Are there any Fetters to the Concept of ‘Supply’ under GST?
“In levying taxes and in shearing sheep it is well to stop when you get down to the skin”, —Austin O’Malley. Even though the definition of ‘supply’ under the GST law is wide, but the courts in India and abroad while dealing with different fact situations have carved out inherent limitations to the scope and meaning of ‘supply’. Such limitations have been determined irrespective of the wording of the charging section, i.e. whether the same is inclusive or restrictive. Read on…
1. Background
1.1 GST is a tax levied on the ‘supply’ of ‘goods’ or ‘services’ or both. While the word ‘goods’ has a specific meaning assigned under the GST law, ‘services’ has been primarily defined to mean ‘anything other than goods’ with specific exceptions.
1.2 Further, the term ‘supply’ has been given an inclusive scope under the GST law.
1.3 Given that there is, (a) the scope of ‘supply’ is extensive; and (b) the word ‘services’ entails a very wide meaning, it is relevant to study whether GST applies on each and every economic activity or there are some boundaries or limitations on its applicability.
1.4 To put this into perspective, understanding the scope of supply is relevant to determine whether GST applies on activities such as, payment of liquidated damages; insurance compensation on account of damage of office building due to fire; payment as a result of out of court settlement with an agreement not to file any court case; government grants etc.
1.5 The purpose of this study paper is to discuss the scope of ‘supply’ and the fetters, if any, that apply so as to limit its applicability in the light of relevant legal provisions, rulings etc. in India and abroad.
2. Relevant GST provisions in India concerning ‘supply’
2.1 Legal provisions under the GST law to the extent they are relevant for the present study along with their analysis is made hereinbelow1:
| Legal Provisions | Analysis |
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Section 9 of the CGST Act: (1) Subject to the provisions of sub-section (2), there shall be levied a tax called the Central Goods and Services Tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 … |
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Sections 2(52) and 2(102): 2(52) “goods” means every kind of movable property other than money and securities but include 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; 2(102) “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form currency or denomination for which a separate consideration is charged; |
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Section 7 of the CGST Act
(1) For the purposes of this Act, the expression “supply” includes– |
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2.2 Thus, solely on a literal interpretation of the provisions one may say that the scope of supply is limitless, i.e. it covers within its ambit each and every economic activity irrespective of its nature apart from the specific forms of supply stated in the section. If that were correct, GST would apply even on alimony money received by a wife upon divorce, winning from game shows (e.g., kaun banega karorpati) etc.
2.3 However, a conclusive view on the nature and scope of supply is only possible on the basis of the careful examination of the legal provisions surrounding the scope of supply in other jurisdictions.
3. Scope of Supply – International Perspective
3.1 For the purpose of the present study, three overseas laws viz., EU, Australia and New Zealand are examined for understanding the scope of supply from an international perspective.
| EU VAT | Australia | New Zealand |
|---|---|---|
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Article 14 - Supply of goods: 1. ‘Supply of goods’ shall mean the transfer of the right to dispose of tangible property as owner….. Article 24 – Supply of services: 1. ‘Supply of services’ shall mean any transaction which does not constitute a supply of goods….. |
You make a taxable supply if:
(a) you make the supply for consideration; and |
5. Meaning of term supply (1) For the purposes of this Act, the term supply includes all forms of supply. ….. |
3.2 Unlike India, the term ‘supply’ under European Union VAT and Australian GST laws has restrictive definition (due to the use of word ‘means’). However, the GST law in New Zealand provides an inclusive definition of supply (due to the use of word ‘includes’) similar to the one provided under the CGST Act.
3.3 At this stage, it is relevant to examine further key legal provisions and court rulings deliberating on the scope of supply in these three jurisdictions.
3.4 European Union
3.4.1 The EU VAT law provides that the supply of services for consideration within the territory of a Member State by a taxable person acting as such shall be subject to VAT3.
3.4.2 Due to the wide ambit of the definition of ‘service’ (i.e. any transaction which does not constitute a supply of goods)4, the courts on multiple occasions have commented on the true nature of supply.
3.4.3 The ECJ ruled in Tolsma’s case5 that supply of services is taxable only where it is provided for a consideration:
“only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the value actually given in return for the service supplied to the recipient.”
Applying the above principle, it was held that:
“if a musician who performs on the public highway receives donations from passers-by, those receipts cannot be regarded as the consideration for a service supplied to them.”
3.4.4 Another issue came up in the context of the provision that ‘the obligation to refrain from an act, or to tolerate an act or situation’ is included in supply of services6. The question was about applicability of VAT on the compensation received by a farmer from Government pursuant to an undertaking given by him that he would not harvest at least 20% of his potato crop. Giving the verdict, ECJ in Landboden-Agrardienste’s case7 held that:
“since the undertaking given by a farmer to reduce production does not entail either for the competent national authorities or for other identifiable persons any benefit which would enable them to be considered to be consumers of a service, it cannot be classified as a supply of services within the meaning of Article 6(1) of the Sixth Directive”
3.4.5 Similarly, in Jurgen Mohr’s case8, ECJ ruled that VAT is a tax on consumption of goods or services. Accordingly, the court held that:
“the undertaking given by a farmer that he will discontinue his milk production does not entail either for the Community or for the competent national authorities any benefit which would enable them to be considered consumers of a service. The undertaking in question does not therefore constitute a supply of services within the meaning of Article 6(1) of the Directive. Consequently, any compensation received for that purpose is not subject to turnover tax.”
3.4.6 Hence, by drawing an analogy from the ECJ rulings, it can be said that in order to constitute a taxable supply there should exist:
- legal relationship between the supplier and recipient;
- reciprocal performance by the supplier and recipient; and
- consideration for both supplier and recipient.
3.5 Australia
3.5.1 Even the Australian courts have restricted the scope of supply to a certain extent by holding that the term supply clearly shows that it requires a voluntary act by the supplier.
3.5.2 In Shaw’s case9, it was held that:
“The verb “make” indicates a legislative intention to impose the tax only on voluntary supplies, not upon those supplies that occur without an act of the releasor…”
3.5.3 In furtherance of this principle, it was ruled that the compulsory acquisition by the government does not qualify as supply under the Australian GST law as there is no voluntary act by the supplier.10
3.5.4 In this regard, another ruling11 laid down the general principles with respect to consideration:
“There must be a sufficient nexus between a particular payment and a particular supply for the payment to be consideration for that supply. … GST is not payable on a supply unless it is made for consideration, and the other tests in section 9-5 are satisfied. There must be a sufficient nexus between the supply and the payment.”
3.5.5 Hence, even under the Australian jurisprudence, for levying the tax on supply:
- there should be an act of making supplies, i.e. supplies that are involuntary (e.g., compulsory acquisition) are outside the ambit of the tax net;
- there should be a consideration for making the supply; and
- nexus should be present between the supply and payment.
3.6 New Zealand
3.6.1 GST law in New Zealand provides a wider ambit to the scope of supply, and the courts have examined its scope on multiple occasions.
3.6.2 In Databank Systems’ case12, while interpreting the scope of supply, the court laid down that the term supply means to ‘furnish’ with or ‘provide’. It was observed that the definitions of ‘provide’ and ‘furnish’ in the Concise Oxford English Dictionary include ‘make available for use; supply’ (provide) and ‘be a source of; provide’ (furnish). Basis this discussion it was held that the scope of ‘supply’ is, wide enough to include both active and passive activities.
3.6.3 In yet another ruling, while interpreting Section 5(1) of the New Zealand GST Act, it was held that supply “includes all forms of supply” which means that virtually any transaction constitutes a supply but a supply is only subject to GST if it is made in the course or furtherance of a taxable activity.13
3.6.4 As regards presence of consideration in order to constitute a taxable supply, in NZ Refining Company’s case14 the court held that for payment to be consideration for a supply, a sufficient connection must exist between the supply and the payment.
3.6.5 Thus, in spite of the wide and inclusive definition of supply the courts in New Zealand have held that for taxability of a transaction:
- a sufficient connection must exist between the supply and payment of consideration;
- legal nature of the transaction and the rights and obligations of the parties need to be considered to determine if the necessary relationship exists between the supplier and receiver.
3.7 Having discussed the jurisprudence on the scope of ‘supply’ in the three overseas jurisdictions, it is of utmost importance to discuss one recent ruling by Bombay High Court on the scope of supply.
4. Ruling of Bombay High Court in Bai Mamubai Trust’s case15
4.1 Bombay High Court in Bai Mamubai’s case got an opportunity to divulge the scope of ‘supply’. The issue under consideration was whether GST applies on the royalty that is collected from the occupant for the period he remains in possession of the suit premises either during the pendency of the eviction suit or at the time of passing of the decree of eviction. This issue came up because during the pendency of the case, a Court Receiver was appointed for collection of the royalty (i.e. payment in lieu of the occupation) during the pendency of the dispute.
4.2 The court after closely examining the provisions of CGST Act and various case laws (including case laws of foreign jurisdictions) explained the scope of ‘supply’. The key finding of the court in this respect is summarized below:
- The supply doctrine does not contemplate or encompass a wrongful unilateral act or any resulting payment of damages (para 58)
- Presence of reciprocal enforceable obligations is necessary in order to constitute taxable ‘supply’ (para 76)
- For a supply to fall under Section 7(a), 7(b) or 7(d) of the CGST Act there must be a contemplated consideration. Only activities specified in Schedule I to the CGST Act are considered as supply, even if made without consideration. Other activities (that are not part of Schedule I) if made without consideration, are not taxable (para 79)
4.3 Basis the above, the Hon’ble Court concluded that in the absence of any reciprocal relationship, no GST is payable on the royalty amount.
5. Conclusion
5.1 On a holistic view of the above discussion, it can be noticed that across different jurisdictions there are various common threads about the scope of ‘supply’. The courts while dealing with different fact situations have carved out inherent limitations to the scope and meaning of ‘supply’. Such limitations have been determined irrespective of the wording of the charging section, i.e. whether the same is inclusive or restrictive.
5.2 Three key principles that can be churned out on the basis of the present study are summarized herein below, along with their practical applicability to different activities:
Principle 1: An unilateral or voluntary act does not constitute taxable supply
For example:
- an athlete receiving award from government or corporates for winning a medal in an international event, cannot be said to have provided taxable supply for earning the award money.
- receiving compensation from accident claims tribunal for the injury caused due to road accident is not a taxable supply. Hence, no GST should apply on such compensation amount.
Principle 2: Relation between the supplier and recipient and reciprocity of performance is necessary to constitute a taxable supply
For example:
- giving unconditional grant without any obligation should not attract GST due the absence of reciprocity;16
- winning from game show should also not be subject to GST on the application of this principle.
Principle 3: There should be presence of consideration for both supplier and recipient and the consideration should have nexus with the supply
For example:
- making gratuitous payment or giving voluntary donation should not constitute a taxable supply in the absence of consideration for both the parties;
- as payment of alimony money on divorce is not a consideration for supply in the eyes of law, the same cannot be subject to GST.
5.3 Please note that in the context of GST law in India, the above principles may not apply in the case of ‘activities treated as supply even if made without consideration’ (i.e., supplies listed in Schedule-I of the CGST Act). For example, giving television as a prize in new year draw by a store, after claiming input tax credit on the television.
5.4 In other words, the above three fetters should apply while interpreting the scope of supply with respect to all the transactions other than those listed in Schedule I of the CGST Act.
5.5 In view of the above principles, the tax authorities in India are expected not to go down below the skin and levy GST on each and every receipt on the basis of the literal interpretation of the provisions relating to ‘supply’.
5.6 In any event, since GST law is still in the nascent stage in India, it is likely that in the times to come the courts will further strengthen the above inherent principles while interpreting supply in relation to different fact situations.
Footnotes & Legal Citations:
- For the purpose of present study paper, reference has been drawn to the CGST Act for examining the relevant legal provisions
- Even under Article 366(29A) of the Constitution of India, ‘services’ has been defined to mean anything other than goods
- Article 2(1)(c) of EU VAT Directive
- Article 24(1) of EU VAT Directive
- Tolsma vs. Inspecteur der Omzetbelasting [Case C-16/93]
- Article 25 of EU VAT Directive (Sixth Directive prior to amendment)
- Landboden-Agrardienste vs. Finanzamt Calau [Case C-384/95]
- Jürgen Mohr vs. Finanzamt Bad Segeberg [Case C-215/94]
- Shaw vs. Director of Housing and State of Tasmania (No. 2) [2001] TASSC 2
- GST Ruling 2006/9 issued by Australian Tax Office
- GST Ruling 2001/6 issued by Australian Tax Office
- Databank Systems Ltd vs. CIR (1987) 9 NZTC 6,213
- Case S84 (1996) 17 NZTC 7,526
- CIR vs. NZ Refining Co Ltd (1997) 18 NZTC 13,187
- Bai Mamumbai Trust and Others vs. Suchitra wd/of Sadhu Koraga 2019-VIL-454-BOM
- In specific situations, Government grants are exempt from the levy of GST subject to fulfillment of conditions.