be treated as supply of goods or supply of services

[The words ‘or transactions’ inserted with retrospective effect from 1-7-2017 vide CGST (Amendment) Act, 2018]

1. Transfer

(a) Any transfer of the title in goods is a supply of goods [This covers sale, barter, exchange etc. In fact, it should cover gift of goods also, as this clause does not talk of consideration].

(b) Any transfer of goods or of right in goods or of undivided share in goods without the transfer of title thereof, is a supply of services [This covers renting or operating lease of goods. ‘Undivided share’ means that exclusive possession is not required to be transferred e.g. renting of one locker by bank, share taxi].

(c) Any transfer of title in goods under an agreement which stipulates that property in goods will pass at a future date upon payment of full consideration as agreed, is a supply of goods [This covers financial lease and hire purchase].

2. Land and Building

(a) Any lease, tenancy, easement, licence to occupy land is a supply of services [The lease of tenancy of land can be of any period – even 99 or 999 years].

(b) Any lease or letting out of the building including a commercial, industrial or residential complex for business or commerce, either wholly or partly, is a supply of services [This covers renting or leasing of building. Even renting of part of residential complex for business or commerce will be subject to GST. Thus, if a residential flat is given to company as residence of their employees, it can get covered under GST].

3. Treatment or process

Any treatment or process which is being applied to another person’s goods is a supply of services [This covers job work, testing].

4. Transfer of business assets

(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, (*), such transfer or disposal is a supply of goods by the person [* – The words were ‘whether or not for a consideration’. These words have been omitted with retrospective effect from 1-7-2017 vide Finance Act, 2020, which was notified on 1-1-2021 but has retrospective effect].

[This clause has to be read with clause I Schedule I. Hence, such transfer will be subject to GST if Input Tax Credit was availed on such goods. This clause also has to be read with clause 4(c) of Schedule II. Further, services by way of transfer of a going concern, as a whole or an independent part thereof is exempt from GST – Notification Nos. 12/2017-CT (Rate) and 9/2017-IT (Rate) both dated 28-6-2017, effective from 1-7-2017. Thus, transfer of entire business as a going concern cannot be subject to GST].

(b) Where, by or under the direction of a person carrying on a business, goods held or used for the purposes of the business 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, (*), the usage or making available of such goods is a supply of services [* – The words were ‘whether or not for a consideration’. These words have been omitted with retrospective effect from 1-7-2017 vide Finance Act, 2020, which was notified on 1-1-2021 but has retrospective effect].

[This covers use of property of taxable person like motor vehicles, residential premises, guest house, telephone, laptop etc. for private use of partner/director/executives/employees].

(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 [Transfer of entire business is not subject to GST. Only goods transferred are subject to tax].

5. Supply of services

The following shall be treated as ‘supply of service’

(a) renting of immovable property [Since lease of building and land is already covered in clause 2(a) and (b) above, this can cover other immovable property like plant and machinery].

(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 after 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.

[This covers sale of flat in a residential complex before it is occupied. Once it is occupied, any sale by the buyer after that will not attract GST, even if completion certificate is not obtained. However, if builder himself is selling, he will be exempt from GST only if he sales after completion certificate is obtained].

(c) temporary transfer or permitting the use or enjoyment of any intellectual property right [This covers allowing use of trade mark, copyright, design, patents].

(d) development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software [This covers development of software but not software itself in physical form].

(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act [this covers demurrage, LD charges, notice pay, penalty for violation of contract] and

(f) transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration [This is renting, where possession and control of goods is transferred to recipient]

6. Composite supply

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

(a) works contract as defined in section 2(119) of CGST Act [The definition covers only immovable property]

(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 [supply of food. The clause does not say ‘in restaurant’. Thus, even home delivery of cooked food will be covered, as it includes service. However, sale of tinned food items is sale of goods as no ‘service’ element is involved].

7. Omitted w.r.e.f. 1-7-2017 vide section 122 of Finance Act, 2021 notified on 1-1-2022 but w.r.e.f. 1-7-2017

The earlier wording is as follows –

Supply of goods – The following shall be treated as supply of goods, namely – supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration [supply of goods by club to its members were covered. Interestingly, this did not cover supply of services].

This paragraph has been omitted w.r.e.f. 1-7-2017, as deeming provision has been introduced in section 7(1)(aa) of CGST Act w.r.e.f. 1-7-2017.

4. Activities which are neither supply of goods nor supply of services

Present service tax law has concept of ‘negative list of services’. Similar concept has been introduced in Model GST Law.

As per Schedule III of CGST Act read with section 7(2)(a) of CGST Act, following matters will not be treated as supply of goods or services.

Schedule III [Section 7]

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

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. [Explanation– The term ‘Court’ includes District Court, High Court and Supreme Court]

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 [true indeed].

4. Services of funeral, burial, crematorium or mortuary including transportation of the deceased [small mercy after death].

5. Sale of land and, subject to para 5(b) of Schedule II, sale of building [para 5(b) covers sale of flat in a complex after completion or after its first occupation].

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

7. Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India.

8. (a) Supply of warehoused goods to any person before clearance for home consumption;

(b) Supply of goods by the consignee to any other person, by endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption.

Explanation 1.—For the purposes of paragraph 2, the term ‘Court’ includes District Court, High Court and Supreme Court

Explanation 2.—For the purposes of this paragraph, the expression “warehoused goods” shall have the same meaning as assigned to it in the Customs Act, 1962.

Paragraphs 7 and 8 and Explanation 2 has been inserted in Schedule III of CGST Act vide CGST (Amendment) Act, 2018, w.e.f. 1-2-2019. It is proposed to make them retrospectively effective from 1-7-2017 itself vide Finance Act, 2023. Thus, these transactions will not be subject to GST from 1-7-2017 itself. However, no refund will be grated if taxes were paid on these transactions during 1-7-2017 to 1-1-2019.

4.1 Services by employee to employer not subject to GST

Services by employee to employer are not subject to GST.  However, services provided by employer to employee can be subjected to GST, if these are for personal use of employees.

It has been clarified that fringe benefits are in relation to employment and hence outside GST-PIB press release dated 10-7-2017 17:09 IST.

Gifts upto Rs 50,000 to employees may be exempted. However, reversal of input tax credit will be required.

In common parlance, gift is without consideration, is voluntary in nature and is made occasionally. It cannot be demanded as a right by employee and the employee cannot move a Court for obtaining gift – PIB press release dated 10-7-2017 17:09 IST.

4.2 Activities in relation to functions under Article 243G are neither goods nor services

Activities or transactions undertaken by the Central Government or State Government or Local Authority in which they are engaged as public authority i.e. services by way of any activity in relation to a function interested to a Panchayat under Article 243G of Constitution of India are neither supply of goods nor supply of services – Notification No. 14/2017-CT (Rate) dated 28-6-2017.

4.3 Service of grant of license of alcoholic liquor by State Government is neither goods nor service

Service supplied by State Government by way of grant of alcoholic liquor licence, against consideration in the form of licence fee or application fee or by whatever name it is called, is neither supply of goods nor supply of service – Notification No. 24/2019-IT (Rate) and No. 22/2019-CT (Rate) both dated 30-9-2019.

4.4 Sale of developed plots by including development cost in sale value of plots

Often a developer purchases land, converts it into plots, develops it by providing internal roads, water drains, compound walls, health club, and then sales individual plots. If he charges separately development charges, then obviously GST is payable on development charges @ 18%. However, if he includes the development cost in value of plots and sales individual plots by paying stamp duty and registration fee on total value, what would be tax liability?

Sale of land after levelling, laying down of drainage lines etc. is sale of land and does not attract GST. Land may be sold either as it is or after some development such as levelling, laying down of drainage lines, water lines, electricity lines, etc. It is clarified that sale of such developed land is also sale of land and does not attract GST. – – However, any service provided for development of land, like levelling, laying of drainage lines (as may be received by developers) shall attract GST at applicable rate for such services – para 14 of CBIC Circular No. 177/09/2022-TRU dated 3-8-2022.

In my view, the clarification is legally correct as it is a composite supply where principal supply is of land, This clarification will settle a long time dispute.

Sale of land under Schedule III to CGST Act covers sale of developed land as deduction in terms of Notification No. 11/2017-Central Tax (Rate) is granted for any transfer of land which includes developed and undeveloped land – Munjaal Manishbhai Bhatt v. UOI [2022] 138 taxmann.com 117 = 62 GSTL 262 = 92 GST 327 (Gujarat HC DB)[Really, a very well reasoned judgment and worth reading in full] – same view in Bhopal Smart City Dev Corpn Ltd. In re (2022) 90 GST 858 = 136 taxmann.com 122 (AAR-MP).

Additional facilities in complex – In case of facilities like health club, club house, However, in respect of health club, swimming pool, library, club house and play courts, it would be difficult to say that these are part of composite supply of plots. Hence, in my view, these should not be part of services offered to customers. It is advisable to hand them over to club or association, who will provide the services to members on chargeable basis.

Preferential location charges is part of value of land – Location charges or preferential location charges (PLC) paid upfront in addition to the lease premium for long term lease of land constitute part of upfront amount charged for long term lease of land and are eligible for the same tax treatment – para 10 of CBIC Circular No. 177/09/2022-TRU dated 3-8-2022.

5. Tax liability in case of mixed supply and composite supply

Often, various supplies are made together e.g.

(a) supplier of car arranges for its registration with RTO

(b) supplier of goods or food arranges for its packing, insurance and delivery

(c) commercial coaching institute supplies printed study material, recorded lectures

(d) Goods Transport Agency arranges loading, unloading and storage

(e) Tour operator arranges hotel booking, sight seeing, travel arrangement, visa etc.

(f) car repairer also supplying spare parts

(g) supplier of machinery also undertaking its erection and commissioning

(h) Hotel providing laundry and intercom services.

5.1 Tax liability in case of composite and mixed supply

The statutory provisions are as follows.

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 – section 8 of CGST Act.

‘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 – section 2(90) of CGST Act.

‘Composite supply’ means a supply made by a taxable person to a recipient comprising of two or more taxable supplies of goods or services or both, 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.