CHAPTER 2 Concept of supply

T axable event under GST is “supply” of goods or services or both. The concept of supply
is discussed in this chapter. Besides, the chapter covers other issues related to supply.

nn WHAT IS TAXABLE EVENT

410. A taxable event in a law is the event, happening of which results in imposition of tax. Taxable event is that
event which on its occurrence activates tax liability. For instance, under the Income-tax Act, taxable event is
earning of income. If a person earns any income, he is subject to income-tax and provisions of Income-tax Act
is applicable, unless such income is exempt from tax. Under excise duty, taxable event is manufacturing of goods.
Under service tax, taxable event is provision of service. Under GST, taxable event is supply of goods or services
or both by a person.
410.1 Taxable event in GST as compared to taxable event in earlier laws - The table given below highlights
taxable event in GST vis-à-vis taxable event in pre-GST regime –
Taxable event in pre-GST regime GST Taxable event in GST
Excise duty Manufacture of goods
Central sales tax Inter-State sale of goods

State VAT Intra-State of goods
Service tax Provision of service GST is applicable
Taxable event is
in lieu of taxes
Countervailing duty (CVD) Import of goods supply of goods or
mentioned in
Special CVD Import of goods services or both
Column 1
Entertainment tax Provision of entertainment
Luxury tax Provision of luxury
Entry tax Entry of goods into specific local area

410.2 “Supply” is taxable event in GST - “Supply” of goods or services or both is taxable event in GST. GST
is applicable only if there is supply of goods/services. To ascertain GST liability, the following propositions
should be kept in view –
Detailed discussion given
in the following paras
1. There is a “supply”. 411
2. Supply is of goods or services or both. 411.1 and 411.2
3. Supply is made by the supplier in the course or furtherance of his business. 416
4. Supply includes deemed supply specified in Schedule II. 413
5. GST is not applicable if supply pertains to an activity given in Schedule III (Schedule III
gives a list of activities/transactions which are treated neither as supply of goods nor
supply of services). 415
6. GST is not applicable if supply pertains to a service specified in exemption notification. 436 and 437

14
15 Meaning of services Para 411.2

Detailed discussion given

in the following paras

7. GST is applicable if supply is for a consideration (however, there are a few cases when
GST is attracted even if consideration is absent or consideration is zero or supply is by way
of gift). 414
8. Supply is made in taxable territory. 444
9. Supply is made by a taxable person. 405.5
10. Time of supply is important to find out GST is liability. 455 to 458
11. Place of supply is also relevant to find out GST liability. 444 to 449
12. GST liability depends upon “value of taxable supply”. 464 to 475
13. GST is payable by person making supply (however, there are a few cases when reci-
pient of supply is subject to GST under reverse charge mechanism). 481 to 483
14. Person making supply can avail credit for input tax. 492 to 500

nn WHAT IS “SUPPLY”
411. Supply of goods or services or both is taxable event in GST.
411.1 Meaning of “goods” - The expression “goods” is defined by section 2(52). The following are salient
features of the definition of goods –
1. “Goods” means every kind of movable property.
2. It does not include money and securities.
3. It includes 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.
4. It includes actionable claims. However, Schedule III (read with section 7) lists the activities or transactions
which shall be treated neither as supply of goods nor supply of services. The Schedule lists actionable claims (but
other than lottery, betting and gambling) as one of such transactions. Thus, only lottery, betting and gambling
shall be treated as supplies. All the other actionable claims shall not be supplies.
411.2 Meaning of “services” - The term “services” is defined by section 2(102). The following are salient features
of the definition–
1. It means anything other than goods, money and securities.†
2. It 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.
p Transactions in money - Transactions only in money do not constitute service and not chargeable to GST. A few
example of such activity are –
a. deposit of principal amount in a bank and withdrawal of such amount;
b. advancing or repayment of principal sum on loan to anybody;
c. conversion of a currency note of Rs. 200 into one rupee coins to the extent amount is received in money form.
The following points should be noted –
- Promissory note is included in the definition of “money” as given in section clause (75) of Section 2 and hence
not liable to GST.
- If a separate consideration is charged for the above activities, the consideration separately charged will be
subject to GST. A transaction in money, per se, is outside the ambit of GST (it is not included in the definition
of “goods” or “services”). However, the related activity, for which a separate consideration is charged, is
subject to GST if other elements of taxability are present. For example, a foreign exchange dealer while
exchanging one currency for another also charges a commission (often inbuilt in the difference between the
purchase price and selling price of forex). The activity of providing the services of conversion of forex,
documentation and other services (for which a commission is charged separately or built in the margins) is
subject to GST.
pSecurities - Securities are neither goods nor services. Consideration received for transfer of “securities” is not
subject to GST. The following are securities for this purpose –
† This point is likely to be amended to clarify that the expression “services” includes facilitating or arranging transactions in securities.
Para 411.3 Concept of Supply 16

- Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or
of any incorporated company or other body corporate.
- Derivative.
- Security receipt as defined in section 2(zg) of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002.
- Units or any other such instrument issued to the investors under any mutual fund scheme.
- Any certificate or instrument issued to any investor by a special purpose distinct entity (which possesses any
debt or receivable).
- Government securities.
- Instruments (as may be declared by the Central Government to be securities).
- Rights or interest in securities.
An activity which is in the nature of only transfer of title by way of sale, redemption, purchase or acquisition of
securities on principal-to-principal basis (excluding services of dealers, brokers or agents in relation to such
transactions) is outside the ambit of “services” and, consequently, GST is not applicable. However, activities
which are not in the nature of transfer of title in securities (for example a person agreeing not to exercise his right
in a security for a given period of time for a consideration) would be subject to GST.
p Future contract - Future contracts are in the nature of financial derivatives, the price of which is dependent on
the value of underlying stocks or index of stocks or certain approved currencies and the settlement happens
normally by way of net settlement with no actual delivery.
Since future contracts are in the nature of derivatives these qualify as “securities”. As securities are neither goods
nor services, future contracts are not chargeable to GST. Where, however, the future contracts have a delivery
option and the settlement of contract takes place by way of actual delivery of underlying commodity/currency,
then such forward contracts would be treated as normal supply of goods and liable to GST.
Further, if some service charges/service fees/documentation fees/broking charges, etc., are charged, the same
would be a consideration for supply of service and chargeable to GST.
p Forward contract in commodities or currencies - A forward contract is an agreement executed to purchase or sell
a pre-determined amount of a commodity/currency at a pre-determined future date at a pre-determined price.
The settlement could be by way of actual delivery of underlying commodity/currency or by way of net settlement
of differential of the forward rate over the prevailing market rate on the settlement date.
Where the settlement takes place by way of actual delivery of underlying commodity/currency, then such
forward contracts would be treated as normal supply of goods and liable to GST.
Where the settlement takes place by way of net settlement of differential of the forward rate over the prevailing
market rate on the settlement date, the same would fall within the purview of “securities”. As securities are
neither goods nor services, future contracts are not chargeable to GST. If, however, some service charges/service
fees/documentation fees/broking charges, etc., are charged, the same would be a consideration for supply of
service and chargeable to GST.
pSale, purchase, acquisition or assignment of a secured debt - Sale, purchase, acquisition or assignment of a secured
debt is in the nature of a derivative. It is a sale/purchase of a security. Consequently, GST is not applicable.
p Exit-load on mutual funds - Exit load in the form of a fee (whether or not as a fixed percentage of the investment)
is liable to GST. Even if the exit load is in the form of units in the fund, it may be concluded that the consideration
received in money was later converted to NAV units.
411.3 Concept of supply - Scope of supply is specified by section 7(1). Under this section, definition of supply
is very wide and includes the following –

Different Activity Important point to be noted

categories Consideration Supply in the course or
furtherance of business
of supplier
Category 1 Supply of goods and services Consideration is required Necessary
Category 2 Import of service Consideration is required Not necessary
17 Meaning of consideration as generally understood Para 412.1

Different Activity Important point to be noted

categories Consideration Supply in the course or
furtherance of business
of supplier
Category 3 Supply without consideration GST applicable, even if no consideration See para 414
Category 4 Deemed supply Barring a few cases, consideration is required See para 413

p Category 1 : Supply of goods or services - This category includes all forms of supply of goods or services or both
such as sale, transfer, barter, exchange, licence, rental, lease or disposal. Under this category, supply of goods
or services shall be treated as “supply” only if the following are satisfied –
1. Supply is made (or agreed to be made) for a consideration.
2. Supply is made by the supplier in the course or furtherance of his business [see para 416].
GST is not applicable if the supplier is not in the business of supplying goods or services. A salaried employee
is not subject to GST if he sells his old gold (as he is not in the business of selling gold).
p Category 2 : Import of service - Import of service is also supply for the purpose of GST. However, it is subject to
the following–
1. Import of service should be for a consideration.
2. Import of service may (or may not be) in the course or furtherance of the business of the supplier.
3. Recipient of service (or importer of service) is liable to pay GST under reverse charge mechanism.
pCategory 3 : Supply without consideration - Supply includes a few activities specified in Schedule I. These activities
are treated as supply even if supply is made without a consideration [see para 414].
p Category 4 : Deemed supply - A few activities referred to in Schedule II are treated as supply (or deemed as supply)
[see para 413].
411.3-1 OTHER POINTS INCLUDED IN THE DEFINITION OF SUPPLY UNDER SECTION 7 - The following points should be
noted –
p Activities or transactions specified in Schedule III are treated neither as supply of goods nor supply of services
[see para 415.1].
p Such 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 the Government, shall be treated
neither as a supply of goods nor a supply of services [see para 415.2].
p Under section 7(3), Government has power to 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.

nn WHAT IS THE SIGNIFICANCE OF “CONSIDERATION”

412. “Consideration” is defined in section 2(31). The definition of term “consideration” in section 2(31) is
inclusive not exhaustive. Therefore, the term “consideration” not only includes those things which are included
in section 2(31) but also includes such things which the term signifies according to its general and natural
meaning. Before discussing the definition of consideration given in section 2(31), it is imperative to know
meaning of “consideration” as generally understood.
Meaning of “consideration” as generally understood See para 412.1
Extended money of “consideration” under section 2(31) See para 412.2

412.1 Meaning of “consideration” as generally understood - In layman’s terms, consideration means

something in return. Since the definition of “consideration” in section 2(31) is inclusive, it will not be
inappropriate to refer “consideration” as defined in section 2(d) of the Indian Contract Act, 1872 which is given
below –
“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing,
or does or abstains from doing, or promises to do or abstain from doing, something, such act or abstinence
or promise is called a consideration for the promise.”
Para 412.2 Concept of Supply 18

In simple terms, ‘consideration’ means everything received or recoverable in return for goods/services. It
includes monetary payment, any consideration of non-monetary nature or deferred consideration. Generally,
consideration refers to something of value given to someone in return for goods, services or some other promise.
Consideration need not be adequate. Moral consideration is not sufficient. Past consideration is not good
consideration. Consideration cannot be illusory.
412.2 “Consideration” as defined under section 2(31) - Under section 2(31) consideration in relation to supply
of goods or services or both includes the following –
“(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the
inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall
not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply
of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy
given by the Central Government or a State Government:
Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment
made for such supply unless the supplier applies such deposit as consideration for the said supply”.
p Salient features - Salient features of the definition are given below –
1. Monetary consideration - Consideration includes monetary consideration. ‘Money’ has been defined in section
2(75) and includes not only cash (Indian currency as well as foreign currency) but also cheque, promissory note,
bill of exchange, letter of credit, draft, pay order, traveller’s cheque, money order, postal or electronic remittance
or any such similar instrument recognised by RBI.
2. Non-monetary consideration - Consideration includes non-monetary consideration. Non-monetary consider-
ation essentially means compensation in kind such as the following –
- Supply of goods and services in return for provision of service (for instance, X agrees to dry clean Y’s clothes
and Y agrees to click X’s photograph).
- Refraining or forbearing to do an act in return for provision of service (for instance, Z agrees not to open dry
clean shop in A’s neighbourhood and A agrees not to open photography shop in Z’s neighbourhood).
- Tolerating an act or a situation in return for provision of a service (for instance, B agrees to design C’s house
and C agrees not to object to construction of B’s house in his neighbourhood).
- Doing or agreeing to do an act in return for provision of service (for instance, D agrees to construct 4 flats for
E on land owned by E and E agrees to provide one flat to D without any monetary consideration).
The value of non-monetary consideration is determined as per section 15 [see para 467].
3. Consideration paid by a person other than recipient of supply - The consideration for goods and/or services may
be provided by a person other than the recipient of supply as long as there is a link between supply of goods and/
or services and receipt of consideration. For instance, holding company may pay for goods and/or services that
are supplied to its subsidiary company.
4. Subsidy from Government - Consideration does not include any subsidy given by the Central Government or
a State Government.
5. Monetary value of an act or forbearance - Consideration includes monetary value of an act or forbearance.
Consideration Meaning For what ?
“Consideration” includes Act means to do something 1. In respect of supply of goods and/or
monetary value of an act services.
“Consideration” includes Forbearance means to abstain from 2. In response to supply of goods and/or
monetary value of forbearance doing anything or refraining services.
from enforcement of something 3. For inducement of supply of goods and/
or services.
Any consideration received for doing something or promise to refrain for doing something, is subject to GST.
6. Deposit - A deposit given in respect of the supply of goods and/or services is generally not considered as
payment made for such supply (e.g., refundable deposit is not subject to GST). If, however, deposit is non-
refundable or the supplier applies such deposit as consideration for the said supply, GST is applicable.
412.3 Other points - The following points should be noted –
1. A grant given for a research (where the researcher is under no obligation to carry out a particular research)
would not be a consideration for such research.