Levy and Collection of Tax PDF

Chapter 3
Levy and Collection of Tax

Sections Rules
7. Scope of supply 3. Intimation for composition levy
8. Tax liability on composite and mixed 4. Effective date for composition levy
supplies 5. Conditions and restrictions for
9. Levy and collection composition levy
10. Composition levy 6. Validity of composition levy
7. Rate of tax of the composition levy
Statutory Provisions
7. Scope of supply
(1) For the purposes of this Act, the expression “supply” includes––
(a) all forms of supply of goods or services or both such as sale, transfer, barter,
exchange, licence, rental, lease or disposal made or agreed to be made for a
consideration by a person in the course or furtherance of business;
(b) import of services for a consideration whether or not in the course or
furtherance of business; and 1
(c) the activities specified in Schedule I, made or agreed to be made without a
consideration; and 2
(d) the activities to be treated as supply of goods or supply of services as
referred to in Schedule II 3
(1A) Where certain activities or transactions constitute a supply in accordance with
the provisions of sub-section (1), they shall be treated either as supply of
goods or supply of services as referred to in Schedule II. 4
(2) Notwithstanding anything contained in sub-section (1), ––
(a) activities or transactions specified in Schedule III; or
(b) such activities or transactions undertaken by the Central Government, a State
Government or any local authority in which they are engaged as public
1
Inserted vide The Central Goods and Services Tax (Amendment) Act, 2018 w.e.f. 01st July, 2017
2
Omitted vide The Central Goods and Services Tax (Amendment) Act, 2018 w.e.f. 01st July, 2017
3
Omitted vide The Central Goods and Services Tax (Amendment) Act, 2018 w.e.f. 01st July, 2017
4
Ch 3: Levy and Collection of Tax Sec. 7-11 / Rule 3-7
authorities, as may be notified by the Government on the recommendations of

the Council,
shall be treated neither as a supply of goods nor a supply of services.
(3) Subject to the provisions of sub-sections (1), (1A) and (2) 5, the Government may,
on the recommendations 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.
SCHEDULE I
[See section 7]
ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION
1. Permanent transfer or 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:
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. 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 6 from a related person or from any of his other
establishments outside India, in the course or furtherance of business
SCHEDULE II
[See section 7]
ACTIVITIES OR TRANSACTIONS 7 TO BE TREATED AS SUPPLY OF GOODS OR
SUPPLY OF SERVICES
5
Substituted vide The Central Goods and Services Tax (Amendment) Act, 2018 w.e.f. 01st July, 2017.
Prior to substitution it was read as ”” sub-sections (1) and (2)”
6
Substituted vide The Central Goods and Services Tax (Amendment) Act, 2018 w.e.f. 01st February,
2019. Prior to substitution it was read as ”taxable person”
7
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1. Transfer
(a) any transfer of the title in goods is a supply of goods;
(b) any transfer of right in goods or of undivided share in goods without the transfer
of title thereof, is a supply of services;
(c) 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
2. Land and Building
(a) any lease, tenancy, easement, licence to occupy land is a supply of services;
(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.
3. Treatment or process
Any treatment or process which is applied to another person's goods is a supply of
services.
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, whether or not for a consideration,
such transfer or disposal is a supply of goods by the person;
(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, whether or not for a consideration, the usage or making
available of such goods is a supply of services;
(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.
5. Supply of services
The following shall be treated as supply of services, namely:—
CGST Act 91
(a) renting of immovable property;

(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
authorised 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
remodelling of any existing civil structure;
(c) temporary transfer or permitting the use or enjoyment of any intellectual
property right;
(d) development, design, programming, customisation, adaptation,
upgradation, enhancement, implementation of information technology
software;
(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a
situation, or to do an act; 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.
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.
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7. 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.
SCHEDULE III
[See 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.
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.
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] 8
8
Inserted vide The Central Goods and Services Tax (Amendment) Act, 2018 w.e.f. 01st February, 2019
CGST Act 93
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 paragraph 8, the expression “warehoused
goods” shall have the same meaning as assigned to it in the Customs Act,
1962 9
Relevant circulars, notifications, clarifications issued by Government

1. Notification No. 14/2017-Central Tax (Rate) dated 28.06.2017 was issued to notify the
supplies which shall be treated neither as a supply of goods nor a supply of service;
2. Circular No. 35/9/2018 dated 05.03.2018 was issued regarding taxability of services
provided by a member of the Joint Venture (JV) to the JV and vice versa and inter se
between the members of the JV;
3. Circular No. 34/8/2018 dated 01.03.2018 was issued clarifying on the taxability of
certain services;
4. Circular No. 1/1/2017-IGST dated 07.07.2017 was issued regarding Inter-state
movement of various modes of conveyance, carrying goods or passengers or for
repairs and maintenance to be treated as neither supply of goods nor supply of
services;
5. Circular No. 21/21/2017 dated 22.11.2017 to clarify on Inter-state movement of rigs,
tools and spares, and all goods on wheels like cranes;
6. Circular No. 10/10/2017-GST dated 18.10.2017 to clarify on goods moved within the
State or from the State of registration to another State for supply on approval basis to
be covered u/s 7 and chargeable to tax u/s 9.
7. GST Flyer as issued by the CBIT can be referred to for a gist of the statutory
provisions, titled ‘The Meaning and Scope of Supply’.
Related provisions of the Statute
Section or Rule Description

Section 2(31) Definition of Consideration
Section 2(17) Definition of Business
Section 2(5) Definition of Agent
Section 2(88) Definition of Principal
9
Inserted vide The Central Goods and Services Tax (Amendment) Act, 2018 w.e.f. 01st February, 2017
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Section 15 Value of taxable Supply

Section 25 Registration
Section 16 Input tax credit
Chapter IV – Rules Determination of Value of Supply Rules
7.1 Introduction
While the definition of the word ‘supply’ is inclusive, the legislature has carefully chosen not to
use the word/s such as “means”, or “means and includes”, “shall mean”, or “shall include”, etc.
A careful consideration of the above explanation would indicate that the draftsman is cautious
about any transaction of supply that might escape the levy. It is for this reason that despite
being exhaustive, the legislature has used the word “includes”.
A plain reading of the definition of the word ‘supply’ contained in Section 7(1) would invite
anybody’s attention to the 8 words – sale, transfer, barter, exchange, license, rental, lease or
disposal. Look at these 8 words – they are arranged in a descending order. Words 2 to 8 was
a subject matter of challenge under the erstwhile State-level VAT Laws. This ambiguity has
been done away with in the GST Laws. These 8 words together form a ‘continuum’. The last 7
words taper-off in their the absoluteness starting from the first of the forms of supply, that is,
‘sale’.
The Model GST Law released in June 2016 had included the meaning of the term ‘Supply’
within the clauses of the definition Section. However, in GST law, the term ‘supply’ is defined
by way of a separate and distinct section. One understands that the meaning attributed to the
term “Supply” is of very wide amplitude, but yet, an inclusive one. It must be noted that this
term is ordinarily attributable to an ‘outward supply’, unless the context so requires that the
term refers to an inward supply - say in case of importation of services or in respect of
transactions without consideration etc. Many things come within ‘supply’ but not everything is
‘supply’. Supply too has boundaries and many transactions are excluded from its grasp. This
points to a clear understanding that expression ‘supply’, although inclusively defined, does
have a recipe or a set of ingredients that each transaction must be tested against to see if it is
or is not a ‘supply’.
The word ‘supply’ could be understood as actual or implied. Implied supplies are governed by
the relevant Schedules. The three pillars of a supply would be:
(a) subject – viz. goods, services or goods treated as services. One cannot find an instance
in the GST statute where a supply of services is treated as a supply of goods.
(b) place of supply – to identify whether the transaction is an inter-State supply or an intra-
State supply
(c) time of supply – where legislature specifies ‘when’ the incidence is attracted.
CGST Act 95
7.2 Analysis
Supply:
(a) Generic meaning of ‘supply’: Supply includes all forms of supply (goods and / or
services) and includes agreeing to supply when the supply is for a consideration and in
the course or furtherance of business (as defined under Section 7 of the Act). It
specifically provides for the inclusion of the following 8 classes of transactions:
(i) Sale
(ii) Transfer
(iii) Barter
(iv) Exchange
(v) License
(vi) Rental
(vii) Lease
(viii) Disposal
The word ‘supply’ is all-encompassing, subject to exceptions carved out in the relevant
provisions. There are various ingredients that differentiate each of these eight forms of
supply. On a careful consideration of the purposeful usage of these eight adjectives to
enlist them as ‘forms’ of supply, it becomes clear that the legislature makes its intention
known by the choice of words that are deliberate and unambiguous. However, the
definition starts off with the phrase – “For the purpose of this Act”, which means that
wherever the term supply has been used anywhere in the Act, the meaning should
always be derived from this section 7 and cannot be substituted by any other
understanding of the term supply.
Barter means a “thing or commodity” given in ‘in return of’ another. In other words, no
value is fixed- viz., barter of wrist watch with a wall clock.
Disposal means distribution, transferring to new hands, extinguishment of control over,
forfeit or pass over control to another but in respect of goods that are ‘unfit for sale’.
Surely, discounted sale is not called disposal if the articles are still ‘fit for sale’.
Transfer means to pass over, convey, relinquishment of a right, abandonment of a
claim, alienate, each or any of the above acts, lawfully.
An attempt at identifying the characteristics of each of these forms of supply is provided
below:
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On an understanding of the above chart, one may infer that ‘supply’ is not a boundless
word of uncertain meaning. The inclusive part of the opening words in this clause may
be understood to include everything that supply is generally understood to be PLUS the
ones that are enlisted. It must be admitted that the general understanding of the word
‘supply’ is but an amalgam of these 8 forms of supply.
Please follow the brief discussion of the 8 forms of supply:
• Sale is a lawful, permanent and absolute transfer of ownership of property in goods
for money consideration under a valid contract such that no rights are left behind
with the transferor;
• Transfer is to lawfully convey property from one person to another. Here, consent of
transferor and capacity of transferee need not be present although all other
ingredients of a lawful contract are incumbent;
• Barter is where the consideration is in the form of goods or services (and not in
money) for a sale or transfer. So in general, barter is itself not a supply but the form
that consideration takes. But, when barter is called one of the forms of supply, it
covers other forms of supply whose consideration is non-monetary. Therefore,
barter will involve two supplies and not one. Each of these supplies would need to
be examined for its respective taxability;
• Exchange is where consideration is still not in money but in form of immovable
property (CIT v. Motors and General Stores Pvt Ltd AIR 1968 SC 200). Similar to
barter, exchange also involves two supplies. Given that land and (completed)
building is excluded from supply, exchange would be the supply whose
consideration is immovable property. And the object of supply itself may be of
goods or of services;
• Lease is where possession is transferred along with the right to use immovable
property with a duty to care, protect and return subject to normal wear and tear
along for consideration in the form of non-recurring premium only or along with
recurring rent. Essence of lease being delivery of possession along with user rights
is the reason lease is also used in the context of movable property (under the
earlier laws). Supplier of a lease does not have possession hence not enjoyt right to
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use but retains right to repossess after term of lease. Lease is discussed first to
contrast it with rental and license;
• License is similar to lease except that possession is not transferred but mere
permission to enter and use the property (movable or immovable) is allowed along
with all other ingredients of a lease. Supplier of a license retains possession of the
property during the term of license without right to use (if license precludes joint
use). And after expiry of the term of license or on termination of license, the
licensee will be a trespasser;
• Rental is lease in respect of movable property. And since recurring payment in
lease (of immovable property) is called rental, transfer of possession with user
rights for recurring payment of consideration is interchangeably applied for movable
and immovable property; and
• Disposal is sale or transfer but property that does not possess merchantable
warranty. Articles that are not merchantable are not ‘fit for sale’ but trade does take
place for the reason that the supplier disposes the article without ascribing any
worth but the receipient accepts the article for some intrinsic worth that he is able to
extract or obtain. Article that does not answer to its description cannot normally
bring a valid contract into existence but due to the respective motivation of each
party, such articles are lawfully disposed off. In other wrods, although there is no
consensus as to the object of supply, the parties are consenting to enter into such a
contract for the respective reasons and considerations.
Any attempt at expanding this list of 8 forms of supply, in case of goods, must be
attempted with great caution. Attempting to find other forms of supply has in the normal
course did not yield the desired results. However, transactions that do not amount to
supply have been discovered viz., transactions in the nature of an assignment where
one person steps into the shoes of another, appears to slip away from the scope of
supply, as well as transactions where goods are destroyed without a transfer of any
kind taking place. Perhaps, the case of destruction of goods is not included within the
meaning of ‘supply’ considering that the input tax credits in respect of destroyed goods
is a blocked credit. However, the contradiction may continue until a clarification is
issued to state whether the blocked credits is in respect of goods that have been
destroyed before the availment of credits, or is applicable even in case where goods are
destroyed after the credits have been availed in respect of such goods.
Now looking at ‘services’, we find that the adjectives used to list the 8 forms of supply in
this clause are akin to transactions involving goods and not services. Services other
than licensing, rental and leasing services have not been specifically included in the
meaning of the term ‘supply’. However, transactions involving services are also
required to be passed through the same criteria for determination of supply. In doing
so, a slight adjustment in the way of looking at transactions involving services is
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necessary so as to substitute the object of supply from goods to services while

administering the tests for determining the forms of supply involving services. In other
words, the same 8 forms of supply must be applied in relation to services but with
adjustment that is understood by the expression mutatis mutandis.
The law has provided an inclusive meaning to the word ‘supply’ which implies that the
specific transactions which are listed in the said Section are only illustrative.
It is essential that such supplies should be by the supplier who is engaged in business
(refer discussion under section 2(17)). However, in case of import of services for a
consideration, even if such services are imported otherwise than in the course or
furtherance of business, it would still be a supply. Refer discussion on inward supply in
2(67) and compare with outward supply in section 2(83).
The word ‘supply’ should be understood as follows:
— It should involve delivery of goods and / or services to another person; The word
‘delivery’ must be understood from allied laws such as Sale of Goods Act, 1930
or Indian Contract Act, 1872; delivery could be actual, physical, constructive,
deemed, etc.
— Supply will be treated as ‘wholly one supply’ – if the goods and / or services
supplied are listed in Schedule II or could be classified as a composite supply or
mixed supply;
— It should involve quid-pro-quo – viz., the supply transaction requires something in
return, which the person supplying will obtain, which may be in money / monetary
terms / in any other form (except in cases of activities specified in Schedule I
which are deemed to be supplies, even when made without consideration). What
is received in return need not be always in ‘money’; it can partly/wholly be in
money’s worth too (non-monetary in nature);
— Transfer of property in goods from the supplier to recipient is not necessary viz.,
lease or hiring of goods;
It is essential that all the above forms of transactions including the extended and
generic meaning given to the word ‘supply’ should be made for a ‘consideration’. The
only exception for this rule of construction will be cases specified in Schedule I.
Absence of consideration (as defined in Section 2(31)) will take away the character of
the word ‘supply’ under this clause, and accordingly, the transaction will not attract tax.
It is important to note supplies listed in Schedule I would nevertheless attract the wrath
of tax, even when made without consideration. One has to therefore, be very careful,
while analysing the tax implications in respect of supplies listed in Schedule I.
(b) Supply should be in the course or furtherance of business: For a transaction to
qualify as ‘supply’, it is essential that the same is ‘in the course’ or ‘furtherance of
CGST Act 99
business’. This implies that it is only such of those supplies of goods and / or services
by a business entity would be liable to tax, so long as it is ‘in the course’ or ‘furtherance
of business’. Supplies that are not in the course of business or in furtherance of
business will not qualify as ‘supply’ for the purpose of levy of tax, except in case of
import of service for consideration, where the service is treated as a supply even if it is
not made in the course or furtherance of business.
The expression ‘in the course of’ must be construed differently from ‘in the course or’.
The GST Laws use the expression ‘in the course or’ and careful analysis is therefore,
essential. The expression ‘in the course’ appearing in Section 7(1)(a) does not appear
in Section 7(1)(b). However, one cannot lose sight of the fact that the expression ‘in the
course’ is used selectively in respect of transactions listed in Schedule I, II or III. The
import of this would mean that the meaning attributable to the expression ‘in the course’
would apply only in respect of such of those transaction, so listed, in the relevant
Schedules.
Let us now try to understand the meaning of the phrase ‘in the course’. The expression
‘in the course’ implies not only a period of time during which the movement or
transaction is in progress but postulates a connected relationship. Therefore, the class
of transactions needs to be analysed and cannot be randomly applied to the provisions
of Section 7 or Section 8. So construed, the word ‘or’ appearing in the phrase or
expression ‘in the course or furtherance of business’ assumes importance. When read
in a proper perspective, the preposition ‘or’ actually bisects the entire phrase into two
limbs. Therefore, the 8 forms of supply would tantamount to transaction of supply when
such supplies are in the course of business, or in the furtherance of business.
Therefore, the legislature has supplied huge amount of elasticity in understanding the
meaning of the term ‘supply’.
The term ‘business’ has been defined under the GST Laws to include:
(i) a wide range of activities (being “trade, commerce, manufacture, profession,
vocation, adventure, wager or any similar activity”),
(ii) “whether or not it is for a pecuniary benefit”,
(iii) regardless of the “volume, frequency, continuity or regularity” of the activity.
(iv) and those “in connection with or incidental or ancillary to” such activities.
A recent order of the Authority for Advance Ruling – Kerala has ruled, in a matter
involving recovery of food expenses from employees for the canteen facility provided by
a Company, that such recovery falls within the definition of ‘outward supply’ and are
therefore taxable outward supplies under the GST law. In paragraph 9 of the order, the
AAR-Kerala has concluded that the supply of food by the applicant (Company) to its
employees would definitely come under clause (b) of Section 2(17) as a transaction
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incidental or ancillary to the main business and thereby the test of ‘in the course or
furtherance of business’ is met by the applicant. – Order No. CT/531/18-C3 dated
26.03.2018.
Also, a question came up before Authority for Advance Ruling – Karnataka in the matter
of Columbia Asia, whether allocation of expenses to other registered units by Corporate
Office tantamount to supply of services between related or distinct persons as per Entry
2 to Schedule I to CGST Act and accordingly liable to tax. The Authority ruled that the
activities performed by the employees at the corporate office in the course of or in
relation to employment such as accounting, other administrative and IT system
maintenance for the units located in the other states as well i.e. distinct persons as per
Section 25(4) of the CGST Act shall be treated as supply as per Entry 2 of Schedule I of
the CGST Act.
Drawing similarities from the erstwhile State-level VAT laws, it follows that the said
transaction should be with a commercial motive, whether or not there is a profit motive
in it or its frequency / regularity. E.g.: sale of goods in an exhibition, participation in a
trade fair, warranty supplies, sale of used assets / scrap sales, etc. would be activities
in the course of business.
(c) Import of service will be taxable in the hands of the recipient (importer): The word
‘supply’ includes import of a service, made for a consideration (as defined in Section
2(31)) 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 for
registration, as tax would be payable in case of import of services on reverse charge
basis, requiring the importer of service to compulsorily obtain registration in terms of
Section 24(ii) of the Act. Although import for personal purposes is included in the
definition of supply, entry 10(a) to Notification No. 9/2017-Int (Rate) dated 28 Jun 2017
exempts import of services under entire chapter 99 from payment of GST. However, the
GST law has ensured that persons who are not engaged in any business activities will
not be required to obtain registration and pay tax under reverse charge mechanism, and
it turn, requires the supplier of services located outside India, to obtain registration for
the OIDAR (online information and database access and retrieval) services only
Note: Import 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(21) of IGST Act has adopted the meaning of ‘supply’ from
CGST/SGST Act.
(d) Transactions without consideration: The law lists down, exhaustively, cases where a
transaction shall be treated as a ‘supply ‘even though there is no consideration. Such
transactions are listed in Schedule I. Once an activity is deemed to be a ‘supply’ under
the paragraph listed in Schedule I, the value of taxable supply shall be determined in
CGST Act 101

terms of provisions of Section 15(4) of the Act read with Chapter IV (Determination of
Value of Supply) of CGST Rules.
In this regard, it may be noted that on careful consideration of the essential ingredients
of a valid contract, it cannot be disputed that a contract without consideration is not a
contract at all. The reference made to ‘transactions without consideration’ In Schedule I
does not imply that a void contract is being made valid, by GST laws. It can be argued
that transactions listed in Schedule I, are not contracts at all owing to lack of
consideration in terms of the Contract Laws. Even though they are not contracts, by
legal fiction, flowing from section 7(1)(c) read with Schedule I, they will be nevertheless
regarded as a ‘supply’ and made taxable. As can be seen from the above, in all other
clauses of section 7(1), supply exists within a valid contract, but in select circumstances
supply is imputed by legal fiction in the absence of a contract. It is therefore important
not to extrapolate this legal fiction beyond the specific cases to which the law imputes
this fiction.
The activities specified in Schedule I are analysed in the ensuing paragraphs:
1. Permanent transfer or disposal of business assets where input tax credit has
been availed on such assets.
(a) Of the 8 forms of supply, the only forms that qualify as a supply, under this
category are ‘transfer’ and ‘disposal’. Other 6 forms of supply listed in section
7(1)(a) would not stand categorised in this paragraph, given that there is (a) an
element of a consideration that is intrinsic to the form, such as the case of a
sale or barter or exchange, or (b) there is no business asset that is
permanently transferred such as in the case of a licence or rental or lease, or
any other service for that matter.
(b) Ordinarily, there can be no permanent transfer in case of goods sent for job
work. The aspect of sending goods on job work is not a supply, has been
clarified vide Circular No.38/12/2018 dated 26.03.2018. However, where a
registered person has purchased any moulds, tools, etc. and has sent the
same to the job worker, there is a good chance that the goods are never
returned, given that the time limits specified in Section 143 for good sent for job
work does not apply to moulds, tools and other specified goods.
(c) It may be noted that this paragraph conjoins two disjointed activities/
transactions viz., (a) permanent transfer; and (b) disposal of business assets
where input tax credit has been availed on such assets. There is a school of
thought that permanent transfer without consideration is in itself an item
covered under Schedule I whether or not any credit is claimed on such asset.
However, there is a second school of thought, not widely followed, who strongly
believe that both permanent transfer and disposal have to be in respect of a
business asset on which credit is availed. For instance, where a capital asset
has been procured, say, by a distillery for the purpose of manufacture of
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alcoholic beverages, no input tax credit would have been availed on such
asset. Accordingly, there would be no output tax payable if the asset is
permanently transferred to another entity (unrelated), if the transfer is without
consideration, going by the second school of thought. However, if consideration
exists, there can be no escape from levy. Support can be found in the way
relief is granted to the ‘disposal of business assets’. If disposal is anyway one
of the forms of supply, how can disposal be excused where credit is not
availed. This is explained when credit is reversed in case of disposal (as
contemplated in section 17(5)(h) of the CGST Act), there cannot be a levy
again by the fiction in Schedule I on this disposal. Now, if Proprietor were to
take away a car used in the business, can tax incidence be excused simply
because credit was not allowed originally. Care must be take to identify how
the disjointed expression in schedule I is understood
(d) In the above context, business asset need not always be goods, it can as well
be service that could be permanently transferred which could attract the above
provisions Eg: unexpired right in a business franchise permanently transferred
to another person.
(e) While the word ‘transfer’ in this entry suggests that there should be another
person who would receive the business assets, there is no requirement of
another person in the case of ‘disposal’. Therefore, if a business asset on
which credit is claimed has been discarded, the transaction shall be regarded
as a supply.
(f) Business assets procured for the purpose of serving the requirements of
‘Corporate Social Responsibility’, being a statutorily imposed obligation’ may
be contended to be a procurement made in the course or furtherance of
business, and an attempt can be made to avail input tax credit. The issue
would however remain contentious and there are no precedents. However,
there would be no escape from the levy of tax on the transaction, if the asset is
permanently transferred. The treatment would be no different even in the case
of a donation.
(g) ADVANCE RULING ON THE CAPTIONED MATTER: AAR, MAHARASHTRA
vs. CMS Info Systems Ltd.- “Whether disposal of scrap vehicles for
consideration is a sale and section 7 explaining expression 'supply' covers
supply of goods such as sale or disposal made for a consideration and it
further, says that supply has to be in course or furtherance of business - Held,
yes - Applicant was engaged in business of having a cash management
network involving transportation of cash - Disposal of cash carrying vans was a
transaction in connection with or incidental or ancillary to business of having a
cash management network - As and when vehicles became scrap, they had to
be disposed of and proceeds therefrom to be identified as income for business
CGST Act 103

which was reflected in profit and loss account of business - Thus, buying new
assets and discarding old and unusable assets was an activity in course of
carrying on business - Whether therefore, supply of motor vehicles as scrap
after its usage was an activity of 'supply' in course or furtherance of business
and such transaction would attract GST - Held, yes”
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:
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
(a) The deemed supplies covered in this paragraph are based on a relationship
between the supplier and recipient. The relationship covered under this
paragraph as related persons defined by way of an explanation to Section 15
and distinct persons in terms of Section 25(4) and 25(5) of the Act.
(b) Transactions with distinct persons are normally without consideration since
they are part of the same entity located in different geographies, unless the
accounting system is so sophisticated or so devised, that it treats the locations
in each State as a separate / independent entity even for book-keeping
purposes and effects payments in monetary terms. Let us take instances of
transactions between distinct persons that are not traceable in the books of
account, but requires attention from the perspective of this paragraph in the
Schedule:
i. Stock transfers e.g., transfer of sub-assemblies, semi-finished goods or
finished goods;
ii. Transfer of new or used capital goods/fixed assets – including movement
of laptops when employees are transferred from one location to another;
iii. Bill-to ship-to transactions wherein the vendor issues the invoice to the
corporate office and ships the goods to the branch office;
iv. Centralised management function like Board of Directors, Finance,
Accounts, HR, Legal, procurement functions and other corporate functions
at one location say corporate office and the entity having multiple
registrations in various states results in supply of management services by
the corporate office to distinct persons;
v. A transaction of sale of goods from one registration and providing after
sales support or warranty services/replacement services by another
registration of the same entity;
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vi. Contract awarded by a customer to an entity at the corporate office from

where the centralized billing to the customer is made but the execution of
the contract is carried out through various registrations of the same entity
located in other / multiple States.
vii. Permitting employees to make use of the office assets for personal use –
say usage of motor vehicles, laptops, printers, scanners, etc.
(c) It appears that this paragraph, has an overriding effect on the first paragraph of
the Schedule relating to transfer or disposal. In other words, in case a business
asset is permanently transferred to a distinct person, the transaction although
out of scope of paragraph 1, would be treated as a supply in terms of this
paragraph, considering that this paragraph does not impose any such condition
on the transaction. The provisions would equally apply even in the case of
assets procured in the pre-GST regime. Please note that a transaction that is
already a ‘supply’ is now furnished a special treatment by the fiction in
Schedule I in this paragraph and in the next unlike paragraph 1 (which was not
a supply but is deemed to be one by this fiction).
(d) The explanation appended to Section 15 of the CGST Act provides that an
employer and employee will be deemed to be “related persons”. Accordingly,
supplies by employer to employees would be liable to tax, if made in the course
or furtherance of business, even though these supplies are made without
consideration, except:
i. Gifts by an employer to an employee of value up to Rs 50,000 (to be
understood as inclusive of taxes, as read with Rule 35 of the CGST Rules)
in a financial year (whether this value needs to be pro-rated in the first year
of implementation of GST / first year of commencement of business is a
moot question; however, the presumption is that a part of the financial year
would be construed as a whole year);
ii. Cash gifts of any value, given that the ‘transaction in money’ is not a
subject matter of supply as the same receives treatment as a taxable
salary in the hands of the employee;
iii. Services by employee to the employer in the course of or in relation to his
employment – treated as neither a supply of goods nor a supply of
services.
(e) The question that arises as to what constitutes a gift is discussed in the
following paras.
i. Gift has not been defined in the GST laws.
ii. In common parlance, gift when made without consideration is voluntary in
nature and is normally made occasionally.
CGST Act 105

iii. It cannot be demanded as a matter of right by the employee and the

employee cannot move a court of law for obtaining a gift. However, if any
gift, by whatever name called, is a right of the employee in terms of the
employment contract / employee policy of the entity, then such gift shall be
treated as emoluments arising out of the employment (including
perquisites) and cannot be treated as a supply.
iv. As a corollary, one can argue that the scope and ambit of the word ‘supply’
also includes a transaction of a barter / exchange, in which case, the
transaction may be regarded a taxable supply. In such a case, the question
that would arise is as to whether a salary paid in non-monetary terms will
attract GST. However, the GST Act contains a dedicated valuation rule
(rule 27) which contains the modus operandi to arrive at the value of the
supply the consideration of which is made either wholly or partly in non-
monetary terms.
v. The credit restriction on membership of a club, health and fitness centre
[under Section 17(5)(b)(ii)] would not apply where the employer provides
the facilities to its employees, whether or not for a consideration, given that
such a supply without consideration, would also be deemed to be an
outward supply under this paragraph of the Schedule.
vi. Where gifts are liable to tax under this Schedule, it would be fair and
proper to treat such gifts as taxable outward supplies, and therefore, credit
thereon may not be required to be restricted under Section 17(5)(h).
vii. It may also be noted that a gift need not always be in terms of goods. A
service can also constitute a gift, such as gift vouchers for a beauty
treatment.
viii. Another question which arises that is on what value will the GST liability be
calculated in case the gift amount exceeds Rs.50,000/-. Although it is not
expressly mentioned in the GST Act. But a reasonable construction can be
drawn that GST shall be levied on the whole amount in case the gift
amount exceeds Rs. 50,000/-.
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.
(a) The definition of the terms ‘agent’ and ‘principal ‘have to be understood
contextually and have been reproduced below:
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• Section 2(5) of the Act – “Agent means a person, including a factor,

broker, commission agent, arhatia, del credere agent, an auctioneer or
any other mercantile agent, by whatever name called, who carries on
the business of supply or receipt of goods or services or both on
behalf of another”.
• Section 2(88) of the Act – “Principal means a person on whose behalf
an agent carries on the business of supply or receipt of goods or
services or both”.
(b) Where an Agent receives goods directly from the Principal, or if the
Principal’s vendor directly dispatches goods to the location of the agent,
the Principal shall be required to treat the movement as an outward supply
of goods by virtue of this clause. If understood in its proper perspective,
when an agent receives goods on behalf of the Principal and thereafter
issues the goods to the Principal, the transaction will be regarded as a
supply by the Agent to the Principal.
(c) An important question that may arise is - as to how the transaction would
appear to the ultimate recipient of a supply, when effected by the Principal
through the Agent, or to the supplier who effects the supply to the Principal
through an Agent. An analysis of the transaction where the Principal
effects a supply through an Agent is provided as follows:
i. The Principal shall recognise the transfer of goods to the Agent as a
supply, at the time of such transfer.
ii. When the Agent supplies such goods to the third-party recipient, the
Principal would recognise revenue as a supply (sale) in his books of
account.
iii. The Agent would, however, issue the invoice to the third-party
recipient in the name of the Principal, while also incorporating the
Agent’s own details as the supplier, and discharge taxes on the
supply.
iv. The third-party recipient would receive the credits on account of this
supply from the GSTIN of the Agent and not the Principal.
v. To this extent, the Principal’s supplies in the GST returns will reflect a
lower value as compared to the actual revenue against the supplies,
since the value of supply to an Agent would normally, be lower than
the actual sale price.
vi. The value of supplies in the GST returns of the Agent would be much
higher than the actual revenues earned, which would be limited to the
commission income.
CGST Act 107

vii. It is pertinent to note that the Agent shall be required to issue an

invoice on the Principal for the value of service provided by him to
earn his commission income but without GST as tax has already been
levied on commission in the form of selling price of the goods.
viii. Statutory Update: - As per Notification No. 15/2018- Central Tax
(Rate) dated 26.07.2018 services supplied by Direct Selling Agents
(Other than Body Corporate, Partnership or LLP) to Bank or NBFC
shall be covered under Reverse Charge.
(d) There are two recent circulars issued clarifying scope of transactions
between principal and agent which clarifies the above aspects:
i. Circular No.57/31/2018-GST dated September 4, 2018 (in the context
of scope of principal-agent relationship). The entire jurisprudence
under Indian Contract Act has been brought to bear in GST by making
reference to section 182 and states as:
“Thus, the key ingredient for determining relationship under GST
would be whether the invoice for the further supply of goods on behalf
of the principal is being issued by the agent or not. Where the invoice
for further supply is being issued by the agent in his name then, any
provision of goods from the principal to the agent would fall within the
fold of the said paragraph. However, it may be noted that in cases
where the invoice is issued by the agent to the customer in the name
of the principal, such agent shall not fall within the ambit of Schedule I
of the CGST Act. Similarly, where the goods being procured by the
agent on behalf of the principal are invoiced in the name of the agent
then further provision of the said goods by the agent to the principal
would be covered by the said paragraph. In other words, the crucial
point is whether or not the agent has the authority to pass or receive
the title of the goods on behalf of the principal”.
There are various scenarios which are discussed to analysis and
conclude the scope of this paragraph in Schedule I. Readers may refer
to the above circular hosted on www.cbic.gov.in to understand those
scenarios. One interesting aspect to highlight in this circular is that
‘whether the agent is required to issue invoice to customer in his own
name or in the name of the Principal’ is a question that must be
determined by the flow of transactions and not left flexible in the hands
of the agent. But this circular appears to wait upon the agent to
confirm who will issue the invoice. This aspect can cause great
concern because a c&f agent who handles the goods – receive, store
and dispatch – on the Principal may pay GST on commission and later
it might be imposed on this agent to pay tax ‘as if’ this entire
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arrangement were a ‘trading transcation’ by fiction in para 3 of sch I.

At that time, thing would have already concluded and irreversible.
Experts hold the view that ‘if agent handles the goods belonging to
Principal’, this fiction applies and even though commission earned
would be income for income-tax purposes, GST requires total turnover
to be treated as outward supply with credit for inward supplies from
Principal. If the agent does not handle the goods but merely introduces
buyer and seller, this fiction would not apply. Yet another category
would be cases of Customs Brokers who handle the goods not for
making further supplies of this goods but to clear them with customs
for import or export.
ii. Circular No.73/47/2018-GST dated November 5, 2018 (in the context
of del-credere agent) states as:
SI Issue Clarification
No.
1 Whether a DCA falls As already clarified vide circular No.
under the ambit of 57/31/2018-GST dated 4th September,
agent under Para 3 of 2018, whether or not the DCA will fall
Schedule I of the under the ambit of agent under Para 3
CGST Act? of Schedule I of the CGST Act
depends on the following possible
scenarios:
for supply of goods is issued by the
supplier to the customer, either himself
or through DCA, the DCA does not fall
under the ambit of agent.
where the invoice for supply of goods
is issued by the DCA in his own name,
the DCA would fall under the ambit of
agent.
2 Whether the In such a scenario following activities
temporary short-term are taking place:
transaction-based 1. Supply of goods from supplier
loan extended by the (principal) to recipient;
DCA to the recipient
(buyer), for which 2. Supply of agency services from DCA
interest is charged by to the supplier or the recipient or both;
the DCA, is to be 3. Supply of extension of loan services
included in the value by the DCA to the recipient.
of goods being
CGST Act 109

supplied by the
supplier (principal) It is clarified that in cases where the
where DCA is not an DCA is not an agent under Para 3 of
agent under Para 3 of Schedule I of the CGST Act, the
Schedule I of the temporary short-term transaction-
CGST Act? based loan being provided by DCA to
the buyer is a supply of service by the
DCA to the recipient on Principal to
Principal basis and is an independent
supply.
Therefore, the interest being charged
by the DCA would not form part of the
value of supply of goods supplied (to
the buyer) by the supplier. It may be
noted that vide notification No.
12/2017-Central Tax (Rate) dated 28th
June 2017 (S. No. 27), services by way
of extending deposits, loans or
advances in so far as the consideration
is represented by way of interest or
discount (other than interest involved
in credit card services) has been
exempted.
3 Where DCA is an In such a scenario following activities
agent under Para 3 of are taking place: 1. Supply of goods by
Schedule I of the the supplier (principal) to the DCA; 2.
CGST Act and makes Further supply of goods by the DCA to
payment to the the recipient; 3. Supply of agency
principal on behalf of services by the DCA to the supplier or
the buyer and the recipient or both; 4. Extension of
charges interest to credit by the DCA to the recipient.
the buyer for delayed It is clarified that in cases where the
payment along with DCA is an agent under Para 3 of
the value of goods Schedule I of the CGST Act, the
being supplied, temporary short-term transaction-
whether the interest based credit being provided by DCA to
will form a part of the the buyer no longer retains its
value of supply of character of an independent supply
goods also or not? and is subsumed in the supply of the
goods by the DCA to the recipient. It is
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emphasised that the activity of

extension of credit by the DCA to the
recipient would not be considered as a
separate supply as it is in the context
of the supply of goods made by the
DCA to the recipient.
It is further clarified that the value of
the interest charged for such credit
would be required to be included in the
value of supply of goods by DCA to the
recipient as per clause (d) of sub-
section (2) of section 15 of the CGST
Act.
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.
(a) The expression ‘import of service’ has been defined to bear an innate
requirement of an outflow of foreign convertible currency, and therefore,
excludes any form of importation of services without consideration. Therefore,
this clause is inserted to encompass such of those services, that are received
from related persons / their establishments outside India. It is important for one
to refer to Explanation 1 to Section 8 of the IGST Act, 2017 which deems any
establishment outside India as an establishment of a distinct person. By virtue
of this treatment, all services received by a person in India from its branches /
establishments located outside India would be considered to be a supply, even
when made without consideration.
(b) For instance, say A Ltd is a holding company in USA and B Ltd a subsidiary in
India. Many business operations are centralized in the USA such as
accounting, ERP and other software, servers for the backup, legal function, etc.
For the purpose of this clause, the back-end support provided by the holding
company to the subsidiary company in India shall be regarded as a supply,
whether or not there is a cross charge, even if the same is not recognised in
the books, or any contracts, since it is categorized as an import of service
by a person from a related person without consideration, in the course of
business.
(e) Activities or Transactions to be treated as supply of goods or supply of services:
It is important to understand as to what constitutes a transaction of supply of goods or a
transaction of supply of service. Section 7(1A) creates a fiction under the statute and
CGST Act 111

specifies ‘what is’ and ‘what is not’ to be treated as a transaction of supply of goods or a
transaction of supply of service. So understood, one can list out 18 classes of
transactions enlisted Schedule II of which 5 classes of transactions are listed out as
supply of goods while 13 others would tantamount to supply of services. On a careful
consideration of the relevant clauses, it can be noticed that all the 6 classes of
transactions listed out in Article 366(29A) of the Constitution of India are covered within
the scope and ambit of Schedule II. While 2 transactions, out of the 6, are treated as
supply of goods, the other 4 are deemed to be supply of services.
Importantly, paragraph 6 (a) relating to works contracts (as defined in Section 2(119)) is
treated as a composite supply, of services. However, Section 2(119) has 14 distinct
words, all of which are required to be read in conjunction with the words “immovable
property”. Contracts relating to construction of immovable property are specifically
covered in paragraph 5(b) of Schedule II. Therefore, all works contracts other than
those relating to construction of immovable property would amount to composite supply
in terms of Section 2(30) read with Section 8.
It is important for one to understand that what is specified/listed in Schedule II not only
provides clarity but also what has to be treated as supply of goods or supply of
services.
Transactions listed out in schedule II DO NOT enlarge scope of supply as defined under
Section 7(1) of the Act. By shifting the ‘placement’ of schedule II from clause (d) of
section 7(1) to a separate section 7(1A), it is made clear that firstly, a transaction must
already be determined to be ‘supply’ and then, for the limited purposes of ‘treatment’ by
fiction, entries in schedule II must be referred. This amendment was introduced with
retrospective effect from 1 Jul 2017 vide CGST Amendment Act 2018.
It is not that schedule II is exhaustive. But where it is listed, then those transactions will
receive the ‘treatment’ as specified. Transactions involving ‘goods’ if specified in
schedule II to be treated as supply of ‘services’ then, all provisions of GST law that is
applicable to supply of services must be extended (without exception) to this transaction
even though it involves goods.
It is important to understand the intent of the legislature. For example, Para 5(a) of
Schedule II reads “renting of immovable property”. In this situation, how does one
understand the taxability of the transaction where consideration is not involved? The
only way to understand this lacuna is that such transactions that lack consideration
would be relegated to valuation principles, but, importantly, the transaction would be
treated as a supply.
Another instance to consider is para 1(c) of schedule II to CGST Act which deals with
‘hire purchase’ transactions. Although Hire Purchase Act, 1972 has been repealed in
2005. Trade understands hire-purchase versus lease (even though lease is divided into
operating and finance lease). In GST law, all kinds of lease are treated the same –
supply of services. Lease without possession is (legally a) license and license too is
112 BGM on GST

treated as a supply of services. But not hire-purchase. While para 1(b) and 5(f) deal
with lease and license, para 1(c) treats hire-purchase as a supply of goods. Invoice for
goods delivered under a hire-purchase will follow time and place of supply provisions
applicable to goods and not to services.
This presents an anomaly which is explain in the illustration below:
 Let’s start with simple operating lease arrangement where goods, say, electricity
generator whose normal sale price is Rs.1,00,000 are lying in stock at Puri, Orissa to
customer-site situated in Bhilai, Chattisgarh;
 Supplier is registered in Orissa and Recipient-customer is registered in Chattisgarh;
 Supplier makes an inter-State supply and issues invoice for Rs.12,000. This is the lease
rental invoice of first month of a 10-month lease including interest built into this lease
rental amount;
 Goods travel from Puri to Bhilai and is clearly an inter-State movement of goods and
IGST has been charged on the invoice;
 At the end of first month, Recipient-customer does NOT return the generator by
transport from Bhilai back to Puri. It is retained in Bhilai to be used in the second month;
 So, the question to consider is, whether 10-month lease agreement, is one agreement
with 10 instalment to pay or is it 10 monthly agreements contained in one document;
 Quick answer that comes to mind is that it is ‘one agreement with 10 installments to
pay’. But it is well understood that time of supply does not get deferred simply because
payment is collected in installments. And if it is one agreement to supply, then it is one
supply and therefore, has one time of supply which is the first day of the first month. By
this reasoning, entire GST at, say, 18% on Rs.1,20,000 (Rs.12,000 x 10 installments)
will be payable in first month (within due date permitted);
 On a more careful consideration of that question, it becomes clear that this lease
(exceptions to be examined) is a ‘month-to-month’ agreement. And as all monthly
agreements are identical, it is executed in a single document. Now there are 10
supplies and will have 10 times of supply and hence, GST is payable on Rs.12,000 at
18% each month;
 Now, that it is clear that lease is a month-to-month arrangement, the next question to
consider is whether the lease rental invoice for the second month, will be inter-State (as
the first month) or will it become an intra-State supply;
 Recollect that generator is lying with the Recipient-customer at Bhilai at the end of first
month and will be continued to be used in second month without actually being return to
Puri and then received back to Bhilai;
 Now, location of supplier of services is defined in IGST Act (and also in CGST Act) but
location of supplier of goods is NOT defined. To examine location of supplier of goods,
CGST Act 113

reference must be had to ‘place of business’ as defined in section 2(85) of CGST Act
which provides that it will be (i) place where business is ordinarily carried on, in this
case, it would be Puri or (ii) place where goods are stored, in this case, it would be
Bhilai or (iii) place from where supplies are made or supplies are received or (iv) place
where books are maintained or (v) place of an agent appointed to carry on business.
Applying the above 5 tests, it appears (ii) would be the appropriate test and hence
location of goods in second month would be place of business;
 Business of lease is not concluded every month. It has already been concluded at the
start of first month. Hence, the first limb in the definition is non-operative in the present
case and second limb in the definition comes into operation to decide the ‘location of
supplier of goods’;
 As a result, location of supplier of goods will be the location of the goods for the supply
by way of lease in the second month. Goods being located in Bhilai will be an intra-
State supply by the Supplier who is located in Puri;
 It is for this reason, that schedule II contains para 1(b) (and even 5(f) in case of license)
that the supply of goods by way of lease will be ‘treated’ as supply of services;
 When transaction is treated as supply of services, then location of goods becomes
irrelevant and location of supplier of services (as defined in section 2(15) of IGST Act
and 2(71) of CGST Act) will determine all months to be inter-State supplies; and
 Supplier situated in Puri, Orissa will NOT be required to take registration in every State
where customers’ sites are located in lease or license supplies.
Now, the above concept DOES NOT apply to hire-purchase because para 1(c) states
that hire-purchase will be treated as supply of goods. The new question that arises
here, is whether the Supplier under hire-purchase arrangements will be liable to take
registration in all States where customers’ sites are located.
Experts opine that in hire-purchase, it is not a month-to-month hire-purchase but a
single agreement for the entire duration and each periodic payment is only an
instalment, therefore there is only one supply with one time of supply and tax is payable
at the rate applicable to those goods and on ENTIRE hire-purchase price. There is a
pressing need for a circular on this aspect of difference between HP and Lease. FAQs
on BFSI released by Government only refers to the aspect that exemption from tax on
interest is NOT AVAILABLE to finance lease (which can be extended to HP also) even
though each periodic payment clearly contains an element of ‘interest’ (FAQ 47).
Reason for the divergent treatment of HP compared to Lease provided by experts is
stated to be in the definition of ‘hire-purchase agreement’ from AS 19 (which carries the
essence from definition in section 2(c) of the (now repealed) HP Act). It states that HP
is a single agreement for the entire duration where (i) possession is already passed (ii)
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option to purchase (actually, option to reject) is granted on payment of last installment

and (iii) each periodic amount paid is merely an installment within HP-Price. Therefore,
in case of HP, since GST has already been paid at the start of HP agreement, there is
no requirement for HP-Supplier to be registered in every State where the HP-stock is
supplied and put to use.
Care must be taken to study what is sought to be achieved by each entry in schedule II.
As an exercise one may think about para 5(b) versus para 6(a). And examine ‘why’ only
‘goods are referred in para 7 and not ‘services’ also.
The activities pertaining to this clause are listed in Schedule II to the Act and discussed
in the following paragraphs.
Entry in Schedule II Analysis
1. Transfer
a. Any transfer of the title in This would be a clear case of a transfer of goods. It
goods is a supply of goods; may be noted that this paragraph covers even a plain
vanilla transfer of title in goods, either by way of sale
or otherwise. Accordingly, where any goods are gifted
to any person, say a motor car gifted by a
businessman to his successor would be a supply of
goods, provided there is a transfer of “title in” such
goods. In legal parlance the phrase “title in” and “title
to” have different connotations.
b. Any transfer of right in This paragraph can be construed to be a case of a
goods or of undivided share temporary transfer whereas a transfer of title in goods
in goods without the transfer would be a sale simpliciter. One must pay attention to
of title thereof, is a supply of the language employed in this paragraph which
services; speaks of transfer of right and not transfer of title.
Even though the activity is categorized as a supply of
service, the rate of tax applicable on the supply has
been linked to the rate of tax as applicable to the
supply of same goods involving transfer of title in
goods. Hence, for all practical purposes to determine
the rate of tax on such services, all notifications in
respect of that particular goods would merit equal
consideration to determine the rate of tax for the
service.
Refer the entries for Heading 9971 and 9973 to the
Notification 11/2017 dt. 28.06.2017 prescribing the
rate of tax on services, covering operating lease and
financial lease transactions.
CGST Act 115


Illustration: Notification 37/2017 Central Tax (Rate)
dated 13.10.2017 was issued to reduce the rate of tax
on motor vehicle to 65% of the tax rate as applicable
with certain conditions. Considering the rate of tax for
leasing of such motor vehicle to be same as that of
the rate of tax as applicable on the motor vehicle,
even the rate of tax on leasing services stands
reduced if the conditions specified in the notification
are met.
c. Any transfer of title in Any instalment sale or hire purchase transaction with
goods under an agreement a precondition that the possession is transferred on
which stipulates that day one, but the ownership is subject to payment of
property in goods shall pass full consideration/ all instalments, would get
at a future date upon categorized as a supply of goods at the time of
payment of full transfer of possession. However, where the
consideration as agreed, is transaction is to be valued at the open market value,
a supply of goods. due care needs to be exercised so as to determine the
value of instalments as against the value of the goods
being transferred. One may also note that transactions
of movables that could get covered under BOOT,
BOLT, BOT etc., may also get covered under this
paragraph.
An important point which requires due consideration is
the interest component in the hire purchase
agreement. In this regard it is worth to mention that
vide Notification No.12/2017-CGST (Rate) dated
28.06.2017 interest is stated to be exempt. However,
only interest component is exempt. Therefore, if
interest is separately mentioned then GST is not
payable, however, if the interest amount is not
separately mentioned than GST is payable on entire
amount including interest.
2. Land and Building
a. Any lease, tenancy, While a transfer (sale) of land is outside the scope of
easement, licence to GST laws, the law seeks to tax certain other transfers
occupy land is a supply of pertaining to land, by way of this paragraph.
services; Notification No. 4/2018 Central Tax (Rate) dated
25.01.2018 warrants attention in this regard. One
issue which clearly emerges from the notification is
116 BGM on GST


that in case of a joint development agreement (JDA),
the activity of providing the right to construct on a land
belonging to the owner, is an independent supply in
the hands of the owner and that supply, is treated as a
supply of service in terms of this clause. It is inferred
that such a service is independent of the construction
service which the developer provides to the
landowner. The challenge that arises would relate to
the valuation for both these supplies. It is important to
note that such transactions are vivisected for the
purposes of levy of tax and have not been construed
as a single demise.
Please also note that this entry throws much need
light on the limits to the exclusion available in para 5
of schedule III to ‘sale of land and (completed)
building’. It appears only absolute sale would be
excluded from GST and any arrangement inferior to or
less than absolute sale, would not be excluded by
schedule III. Arrangements less than absolute sale
would be transactions such as lease, license,
easement, etc., that create ‘interest’ in immovable
property.
Further, when only land and (completed) buildings are
listed in schedule III, all other forms of immovable
property and immovable property rights would also not
be excluded by schedule III.
b. Any lease or letting out of The activity of leasing or letting out of complexes for
the building including a the purpose of business or commerce is covered
commercial, industrial or under this clause, and not those used for the purpose
residential complex for of residence. It may be noted that the services by way
business or commerce, of renting of residential dwelling for use as residence
either wholly or partly, is a is exempt vide Notification No.12/2017 – Central tax
supply of services. (Rate) dated 28.06.2017. While on the subject, it is
pertinent to note the distinction between a transaction
of rent, lease and a transaction of “letting out”. A
transaction of rent is what is lawfully payable by a
tenant, a transaction of lease is an alienation or
conveyance for the purpose of enjoyment whether or
not for a specified period. The word ‘let’ is to be
understood as a verb meaning allow, permit, grant or
hire.
CGST Act 117


3. Treatment or process
Any treatment or process While this transaction may not be pari materia with a
which is applied to another works contract the activity, which could get
person's goods is a supply categorized under this clause it appears would be “job
of services. work” as defined under Section 2(68) of the Act.
The only difference between the definition clause in
terms of section 2(68) and this paragraph - is that the
activity would be regarded as a job work only if carried
out for a registered principal. However, regardless of
the registration of the principal, the activity would be
categorized as service by this clause.
Certain clarifications have been provided vide Circular
No.38/12/2018 dated 26.03.2018 on job work which
would be relevant and are a useful read.
4. Transfer of business assets
a. Where goods forming This clause provides for taxability of such of those
part of the assets of a transactions where business assets stand transferred.
business are transferred or Typically, assets donated could be an example of
disposed of by or under the such a transaction. One must pay attention to the fact
directions of the person that this clause abstains from the usage of the
carrying on the business so expression “in the course or furtherance of business”
as no longer to form part of or “consideration”. But, when read along with 2(17)(d),
those assets, whether or not shutting down of a business is also included within
for a consideration, such business.
transfer or disposal is a Also, goods ‘forming part’ of business assets when
supply of goods by the applied for non-business purposes covers all cases of
person; ‘diversion from intended end-use in business’. Such
diversion may be conscious or by a force majeure
event. Ultimately, end-use of business assets requires
careful examination. And these assets may be
tangible or intangible.
Care must also be taken when such assets are partly
used for business and partly for non-business use
which may not escape incidence of GST.
b. Where, by or under the Any part of the business assets if put to use for (a)
direction of a person private purpose or (b) make available to another
carrying on a business, person to apply it to any non-business use, are
goods held or used for the covered under this para.
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purposes of the business Please note that this sub-para holds its own filed
are put to any private use or compared to previous sub-para regarding end-use of
are used, or made available business assets that are goods. Also, supply involving
to any person for use, for goods may be treated as supply of goods or supply of
any purpose other than a services but para 4 is attracted when ‘goods’ are used
purpose of the business, as observed by these sub-paras whichever way them
whether or not for a may be treated under other paras in sch II.
consideration, the usage or One must exercise caution while determining what
making available of such amounts to private use / non-business use, since this
goods is a supply of will have a direct bearing on the deductions claimed
services; under the Income tax law.
In this regard, it may be noted that a service by way of
transfer of a going concern, as a whole or an
independent part thereof, is an exempted service in
terms of Notification 12/2017-Central Tax (Rate) dated
28.06.2017.
c. where any person The supply under this clause can be understood to be
ceases to be a taxable a supply of goods, although the paragraph does not
person, any goods forming explicitly specify so.
part of the assets of any Attention is drawn to Section 29(5) of the Act dealing
business carried on by him with “Cancellation of Registration”, wherein the law
shall be deemed to be provides that the person applying for cancellation of
supplied by him in the registration is required to pay an amount equivalent to
course or furtherance of his the credit of input tax or the output tax payable
business immediately thereon, in respect of inputs held in stock and inputs
before he ceases to be a contained in semi-finished or finished goods held in
taxable person, unless— stock or capital goods or plant and machinery on the
i. the business is day immediately preceding the date of such
transferred as a going cancellation, whichever is higher. But, this
concern to another requirement under section 29(5) applies only to
person; or regular registered person who has claimed input tax
ii. the business is carried credit and holds inputs and capital goods in stock and
on by a personal not to a composition taxable person who has never
representative who is claimed any credit to be liable to reverse.
deemed to be a taxable It is important to understand the subtle usage of the
person. expression “ceases to be a taxable person”. Cessation
of being a taxable person could result from either
closure of business, voluntarily or otherwise, while the
clause also speaks of transfer of business in the latter
CGST Act 119


part. In case of cancellation of registration, a person
ceases to be a registered person and not a taxable
person.
One can reasonably infer that in terms of this clause if
a business is transferred on a ‘lock, stock and barrel’
basis as a going concern then such transactions
cannot be subjected to tax; even in situations where
the transfer of business takes place and a
representative (acting as a taxable person) carries on
such business, the question of subjecting such a
transaction to tax, as a cessation of business does not
arise. For this reason, there is an express exemption
in entry 2 to Notification 12/2017-Central Tax (Rate)
dated 28 Jun 2017.
5. Supply of services: The following shall be treated as supply of service,
namely: —
a. renting of immovable Renting wholly or partly of any immovable property is
property; treated as a service. Therefore, unless the supply is
otherwise exempted (such as renting of residential
dwelling for the purpose of residence), the activity
shall be regarded as a supply.
Please note ‘immovable property’ covers a wide
variety of property that includes interests in
immovable properties.
b. Construction of a Schedule III of the Act at SI No.5 reads “sale of land
complex, building, civil and, subject to clause b of paragraph 5 of schedule II,
structure or a part thereof, sale of building. We need to pay attention as to how
including a complex or this clause is to be read and understood. Let us now
building intended for sale to read the clause as follows:
a buyer, wholly or partly, • Sale of land;
except where the entire • Sale of building;
consideration has been
• Sale of land and sale of building;
received after issuance of
• Sale of land and building in which an undivided
completion certificate,
share in land stands transferred.
where required, by the
competent authority or after It must be noted with caution, that paragraph 5 of
its first occupation, schedule III is ‘subject to clause b of paragraph 5 of
whichever is earlier. schedule II’. It means that, this para 5 must may way
for para 5 of schedule III. It is for this reason that
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development contracts in the real estate sector have
been a subject matter of tax only if they are not saved
by the exclusion in para 5 of schedule III.
Any agreement for sale of an immovable property
(being in the nature of transfer of UDI in land plus
building or in case of revenue share agreements
which equally stipulates transfer of UDI in land plus
constructed part) would be subject to tax as a service.
But a plain agreement to sell land which later results
in a sale deed for land simiplicitor being executed will
not be liable to GST.
Some experts are of the view that the legislature
intends to overcome the constitutional bench decision
of the Supreme Court in the Larsen & Toubro’s case
(65 VST 1) and where any part of the consideration is
received, prior to obtaining completion certificate or
first occupation, would be taxed while all transactions
entered into thereafter, would be excluded by para 5
of schedule III as sale of land and sale of (completed)
building.
c. Temporary transfer or The words ‘or’ in this clause is to be understood as a
permitting the use or disjunctive that carves out alternatives. So, this clause
enjoyment of any intellectual envisages three separate classes of transactions
property right; which could be as follows:
• Temporary transfer of any IPR;
• Permitting the use of any IPR;
• Permitting the use or enjoyment of any IPR.
In respect of temporary transfer or usage of IPRs one
needs to travel to the relevant notification to
understand their import. The scheme of classification
of services for the heading 9973 provides for
temporary as well as permanent transfer of IPR in
respect of goods.
However, with effect from 15.11.2017, the rate
notification for goods has also incorporated a
paragraph for the permanent transfer of IPR in respect
of goods and there has been no corresponding
deletion of the words “or permanent” in the rate
CGST Act 121


notification for services.
Due care needs to be exercised by the registered
person in order to determine whether supply is of
goods or services.
d. Development, design, The dichotomy which prevailed in the erstwhile service
programming, tax and VAT regime (i.e., the question of whether
customisation, adaptation, software should suffer service tax or VAT or both) has
upgradation, enhancement, been put to rest under GST.
implementation of While this paragraph takes care of certain activities in
information technology respect of IT software, it must be noted that the supply
software; of pre-developed or pre-designed software in any
medium/storage (commonly bought off-the-shelf), or
making available of software through the use of
encryption keys, is treated as a supply of goods,
classifiable under heading 4907 or 8523.
e. Agreeing to the Some examples that may get covered under this
obligation to refrain from an clause are as under:
act, or to tolerate an act or a • Non-compete agreement for a fee;
situation, or to do an act; • Notice period recovery (certain cases);
• Additional amount agreed upon for settlement of
any dispute/matter etc.;
• Liquidated damages;
• Forfeiture amounts actually forfeited or adjusted;
• Punitive recoveries (even if computed based on
quantity and price of material not delivered or
piece-rate for work not completed);
• Payment to induce another transaction (being
itself taxable or non-taxable).
Consider a situation where a supplier would supply
product ‘A’ only if the recipient agrees to buy product
‘B’- readers can think as to whether such transactions
would amount to supply of goods or supply of
services?
Reference may be made to Maharashtra AAR decision
in the case of Maharashtra State Power Generation
Company Limited, ruling liquidated damages as
supplies under GST.
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Payment made for purchase of goodwill will not come
within this transaction as goodwill is goods and may
be taxed under restrictive HSN or entry 453 to sch III
to 1/2017-Central Tax (Rate) dated 28 Jun 2017.
However, if transferee of a business accounts ‘goods’
being the premium paid over and above the cost of
assets received in this acquisition, no supply under
this para can be implied. As this goodwill is a term
applied as art of purchase price accounting process.
f. Transfer of the right to use Transfer of ‘right to use goods’ is treated as a supply
any goods for any purpose of service and taxed at par, with the rate of tax as
(whether or not for a applicable to the goods involved in the transaction.
specified period) for cash, (Refer discussion under clause 1(a) of Schedule II).
deferred payment or other
valuable consideration.
6. Composite supply: The following composite supplies shall be treated as a
supply of services, namely: —
a. Works contract as Our understanding of works contract under the
defined in clause (119) of erstwhile VAT / sales tax / service tax laws has no
section 2; relevance in the GST regime. In the GST regime, only
such of those contract that results in an immovable
property is a ‘works contract’. Every other contract
which was understood to be a ‘works contract ‘under
the erstwhile laws will be treated as a composite /
mixed supply under the Act. In such cases, the
transaction may be treated as goods or services,
based on the principles laid down in Section 8
(discussed separately in this Chapter).
b. Supply, by way of or as The Law categorises the supplies referred to in this
part of any service or in any clause as a composite supply, given that there are
other manner whatsoever, multiple goods and/or services which are essentially
of goods, being food or any involved in such a transaction culminating into a
other article for human composite supply of service.
consumption or any drink Under this clause both restaurant and outdoor
(other than alcoholic liquor catering services get covered. It may also be
for human consumption), contended that the clause also covers other forms
where such supply or such as parcels, take-away, home-delivery, etc. As
service is for cash, deferred long as the circumstances where the goods supplied
CGST Act 123


payment or other valuable are ‘for the purpose of immediate consumption’,
consideration. whether or not it is actually consumed, it would be
treated as supply of services. For eg. bottled-water
supplied to Railways will be supply of goods but
transforms into supply of services when supplied by
Railways to its passengers. Please note that the
expression used here (and repeated in HSN 9963) are
‘supply of goods as part of any service’ will come
within this fiction.
Irrespective of the rate of tax as applicable on
independent goods or services that are being
supplied, the rate of tax as applicable to a restaurant
service or outdoor catering service would apply to
these goods being supplied but in the circumstance
for ‘immediate consumption; E.g.: Aerated drink which
is served in a restaurant would be subject to tax at the
rate applicable to the entire supply (restaurant
service) although aerated drinks are otherwise
subjected to a higher rate of tax as well as cess.
By this reasoning, some experts argue that tobacco
products which are sold in a restaurant and billed
along with the supply of food/beverage will also be
taxed at the rate as applicable to restaurant services -
as a composite supply.
The test that one needs to apply in the given situation
is find out as to whether tobacco products are “other
article for human consumption”.
7. Supply of Goods: The following shall be treated as supply of goods,
namely: —
Supply of goods by any The definition of the term ‘business’ under Section
unincorporated association 2(17) includes “provision by a club, association,
or body of persons to a society, or any such body (for a subscription or any
member thereof for cash, other consideration) of the facilities or benefits to its
deferred payment or other members;” In order to clarify that the supply of goods
valuable consideration by such association etc., to its members is to be
treated as a supply of goods and not as a service of
providing facilities, this clause has been included.
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(f) Certain supplies will be neither a supply of goods, nor a supply of services: The
law lists down matters which shall not be considered as ‘supply’ for GST by way of
Schedule III. Since these are transactions that are not regarded as ‘supply’ under the
GST Laws, there is no requirement to report the inward / outward supply of such
activities in the returns.
Activities listed in Schedule III Analysis

Services by an employee to the The paragraph includes only services
employer in the course of or in relation to and not goods. Further, the paragraph
his employment. only covers those services provided by
an employee to the employer and not
vice versa. Please note that ‘in the
course or in relation to’ does not save
every transaction between employer-
employee. Only those transactions
occurring within the four corners of the
‘master-servant’ relationship will be
saved. The same two persons (who
have employer-employee) can
constitute another relationship and
those will be taxed on their own merits.
It is also important to identify if the
consideration that is claimed to be for
‘services of employee’ can be verified
and validated with the amount reported
for income-tax or provident fund
purposes as ‘salary’.
Services by any Court or Tribunal The word tribunal does not cover
established under any law for the time Arbitral Tribunal. Since the tribunal is
being in force; dissolved after the adjudication
The term "court" includes District Court, proceedings are concluded.
High Court and Supreme Court.
Functions performed by MPs, MLAs, Persons included in this clause may be
etc.; the duties performed by a person Governor, Prime Minister, President etc.
who holds any post in pursuance of the
provisions of the Constitution in that
capacity; the duties performed by
specified persons in a body established
by the Central State Government or local
authority, not deemed as an employee;
CGST Act 125


Services of funeral, burial, crematorium This clause is consonance with the
or mortuary including transportation of exemption available in the erstwhile
the deceased. service tax regime.
Sale of land and, subject to clause (b) of It is intriguing as to why two activities
paragraph 5 of Schedule II, sale of being (i) sale of land and (ii) sale of
building building, have been clubbed into a
(i.e., excluding sale of under- single paragraph. However, one may
construction premises where the part or expand the paragraph to read the two
full consideration is received before activities as distinct activities, so as to
issuance of completion certificate or treat a sale of land without the sale of
before its first occupation, whichever is building, also to be outside the purview
earlier); of GST. Refer to discussions schedule
II paragraph 5(b) supra.
Care must be taken to resist the urge to
expand the words ‘land and building’ to
cover ‘all immovable properties’.
Immovable property includes far more
rights and interests that can be supplied
without land and / or building.
Also, sale is absolute sale and not
lease or license. If transactions other
than sale were to be excluded, then
Legislature should have employed
suitable words or given some indication
within in the law to authorize expansion
of the coverage.
Unlike service tax, GST very cautiously
allows this relief to (a) just land and
(completed) building and (b) absolute
sale and not other forms of interests
inferior to absolute sale.
Experts are divided on the issue of
whether (a) sale includes absolute sale
or something less also and (b) land
includes land only or rights, benefits
and interests in land also.
Actionable claims, other than lottery, A plain reading of this paragraph would
betting and gambling mean that actionable claims are neither
126 BGM on GST


a supply of goods nor a supply of
services. However, the three classes of
actionable claims listed in this
paragraph warrant attention.
The definition of the word ‘goods’
includes the words ‘actionable claims’.
It has to therefore, be necessarily
understood that the three classes of
actionable claims viz. lottery, betting
and gambling, if and when subjected to
tax, must be taxed as goods. The irony
is, while lottery is subject to tax as
goods, betting and gambling have been
subjected to tax as services under the
heading 9996. This is deliberate to
cover ‘actionable claims’ involving
betting and gambling to taxed as goods
and ‘other than actionable claims’
towards betting and gambling to be
taxed as services.
Supply of goods from a place in the non- This insertion w.e.f. 1st February 2019
taxable territory to another place in the puts to rest the confusion which had
non-taxable territory without such goods arisen on such transactions and keeps
entering into India. them outside the ambit of GST.
Therefore, any transaction involving
supply of goods by a person in India
would not be called a supply when they
are supplied from one place to another,
both of which are outside India.
Supply of warehoused goods to any The levy of the IGST on import of goods
person before clearance for home would be levied under the Customs Act,
consumption; 1962 read with the Custom Tariff Act,
Supply of goods by the consignee to any 1975. IGST is payable when the goods
other person, by endorsement of are cleared for home consumption,
documents of title to the goods, after the however high sea sales were
goods have been dispatched from the considered akin to inter-state
port of origin located outside India but transactions.
CGST Act 127


before clearance for home consumption. Even though Circular No. 33 /2017-Cus,
dated 1st August, 2017 clarified this
matter that IGST on high sea sale, shall
be levied and collected only at the time
of importation i.e. when the import
declarations are filed before the
Customs authorities for the customs
clearance purposes for the first time.
However, the point of reversal of ITC
was always contentious and various
advance rulings, ruled in favour of
revenue, further added on to it.
Now after insertion of this entry in
schedule III, reversal of ITC would no
longer be required. Debate that now
rages on is whether this was always the
intention and therefore this amendment
ought to be read not from 1 Feb 2018
but from 1 Jul 2017 or not, so that credit
reversal can be saved. Some experts
believe that the retrospective effect
comes from the fact that an
‘explanation’ has also been inserted in
section 17(3) of CGST Act.
(g) To be notified: The Government has vested itself powers to notify ‘activities or other
transactions’ which shall neither be treated as supply of goods nor a supply of services
in terms of section 7(2). Such notification would be issued from time to time based on
the recommendations of the GST Council.
• The Government has notified the following supplies in this regard:
Services by way of any activity in relation to a function entrusted to Panchayat
under Article 243G of the Constitution
(Inserted vide Notification No. 14/2017- Central Tax (Rate) dated 28.06.2017)
• The inter-State movement of goods like movement of various modes of
conveyance, between ‘distinct persons’ as explained in this Chapter, including
trains, buses, trucks, tankers, trailers, vessels, containers & aircrafts, carrying
goods or passengers or both, or for repairs and maintenance, would also not be
128 BGM on GST

regarded as supplies except in cases where such movement is for further supply of
the same conveyance (Clarified vide Circular No. 1/1/2017-IGST dated
07.07.2017).
• The above logic would apply to the issue pertaining to inter-State movement of jigs,
tools and spares, and all goods on wheels like cranes, except in cases where
movement of such goods is for further supply of the same goods, and consequently
no IGST would be applicable on such movements (Clarified vide Circular No.
21/21/2017-GST dated 22.11.2017).
(h) The Government is also empowered to specify what shall be treated as a supply of
goods / services, as is the function of Schedule II, based on the recommendation of the
GST Council, by specifying that a supply is to be treated as:
i) A supply of goods and not a supply of service;
ii) A supply of service and not a supply of goods.
(i) In summary, supply can be understood as follows:
(j) The GST Law also treats certain transactions to be supplies by way of a deeming fiction
imposed in the statute.
(a) The law expressly uses the phrase ‘deemed supply’ in Section 19(3) and 19(6) in
respect of inputs/capital goods sent to a job worker but are not returned within the
time period of 1 year/ 3 years permitted for their return.
(b) The bill-to-ship-to transactions wherein the supply is deemed to have been made to
the person to whom the invoice is issued, imposes an intrinsic condition that such
person who receives the invoice should in turn issue an invoice to the recipient
unless the transaction demands a treatment otherwise. For instance, where an
order is placed on a vendor based on an order received from a customer, the
registered person may request the vendor to directly ship the goods to the
customer. In this case, although there is a single movement of goods, there is a
dual change of title to goods, and therefore, there would be 2 supplies. However,
the other limb of the transaction would get independently tested for supply under
Section 7.
CGST Act 129

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

1. Circular No. 34/8/2018 dated 01.03.2018 clarifying on the taxability of certain services;
2. Circular No. 13/13/2017 dated 27.10.2017 regarding unstitched salwar suits;
3. Circular No. 11/11/2017 dated 20.10.2017 regarding taxability of printing contracts;
4. GST Flyer as issued by the CBIT can be referred to for a gist of the statutory
provisions, titled ‘Composite Supply and Mixed Supply’.

Section 2(30) Definition of Composite Supply
Section 2(90) Definition of Principal Supply
Section 2(74) Definition of Mixed Supply
Schedule II Activities to be treated as a supply of goods or a supply of services
8.1. Introduction
Every supply should involve either goods, or services, or a combination of goods or a
combination of services, or a combination of both. The law provides that such supplies would
be classifiable for the purpose of tax treatment, either as wholly goods or wholly services, in
the case of all such combinations. Schedule II of the Act provides for this classification in
some of the listed instances thereunder.
8.2. Analysis
Where a supply involves multiple (more than one) goods or services, or a combination of
goods and services, the treatment of such supplies would be as follows:
(a) If it involves more than one, goods and / or services which are naturally bundled
together and supplied in conjunction with each other in the ordinary course of
business and one such supply would be a principal supply:
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(i) These are referred to as composite supply of goods and / or services. It shall be
deemed to be a supply of those goods or services, which constitutes the principal
supply therein. Only where all of the conditions specified for a supply of a
combination of goods and/or services to be treated as a composite supply are
satisfied, the supply can be regarded as a composite supply. The conditions are as
follows:
1. The supply must be made by a taxable person: This condition presumes that
composite supplies can only be effected by a taxable person.
2. The supply must comprise 2 / more taxable supplies: The law merely specifies
that the supplies included within a composite supply must contain 2 or more
taxable supplies. A question may then arise as to what would be the treatment
in case of a supply that fulfils all the conditions, but involves an exempt supply
– say, purchase of fresh vegetables from a store which offers home delivery for
an added charge. Fresh vegetables are exempt from tax, whereas the service
of home delivery would attract tax. No clarification has been issued in this
regard. However, on a plain reading of the provision, it appears that this
condition would not be satisfied where the composite supply involves an
exempt supply. One could argue that taxable supply includes exempt by virtue
of the definition of taxable supply under Section 2(108).
3. The goods and / or services involved in the supply must be naturally bundled:
The concept of natural bundling needs to be examined on a case to case basis.
What is naturally bundled in one set-up may not be regarded as naturally
bundled in another situation. For instance, stay with breakfast is naturally
bundled in the hotel industry, while the supply of lunch and dinner, even if they
form part of the same invoice, may not be considered as naturally bundled
supplies along with room rent.
4. They must be supplied in conjunction with each other in the ordinary course
of business: Where certain supplies could be naturally bundled, it is essential
that they are so supplied in the ordinary course of business of the taxable
person. For instance, it is possible to consider the supply of a water purifier
along with the first-time installation service as a naturally bundled supply.
However, if a supplier of water purifiers does not ordinarily provide the
installation service, and arranges for a person to provide the installation service
in the case of an important business customer, the supply would not satisfy the
said condition.
5. Only one of the supplies involved must qualify as the principal supply: In
every composite supply, there must be only one principal supply. Where a
conflict between the various components of the supply, as to which of those
qualify as the principal supply, cannot be resolved and results in multiple
predominant supplies, the supply cannot be regarded as a composite supply.
CGST Act 131

(a) A principal supply is defined u/s 2(90) to mean the predominant element of
a composite supply to which any other supply forming part of that
composite supply is ancillary.
(b) Therefore, mere identification of the predominant element would not
suffice, and it must be ascertained that all other supplies composed in the
composite supply are ancillary to that predominant element of the supply.
(c) Consider the case of a supply of dining table with chairs. There would
normally be no issue in this regard if both the components are made of the
same material. However, if the dining table is made of granite, while the
chairs are made of superior quality wood, there would be a conflict.
Normally, the dining table would be regarded as the principal supply to
which the supply of chairs is ancillary. However, in this case, it may not be
possible to determine which of the two make the principal supply.
Where any of the aforesaid conditions are not satisfied, the transaction cannot
be treated as a composite supply.
(ii) The matters such as time of supply, invoicing, place of supply, value of supply, rate
of tax applicable to the supply, etc. shall all be determined in respect of the
principal supply alone, since the entire supply shall be deemed to be a supply of
the principal supply alone.
(iii) Some Illustrations and cases of composite supplies have been discussed in the
following paragraphs:
 Illustration (provided in Section 2(27)): Where goods are packed, and
transported with insurance, the supply of goods, packing materials, transport
and insurance is a composite supply and supply of goods is the principal
supply. This implies that the supply will be taxed wholly as supply of goods.
 Para 5(3) of Circular No.32/06/2018-GST dated 12.02.2018 clarifies that “food
supplied to the in-patients as advised by the doctor/nutritionists is a part of
composite supply of health care and not separately taxable”. It also goes on
to clarify further that supplies of food by hospital to patients (not admitted) or
their attendants or visitors are taxable.
 Circular No.11/11/2017-GST dated 20.10.2017 has provided clarification on
treatment of printing contracts. It is clarified that:
 In the case of printing of books, pamphlets, brochures, annual reports, and
the like, where only content is supplied by the publisher or the person who
owns the usage rights to the intangible inputs while the physical inputs
including paper used for printing belong to the printer, supply of printing of
the content supplied by the recipient of supply is the principal supply.
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 In case of supply of printed envelopes, letter cards, printed boxes, tissues,

napkins, wall paper etc. falling under Chapter 48 or 49, printed with design,
logo etc. supplied by the recipient of goods but made using physical inputs
including paper belonging to the printer, the predominant supply is that of
goods and the supply of printing of the content supplied by the recipient of
supply is ancillary to the principal supply of goods and therefore such
supplies would constitute supply of goods falling under respective
headings of Chapter 48 or 49 of the Customs Tariff.
 Circular No. 34/8/2018-GST dated 01.03.2018 provides a clarification on some
matters including the following:
 The activity of bus body building is a composite supply. As regards which
of the components is the principal supply, the Circular directs that it be
determined on the basis of facts and circumstances of each case.
 Re-treading of tyres– In re-treading of tyres, which is a composite supply, the
pre-dominant element is the process of re-treading which is a supply of service,
and the rubber used for re-treading is an ancillary supply. The Circular also
specifies that “Value may be one of the guiding factors in this determination,
but not the sole factor. The primary question that should be asked is what is
the essential nature of the composite supply and which element of the supply
imparts that essential nature to the composite supply”.
 Other examples: If a contract is entered for (i) supply of certain goods and
erection and installation of the same thereto or (ii) supply of certain goods
along with installation and warranty thereto, it is important to note that these
are naturally bundled and therefore would qualify as ‘composite supply’.
Accordingly, it would qualify as supply of the goods therein, which is essentially
the principal supply in the contract. Thus, the value attributable to erection and
installation or installation and warranty thereto will also be taxable as if they
are supply of the goods therein.
 ADVANCE RULING ON COMPOSITE SUPPLY:- AAR, West Bengal vs.
Switching Avo Electro Power Ltd.-“ Whether if a combination of goods that
does not amount to a composite supply is being offered at a single price, such
supplies are to be treated as mixed supplies - Held, yes - Whether where UPS
and battery are supplied as separate goods, but a single price is charged for
combination of goods supplied as single contract, supply of UPS and battery is
to be considered as mixed supply within meaning of section 2(74), as they are
supplied under a single contract at a combined single price - Held, yes”
(b) If it involves supply of more than one, goods and / or services which are not
naturally bundled together but sold for a single price:
(i) These are referred to as mixed supply of goods and / or services. It shall be
CGST Act 133

deemed to be a supply of that goods or services therein, which are liable to tax at
the highest rate of GST. The characteristics of a mixed supply is as follows:
1. It involves 2 / more individual supplies: It may be noted that the term used in
the case of mixed supply is “individual supplies” as against “taxable supplies”.
Therefore, a mixed supply can include both taxable and non-taxable supplies
2. It is made by a taxable person;
3. The supply is made for a single price: The fact that a composite supply does
not include this condition merits consideration. Where a supply of 2 / more
goods or services is made for different prices, the supplies cannot be regarded
as mixed supplies.
4. The supply does not constitute a composite supply: The expression
“constitute” has a large ambit to include cases where the supply results in a
composite supply, as well as a case where some of the components together
make a composite supply, whereas the bundle together would make a mixed
supply. While the condition as such is not explicit, given that there is no
provision for treatment of a bundled supply where only some components
together qualify as a composite supply, it may be safe to interpret that a mixed
supply is one which is not regarded as a composite supply.
(ii) The matters such as time of supply, invoicing, place of supply, value of supply, rate
of tax applicable to the supply, etc. shall all be determined in respect of that supply
which attracts the highest rate of tax. However, the law remains silent on what is
the treatment required to be undertaken where more than one component is
subjected to the highest rate of tax. For instance, consider a case where a
commercial complex is let out for a consideration of monthly rentals, and the owner
of the complex also supplies parking lots to those tenants who opt for the facility.
While both the supplies attract tax @ 18%, the law does not prescribe for treatment
of the transaction as that of only one of the two supplies.
(iii) Some Illustrations and cases of mixed supplies have been discussed in the
following paragraphs:
 Illustration (provided in Section 2(66)): A supply of a package consisting of
canned foods, sweets, chocolates, cakes, dry fruits, aerated drink and fruit
juices when supplied for a single price is a mixed supply. Each of these items
can be supplied separately and is not dependent on any other. It shall not be a
mixed supply if these items are supplied separately. This implies that the
supply will be taxed wholly as supply of those goods which are liable to
the highest rate of GST.
 Other examples: If a tooth paste (say for instance it is liable to GST at 12%) is
bundled along with a tooth brush (say for instance it is liable to GST at 18%)
and is sold as a single unit for a single price, it would be reckoned as a mixed
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supply. This would therefore be liable to GST at 18% (higher of 12% or 18%
applicable to each of the goods therein).
(c) While there are no infallible tests for such determination, the following guiding principles
could be adopted to determine whether a supply would be a composite supply or a
mixed supply. However, every supply should be independently analysed.
Description Composite Mixed Supply
Supply
Naturally bundled Yes No
Each supply available for supply individually No Yes / No
One is predominant supply for recipient Yes Yes / No
Other supply(ies) are ancillary or they are Yes No
received because of predominant supply
Each supply priced separately Yes / No No
Supplied together Yes Yes
All supplies can be goods Yes Yes
All supplies can be services Yes Yes
A combination of one / more goods and one / Yes Yes
more services
ADVANCE RULING ON COMPOSITE SUPLY/MIXED SUPPLY

• AAR, Haryana vs. Paras Motor Industries-Whether activity of fabrication and fitting
and mounting of bus bodies on chassis supplied by other party is a composite supply of
service with supply of goods, i.e., bus bodies, being principal supply and same is
covered under HSN Code 8707 - Held, yes
• AAR, Kolkata vs. Switching Avo Electro Power Ltd.- Whether if a combination of
goods that does not amount to a composite supply is being offered at a single price,
such supplies are to be treated as mixed supplies - Held, yes - Whether where UPS and
battery are supplied as separate goods, but a single price is charged for combination of
goods supplied as single contract, supply of UPS and battery is to be considered as
mixed supply within meaning of section 2(74), as they are supplied under a single
contract at a combined single price - Held, yes.
Statutory Provisions- Effective from 1st July, 2017 to 31st January, 2019
9. Levy and Collection
(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
CGST Act 135

determined undersection 15 and at such rates, not exceeding twenty per cent., as
may be notified by the Government on the recommendations of the Council and
collected in such manner as may be prescribed and shall be paid by the taxable
person.
(2) The central tax on the supply of petroleum crude, high speed diesel, motor spirit
(commonly known as petrol), natural gas and aviation turbine fuel shall be levied with
effect from such date as may be notified by the Government on the recommendations
of the Council.
(3) The Government may, on the recommendations of the Council, by notification,
specify categories of supply of goods or services or both, the tax on which shall be
paid on reverse charge basis by the recipient of such goods or services or both and
all the provisions of this Act shall apply to such recipient as if he is the person liable
for paying the tax in relation to the supply of such goods or services or both
(4) The central tax in respect of the supply of taxable goods or services or both by a
supplier, who is not registered, to a registered person shall be paid by such person
on reverse charge basis as the recipient and all the provisions of this Act shall apply
to such recipient as if he is the person liable for paying the tax in relation to the
supply of such goods or services or both.
specify categories of services the tax on intra-State supplies of which shall be paid
by the electronic commerce operator if such services are supplied through it, and all
the provisions of this Act shall apply to such electronic commerce operator as if he is
the supplier liable for paying the tax in relation to the supply of such services:
Provided that where an electronic commerce operator does not have a physical
presence in the taxable territory, any person representing such electronic commerce
operator for any purpose in the taxable territory shall be liable to pay tax:
Provided further that where an electronic commerce operator does not have a
physical presence in the taxable territory and also, he does not have a representative
in the said territory, such electronic commerce operator shall appoint a person in the
taxable territory for the purpose of paying tax and such person shall be liable to pay
tax.
Statutory Provisions- Effective from 1st February 2019 vide The Central Goods &
Services Tax Amendment Act,2018
9. Levy and Collection

(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
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undersection 15 and at such rates, not exceeding twenty per cent., as may be notified
by the Government on the recommendations of the Council and collected in such
manner as may be prescribed and shall be paid by the taxable person.
(2) The central tax on the supply of petroleum crude, high speed diesel, motor spirit
(commonly known as petrol), natural gas and aviation turbine fuel shall be levied with
effect from such date as may be notified by the Government on the recommendations of
the Council.
(3) The Government may, on the recommendations of the Council, by notification, specify
categories of supply of goods or services or both, the tax on which shall be paid on
reverse charge basis by the recipient of such goods or services or both and all the
provisions of this Act shall apply to such recipient as if he is the person liable for paying
the tax in relation to the supply of such goods or services or both
specify a class of registered persons who shall, in respect of supply of specified
categories of goods or services or both received from an unregistered supplier,
pay the tax on reverse charge basis as the recipient of such supply of goods or
services or both, and all the provisions of this Act shall apply to such recipient as
if he is the person liable for paying the tax in relation to such supply of goods or
services or both.
(5) The Government may, on the recommendations of the Council, by notification, specify
categories of services the tax on intra-State supplies of which shall be paid by the
electronic commerce operator if such services are supplied through it, and all the
provisions of this Act shall apply to such electronic commerce operator as if he is the
supplier liable for paying the tax in relation to the supply of such services:
Provided that where an electronic commerce operator does not have a physical
presence in the taxable territory, any person representing such electronic commerce
operator for any purpose in the taxable territory shall be liable to pay tax:
Provided further that where an electronic commerce operator does not have a physical
presence in the taxable territory and also, he does not have a representative in the said
territory, such electronic commerce operator shall appoint a person in the taxable
territory for the purpose of paying tax and such person shall be liable to pay tax.

1. All rate notifications issued under the law from time to time;
2. Circular No. 44/18/2018 dated 02.05.2018 clarifying on the taxability of tenancy rights;
3. Circular No. 35/9/2018 dated 05.03.2018 clarifying on the taxability of services
provided by member of JV to JV;
CGST Act 137

4. Circular No. 34/8/2018 dated 01.03.2018 clarifying on the taxability of certain

services;
5. Circular No. 32/06/2018 dated 12.02.2018 clarifying on the taxability of certain
services;
6. Circular No. 30/4/2018 dated 25.01.2018 regarding supplies made to the Indian
Railways classifiable under any chapter other than Chapter 86;
7. Circular No. 29/3/2018 dated 25.01.2018 regarding applicability of GST on
Polybutylene feedstock and Liquefied Petroleum Gas retained for the manufacture of
Poly Iso Butylene and Propylene or Di-butyl paragraph Cresol;
8. Circular No. 28/02/2018 dated 08.01.2018 regarding GST on College Hostel Mess
Fees;
9. Circular No. 27/01/2018 dated 04.01.2018 regarding levy of GST on accommodation
services, betting and gambling in casinos, horse racing, admission to cinema,
homestays, printing, legal services etc.;
10. Circular No. 21/21/2017 dated 22.11.2017 regarding Inter-state movement of rigs,
tools and spares, and all goods on wheels [like cranes];
11. Circular No. 20/20/2017 dated 22.11.2017 regarding classification and GST rate on
Terracotta idols;
12. Circular No. 19/19/2017 dated 20.11.2017 regarding taxability of custom milling of
paddy;
13. Circular No. 16/16/2017 dated 15.11.2017 regarding applicability of GST on certain
services;
14. Circular No. 13/13/2017 dated 27.10.2017 regarding unstitched Salwar Suits;
15. Circular No. 12/12/2017 dated 26.10.2017 regarding applicability of GST on the
superior kerosene oil [SKO] retained for the manufacture of Linear Alkyl Benzene
[LAB]
16. Circular No. 11/11/2017 dated 20.10.2017 regarding taxability of printing contracts;
17. Circular No. 6/6/2017 dated 27.08.2017 regarding classification and rate of GST on
lottery tickets.
18. Circular No. 10/10/2017-GST dated 18.10.2017 regarding clarification on movement
of goods on approval basis.
19. Circular No. 6/11/2017 dated 27.08.2017 regarding classification and rate of GST on
lottery tickets.
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Section 1 Short title, extent and commencement
Section 2(84) Definition of Person
Section 2(107) Definition of Taxable Person
Section 2(108) Definition of Taxable Supply
Section 2(45) Definition of Electronic Commerce Operator
Section 2(98) Definition of Reverse Charge
Section 10 Composition levy
Section 11 Power to grant exemption from tax
Section 7 (IGST) Inter-State supply
Section 8 (IGST) Intra-State supply
Section 15 Value of supply
Section 25 Registration
9.1. Introduction
Article 265 of the Constitution of India mandates that no tax shall be levied or collected except
by the authority of law. The charging section is a must in any taxing statute for levy and
collection of tax. Before imposing any tax, it must be shown that the transaction falls within the
ambit of the taxable event and that the person on whom the tax is so imposed also gets
covered within the scope and ambit of the charging Section by clear words used in the
Section. No one can be taxed by implication. The scope of the taxable event being ‘supply’
has been discussed in the earlier part of this Chapter. This Section will provide an insight into
the chargeability of tax on a supply. Section 9 is the charging provision of the CGST Act. It
provides the maximum rate of tax that can be levied on supplies leviable to tax under this law,
the manner of collection of tax and the person responsible for paying such tax.
It is interesting to note that the 4 pillars of taxation that together constitute the cornerstone for
levy are couched in Section 9(1). The taxable event, tax rate, collection or levy, and the
person to pay are so worded that there is no escape. It appears that the law laid down by the
Hon’ble Supreme Court in Govind Saran Ganga Saran’s Case has been followed.
9.2. Analysis
The IGST Law provides the basis for determination of a supply as an intra-State supply or an
inter-State supply – simply put, if the location of the supplier and the place of supply are within
the same State, the transaction will be an intra-State supply, barring the case of supplies
made by / to SEZ, and all other supplies will be regarded as inter-State supplies. Please refer
to the discussion in the IGST Chapters for a holistic understanding of ‘Levy’ as a concept
under the GST law.
CGST Act 139

(i) Taxable supply: Every taxable supply will be subjected to GST. A taxable supply refers
to any supply of goods or services or both, which qualifies as a supply in terms of
Section 7. The exception to this rule would be all supplies that the levy Section forgoes
to tax, as also all those supplies that have been notified to be nil-rated or exempted
from tax. The provisions imposing GST are phrased in such a manner so as to exclude
the supply of alcoholic liquor for human consumption from the scope of levy itself.
However, the law specifies certain other goods whereby the levy of GST has been
deferred until such time the goods are notified in this regard to be taxable supplies (by
the Government, based on the recommendation of the GST Council):
(1) petroleum crude
(2) high speed diesel
(3) motor spirit (commonly known as petrol)
(4) natural gas and
(5) aviation turbine fuel
(ii) Tax payable: The nature of tax would depend upon the nature of supply, viz., inter-
State supplies will be liable to IGST and intra-State supplies will be liable to CGST and
SGST/UTGST (i.e., UTGST in case intra-State supplies within a particular Union
Territory). Every intra-State supply will attract CGST as well as SGST, as follows:
(1) Imposition of CGST by the Union Government of India
(2) Imposition of SGST by the respective State Government or (in case of UTGST, by
the Central Government through the appointed Administrator)
(iii) Tax shall be payable by a ‘taxable person’: The tax shall be payable by a ‘taxable
person’ i.e., a person who is liable to obtain registration, or a person who has obtained
registration. Please note that there can be multiple taxable persons for a single person.
It comprises separate establishments of persons registered or liable to be registered
under sections 22 or section 24 of the CGST Act. Please refer to the discussion under
Section 25 for a thorough understanding of this concept. Under the GST law, the person
liable to pay the tax levied on a supply under the Statute would be one of the following:
(1) The supplier, in terms of Section 9(1)–Referred to as forward charge. This is
ordinarily applicable in case of all supplies unless the supplies qualify under the
other two categories, i.e., this would be the residual category of supply wherein the
supplier would be liable to pay tax. (In this regard, it must be noted that the term
‘supplier’ is attributed to an establishment, and not to the PAN as a whole.
Therefore, if the supply is effected from an establishment in Karnataka, the
establishment of the same entity located in say Delhi, cannot discharge the
liabilities);
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(2) The recipient – Referred to as tax under reverse charge mechanism. In such a
case, all the provisions of the Act as are applicable to the supplier in a normal case,
would apply to the recipient of supply (being a taxable person, and not the PAN as
explained above). A supply would be subjected to tax in the hands of the recipient
only in the following cases:
1. Notified supplies under Section 9(3): The supply of goods or services is notified
as a supply liable to tax in the hands of the recipient vide Notification No.
4/2017-Central Tax (Rate) in case of goods and Notification No. 13/ 2017-
Central Tax (Rate) in case of services, as amended from time to time. Please
note that the supplier discharging this liability would not render the liability
discharged, since the law imposes the obligation on the recipient. The recipient
of supply would nevertheless be liable to discharge the taxes, and the relief
available to the supplier would be only by way of an application for refund;
2. Supplies received from unregistered persons under Section 9(4): The supply is
an inward supply of goods and / or services effected by a registered person
from an unregistered supplier. In this regard, it may be noted that the levy
under this clause applies (as amended by CGST Amendment Act) only in
respect of (a) ‘class of registered persons’ and (b) ‘categories of goods or
services’, by a notification. W.e.f. 1st April, 2019, the Central Government vide
Notification No. 07/2019-Central Tax (Rate) notified the following categories of
goods or services or both, in respect of which registered person shall pay tax
on reverse charge basis as recipient of such goods or services or both:-
Sl. Category of supply of goods and services Recipient
No. of goods
and
services
1. Supply of such goods and services or both [other than Promoter
services by way of grant of development rights, long
term lease of land (against upfront payment in the form
of premium, salami, development charges etc.) or FSI
(including additional FSI)] which constitute the shortfall
from the minimum value of goods or services or both
required to be purchased by a promoter for construction
of project, in a financial year (or part of the financial
year till the date of issuance of completion certificate or
first occupation, whichever is earlier) as prescribed in
notification No. 11/ 2017- Central Tax (Rate), dated 28th
June, 2017, at items (i), (ia), (ib), (ic) and (id) against
serial number 3 in the Table, published in Gazette of
CGST Act 141

India vide G.S.R. No. 690, dated 28th June, 2017, as

amended.
2. Cement falling in chapter heading 2523 in the first Promoter
schedule to the Customs Tariff Act, 1975 (51 of 1975)
which constitute the shortfall from the minimum value of
goods or services or both required to be purchased by a
promoter for construction of project, in a financial year
(or part of the financial year till the date of issuance of
completion certificate or first occupation, whichever is
earlier) as prescribed in notification No. 11/ 2017-
Central Tax (Rate), dated 28th June, 2017, at items (i),
(ia), (ib), (ic) and (id) against serial number 3 in the
Table, published in Gazette of India vide G.S.R. No.
690, dated 28th June, 2017, as amended.
3. Capital goods falling under any chapter in the first Promoter
schedule to the Customs Tariff Act, 1975 (51 of 1975)
supplied to a promoter for construction of a project on
which tax is payable or paid at the rate prescribed for
items (i), (ia), (ib), (ic) and (id) against serial number 3
in the Table, in notification No. 11/ 2017- Central Tax
(Rate), dated 28th June, 2017, published in Gazette of
India vide G.S.R. No. 690, dated 28th June, 2017, as
amended.
Central Government on the recommendation of the GST Council has notified goods in respect
of whose intra-state and inter-state supplies, central/integrated tax shall be paid by the
recipient of such goods under reverse charge. These goods are as under:
HSN Description of Suppliers of Recipient of Notification No.
goods goods supply
0801 Cashew nuts, Agriculturist Any registered 4/2017-Central
not shelled or person Tax (Rate) dated
peeled June 28, 2017
and 4/2017-
Integrated Tax
(Rate) dated
June 28, 2017
1404 90 10 Bidi wrapper Agriculturist Any registered 4/2017-Central
leaves (tendu) person Tax (Rate) dated
June 28, 2017
and 4/2017-
Integrated Tax
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(Rate) dated
June 28, 2017
2401 Tobacco leaves Agriculturist Any registered 4/2017-Central
person Tax (Rate) dated
June 28, 2017
and 4/2017-
Integrated Tax
(Rate) dated
June 28, 2017
5004 to 5006 Silk yarn Any person who Any registered 4/2017-Central
manufactures person Tax (Rate) dated
silk yarn from June 28, 2017
raw silk or silk and 4/2017-
worm cocoons Integrated Tax
for supply of silk (Rate) dated
yarn June 28, 2017
- Supply of lottery State Lottery 4/2017-Central
Government, distributor or Tax (Rate) dated
Union Territory selling agent. June 28, 2017
or any local and 4/2017-
authority Integrated Tax
(Rate) dated
June 28, 2017
Any Chapter Used vehicles, Central Any registered 36/2017-Central
seized and Government, person Tax (Rate) dated
confiscated State October 13,
goods, old and Government, 2017
used goods, Union territory or
waste and scrap a local authority
Any Chapter Priority Sector Any registered Any registered 11/2018–Central
Lending person person Tax (Rate) dated
Certificate May 28, 2018
Central Government on the recommendation of the Council has notified the category of supply
of services on which GST shall be paid by the recipient on reverse charge basis (Notification
No. 13/2017- Central Tax (Rate) dated 28.06.2017 as amended from time to time)
Sl. Category of Supply of Services Supplier Recipient of Service
No. of service
(1) (2) (3) (4)
1 Supply of Services by a goods Goods (a) Any factory registered under
transport agency (GTA) who has Transport or governed by the
CGST Act 143

not paid central tax @ 6% in Agency Factories Act, 1948(63 of

respect of transportation of goods (GTA) 1948); or
by road to- (b) any society registered under
(a) any factory registered under the Societies Registration
or governed by the Factories Act, 1860 (21 of 1860) or
Act, 1948(63 of 1948);or under any other law for the
(b) any society registered under time being in force in any part
the Societies Registration of India; or
Act, 1860 (21 of 1860) or (c) any co-operative society
under any other law for the established by or under any
time being in force in any part law; or
of India; or (d) any person registered under
(c) any co-operative society the Central Goods and
established by or under any Services Tax Act or the
law; or Integrated Goods and
(d) any person registered under Services Tax Act or the
the Central Goods and State Goods and Services
Services Tax Act or the Tax Act or the Union
Integrated Goods and Territory Goods and
Services Tax Act or the Services Tax Act; or
State Goods and Services (e) anybody corporate
Tax Act or the Union Territory established, by or under any
Goods and Services Tax Act; law; or
or (f) any partnership firm
(e) anybody corporate whether registered or not
established, by or under any under any law including
law; or association of persons; or
(f) any partnership firm (g) any casual taxable person;
whether registered or not located in the taxable
under any law including territory.
association of persons; or
(g) any casual taxable person.
2 Services supplied by an An individual Any business entity located in the
individual advocate Including A Advocate taxable territory.
senior advocate by way of including a
representational services before Senior
any court, tribunal or authority, advocate or
directly or indirectly, to any
firm of
business entity located in the
advocates.
taxable territory, including where
contract for provision of
such service has been entered
through another advocate or a
firm of advocates, or by a
144 BGM on GST

firm of advocates, by way of

legal services, to a business
entity.
3 Services supplied by An arbitral An arbitral Any business entity located in the
tribunal to a business entity. tribunal. taxable territory.
4 Services provided by way of Any person Any body corporate or partnership
sponsorship to anybody firm located in the taxable territory.
corporate or partnership firm.
5 Services supplied by the Central Central Any business entity located in the
Government, State Government, Government taxable territory.
Union territory or local authority State
to a business entity excluding, - Government
(1) renting of immovable Union territory
property, and or local
(2) services specified below- authority
(i) services by the Department
of posts by way of speed
post, express parcel post,
life insurance, and agency
services provided to a
person other than Central
Government, State
Government or Union
territory or local authority;
(ii) services in relation to an
aircraft or a vessel, inside
or outside the precincts of a
port or an airport;
(iii) transport of goods or
passengers.
5A Services supplied by the Central Central Any person registered under the
Government, State Government, Government, Central Goods and Services Tax
Union territory or local authority State Act, 2017
by way of renting of immovable Government,
property to a person registered Union territory
under the Central Goods and or local
Services Tax Act, 2017 (12 of authority
2017).
(Inserted vide Notification
No.3/2018-Central Tax (Rate)
dated January 25, 2018
CGST Act 145

6 Services supplied by a director of A director of a The company or a body corporate

a company or a body corporate to company or a located in the taxable territory.
the said company or the body
body corporate. corporate
7 Services supplied by an An Any person carrying on insurance
insurance agent to any person Insurance business, located in the taxable
carrying on insurance business. agent territory.
8 Services supplied by a recovery A recovery A banking company or a financial
agent to a banking company or a agent Institution or a non-banking
financial institution or a non- financial company, located in the
banking financial company. taxable territory.
9 Supply of services by a music Music Music company, producer or the
composer, photographer, artist or composer, like, located in the taxable territory.
the like by way of transfer or photographer,
permitting the use or enjoyment artist, or the
of a copyright covered under like
clause (a) of sub-section (1) of
section 13 of the Copyright Act,
1957 relating to original literary,
dramatic, musical or artistic
works to a music company,
producer or the like.
10 Supply of services by the Members of Reserve Bank of India.
members of Overseeing Overseeing
Committee to Reserve Bank of Committee
India constituted by
(Inserted vide Notification the Reserve
No.33/2017-Central Tax (Rate) Bank of India
dated October 13, 2017)
11 Services supplied by individual Individual A banking company or a non-
Direct Selling Agents (DSAs) Direct Selling banking financial company, located
other than a body corporate, Agents in the taxable territory.
partnership or limited liability (DSAs) other
partnership firm to bank or non- than a body
banking financial company corporate,
(NBFCs). partnership or
(Inserted vide Notification limited liability
No.15/2018-Central Tax (Rate) partnership
dated July 26, 2018) firm.
12 Services provided by business Business A banking company, located in the
facilitator (BF) to a banking facilitator (BF) taxable territory
company
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13 Services provided by an agent of An agent of A business correspondent, located

business correspondent (BC) to business in the taxable territory.
business correspondent (BC). correspondent
(BC)
14 Security services (services Any person A registered person, located in the
provided by way of supply of other than a taxable territory.”;
security personnel) provided to a body
registered person: Provided that corporate
nothing contained in this entry
shall apply to, - (i)(a) a
Department or Establishment of
the Central Government or State
Government or Union territory; or
(b) local authority; or (c)
Governmental agencies; which
has taken registration under the
Central Goods and Services Tax
Act, 2017 (12 of 2017) only for
the purpose of deducting tax
under section 51 of the said Act
and not for making a taxable
supply of goods or services; or
(ii) a registered person paying tax
under section 10 of the said Act.
Any person other than a body
corporate. A registered person,
located in the taxable territory.”;
(Inserted vide Notification
No.29/2018-Central Tax (Rate)
dated Dec 31, 2018)
15 Services provided by way of Any person Any body corporate located in the
renting of a motor vehicle other than a taxable territory.
provided to a body corporate. body
corporate,
paying central
tax at the rate
of 2.5% on
renting of
motor
vehicles with
input tax
credit only of
CGST Act 147

input service
in the same
line of
business
16 Services of lending of securities Lender i.e. a Borrower i.e. a person who
under Securities Lending Scheme, person who borrows the securities under the
1997 (“Scheme”) of Securities and deposits the Scheme through an approved
Exchange Board of India (“SEBI”), Securities intermediary of SEBI.”
as amended. registered in
his name or in
the name of
any other
person duly
authorised on
his behalf with
an approved
intermediary
for the
purpose of
lending under
the Scheme
of SEBI
In addition to the above list given under Central Tax- Rate, following additional category
of supply of services is listed under Notification No. 10/2017- Integrated Tax (Rate) on
which GST shall be paid by the recipient on reverse charge basis:-
Sl. Category of Supply of Services Supplier Recipient of Service
No. of service
(1) (2) (3) (4)
1 Any service supplied by any Any person Any person located in the taxable
person who is located in a non- located in a territory other than non-taxable
taxable territory to any person non-taxable online recipient.
other than non-taxable online territory
recipient
10 Services supplied by a person A person Importer, as defined in clause (26)
located in non- taxable territory by located in of section 2 of the Customs Act,
way of transportation of goods by non-taxable 1962(52 of 1962), located in the
a vessel from a place outside territory taxable territory.
India up to the customs station of
clearance in India
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ANALYSIS:-
• No partial reverse charge will be applicable under GST. 100% tax will be paid by
the recipient if reverse charge mechanism applies.
• All taxpayers required to pay tax under reverse charge have to mandatorily obtain
registration and the threshold exemption is not applicable on them.
• Payment of taxes under Reverse Charge cannot be made with utilisation of Input
Tax Credit and has to be made in Cash.
• The recipient can take the credit of tax paid on inward supplies liable to reverse
charge once the recipient makes payment of tax in cash.
(iv) The e-commerce operator, in terms of Section 9(5): The Government is empowered to
notify categories of services wherein the person responsible for payment of taxes would
nether be the supplier nor the recipient of supply, but the e-commerce operator through
which the supply is effected. It is important to note that, in case of such supplies, the e-
commerce operator is neither the supplier nor does it receive the services. The e-
commerce operator is merely the person who person who owns, operates or manages
digital or electronic facility or platform for e-commerce purposes. Under the erstwhile
service tax law, the e-commerce operator in such an arrangement was referred to as an
‘aggregator’.
1. The Government has notified certain services in this regard vide Notification No.
17/2017-Central Tax (Rate) as amended from time to time, including services by
way of transportation of passengers by a radio-taxi, motor cab, maxi cab and motor
cycle, etc.); accommodation in hotels, inns, guest houses, clubs, campsites;
services by way of housekeeping, such as plumbing, carpeting etc.
2. Where the e-commerce does not have a physical presence in the taxable territory,
any person representing his in the taxable territory would be liable to pay the taxes.
If no such representative exists, the e-commerce operator is liable to appoint such
a person in order to discharge this obligation.
3. All other provisions of the Act will apply to the e-commerce operator or his
representative (as the case may be) in respect of such services, as if he is the
supplier liable to pay tax on the services.
4. In this regard it may be noted that liability to pay tax on the supply by the e-
commerce operator is not another provision imposing tax on the reverse charge
basis. Reference to the definition of reverse charge in section 2(98) makes it clear
that reverse charge is limited to tax payable under section 9(3) and 9(4). It is very
important to note that the language employed in Section 9(5) makes it clear that the
liability to pay tax on the supply is placed on the e-commerce operator, “as if” the e-
commerce operator were the “supplier liable to tax”. The marked departure of the
language from that used in case of the reverse charge provisions suggests that:
CGST Act 149

(a) The tax that is applicable on the supply is to be paid by the e-commerce
operator ‘” as if” such e-commerce operator was the supplier liable to tax. The
provisions require the e-commerce operator to step into the shoes of the actual
supplier, for the limited purpose of discharging his liability, and the supply by
the e-commerce operator to the actual supplier (facilitation services,
commission services or by any service inter se) will be taxable separately, in
the hands of the e-commerce operator as a supplier of service to the actual
supplier.
(b) The actual supplier is no longer liable to pay any tax. This means that the
suppliers will not be the person liable to pay tax on such services effected
through an e-commerce operator, even if they have obtained registration. This
is clear not only from the exclusion from compulsory registration under section
24(ix) (to such actual suppliers where the e-commerce operator will pay tax
under section 9(5)) but also allowed to enjoy exclusion from registration under
section 23(1)(a) when entire turnover is taxed under 9(5) in the hands of e-
commerce operator. Also refer Notification 17/2017-Central Tax (Rate) dated
28 Jun 2017 where exception is made for ‘requirement to otherwise register
under section 22” to such actual supplies attracting section 9(5).
Readers may refer to decision of Karnataka AAR in the matter of Opta Cabs Private
Limited as below:
Question raised: Whether the money paid by the customer to the driver of the cab for
the services of the trip is liable to GST and whether the applicant company is liable to
pay GST on this amount
Ruling: The services of transportation of passengers is supplied to the consumers
through the applicant and it shall be deemed that the applicant would be deemed to be
the supplier liable to pay tax in relation to the supply of such service by the taxi operator
- in accordance with the provisions of sub-section (5) of section 9 of the Central Goods
and Services Tax Act 2017 r/w Notification No. 17/2017- Central Tax (Rate), the
applicant is liable to tax on the amounts billed by him on behalf of the taxi operators for
the service provided in the nature of transportation of passengers through it.
(iv) Rate of tax: The rate of tax will be applicable as specified in the Notification No.
1/2017- Central Tax (Rate) for goods and Notification No. 11/2017- Central Tax (Rate)
for services issued in this regard and read with other Rate Notifications which may be
issued to partially exempt any other goods or services from payment of tax. The rates of
tax contained in these notifications cannot exceed 20% under each limb (i.e., 20%
under CGST Law and 20% under SGST), as amended from time to time. These rates
would be notified based on the recommendation of the GST Council. In order to
determine the applicable rate of tax, the following approach is to be adopted:
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(i) Identify whether the supply is an intra-State supply;

(ii) Identify whether the supply is a plain supply / composite supply / mixed supply and
adopt the treatment accordingly;
(iii) Identify HSN of the goods or services and applicable rate of tax as per rate
notification;
(iv) Identify whether the HSN applies to more than one description-line. If yes, analyse
which of the description is most specific to the supply in question;
(v) Once classification is ascertained, identify whether such goods or services qualify
for any exemption (partially or wholly) from payment of tax.
(v) Taxable value: The rate of tax so notified will apply on the value of supply as
determined under Section 15. The transaction value would be accepted subject to
inclusions / exclusions specified in the said Section, where the price is the sole
consideration for the supply and the supplier and recipient are not related persons. In all
other cases, the value of supply will be that value which is determined in terms of the
rules (i.e., Chapter IV of the CGST Rules, 2017).
(vi) Classification of Goods or Services: In order to apply a particular rate of tax, a taxable
person need to determine the classification of his supply as to whether supply constitute
a supply of goods or services. Once the same is determined, further classification in
terms of HSN of goods and services has to be made by the assesse so as to arrive at
the rate of tax at which he is required to pay tax. At the outset, it is important to note
that HSN for goods are contained in Chapters from 1 to 98 and HSN for Services are
contained in Chapter 99. Since Classification of Goods is older and is based on
knowledge gathered from precedents on HSN classification, we shall discuss the steps
for classification of goods. The steps for determination of proper classification is as
under:
(vii) It is important to note that classification of each product supplied has to be made
separately if supply of such product is independent. This shall include all by-products,
scraps etc.
(viii) Identify the description and nature of the goods being supplied. One must confirm that
the product is also similarly or more specifically covered in the Customs Tariff and HSN
2017. The Section Notes and Chapter Notes to the applicable Schedule to be read as it
forms an integral part of the Tariff for the purpose of classification.
(ix) If there is any ambiguity, first reference shall be made to the Rules for interpretation of
the Customs Tariff.
(x) As per the Rules, first step to be applied is to find the trade understanding of the terms
used in the Schedule, if the meaning or description of goods is not clear.
(xi) If the trade understanding is not available, the next step is to refer to the technical or
CGST Act 151

scientific meaning of the term. If the tariff headings have technical or scientific
meanings, then that has to be ascertained first before the test of trade understanding.
(xii) If none of the above are available reference may be had to the dictionary meaning or ISI
specifications. Evidence may be gathered on end use or predominant use.
(xiii) In case of the unfinished or incomplete goods, if the unfinished product bears the
essential characteristics of the finished product, its classification shall be same as that
of finished product.
(xiv) If the classification is not ascertained as per above point, one has to look for the nature
of product which is more specific.
(xv) If the classification is still not determinable, one has to look for the ingredient which
gives the article its essential characteristics.
(xvi) It is important to note that in following cases of supply of services, same rate of central
tax as on supply of like goods involving transfer of title in goods would be applicable:
Sl Chapter, Section Description of Rate (per cent.) Rate (per cent.)

No. or Heading Service of Central Tax of Integrated
Tax
15 Heading 9971 (ii) Transfer of Same rate of Same rate of
(Financial and the right to use central tax as on central tax as on
related services) any goods for supply of like supply of like
any purpose goods involving goods involving
(whether or not transfer of title transfer of title
for a specified in goods in goods
period) for cash,
deferred
payment or
other valuable
consideration.
(iii) Any transfer Same rate of Same rate of
of right in goods central tax as on central tax as on
or of undivided supply of like supply of like
share in goods goods involving goods involving
without the transfer of title transfer of title
transfer of title in goods in goods
thereof.
17 Heading 9973 (iii) Transfer of Same rate of Same rate of
(Leasing or rental the right to use central tax as on central tax as on
services, with or any goods for supply of like supply of like
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without operator) any purpose goods involving goods involving

(whether or not transfer of title transfer of title
for a specified in goods in goods
period) for cash,
deferred
payment or
other valuable
consideration.
(iv) Any transfer Same rate of Same rate of
of right in goods central tax as on central tax as on
or of undivided supply of like supply of like
share in goods goods involving goods involving
without the transfer of title transfer of title
transfer of title in goods in goods
thereof.
(vi) Leasing or Same rate of Same rate of
rental services, central tax as central tax as
with or without applicable on applicable on
operator, other supply of like supply of like
than (i), (ii), (iii), goods involving goods involving
(iv) and (v) transfer of title transfer of title
above. in goods in goods
(xvii) The only exception to the above table is leasing of motor vehicle which was purchased
by the Lessor prior to July 1, 2017, leased before July 1, 2017 and no ITC of central
excise, VAT or any other taxes on such motor vehicle was availed by him. If all these
conditions are fulfilled then the lessor is liable to pay GST only on 65% of the GST
applicable on such motor vehicle. – Refer notification No.37/2017- Central Tax (Rate)
dated October 13, 2017.
9.3 Comparative review
Under the erstwhile tax laws, Central Excise is levied on ‘manufacture of goods’, VAT /
CST is levied on ‘sale of goods’ and service tax is charged on ‘service provided or
agreed to be provided’. Unlike such different incidences, under the GST law, it is
‘supply’ which would be the taxable event. Under the erstwhile law, e.g.: while stock
transfers are liable to Central Excise (if they are removed from the factory), it would not
be liable to VAT / CST on production of necessary forms – however, under the GST law,
it would be taxable as a ‘supply’ if such supplies are between distinct persons under
section 25(4) or 25(5). Further, free supplies were liable to excise duty, while under the
VAT laws, free supplies would require reversal of input tax credit; under the GST law,
we have to be careful to analyse whether there is any non-monetary consideration
CGST Act 153

(inducement) present in the supplies (free-marketed as), if yes then we have to get into
valuation of such free supplies to arrive at a transaction value. If not, then the treatment
would be similar to the erstwhile VAT laws, where the supplies are made without any
consideration (monetary/ otherwise). However, where the free supplies are made
between distinct persons or between related persons then such supplies may be
regarded as supply under Schedule I, paragraph 2.
In the erstwhile law, there are multiple transactions which apparently qualify as both
‘sale of goods’ as well as ‘provision of services’. E.g.: license of software, providing a
right to use a brand name, etc. To avoid this situation, GST law clarifies as to whether a
transaction would qualify as a ‘supply of goods’ or as ‘supply of services’ by introducing
a deeming fiction. A transaction of supply under composite contracts would either
qualify as supply of goods or as services, under the GST law (Schedule II of the Act,
concept of composite supply and mixed supply).
The payment of VAT in the hands of the purchaser (registered dealer) on purchase of
goods from an unregistered dealer and the circumstances where the Service Tax is
payable under the reverse charge mechanism in respect of say, advocate services,
import of services, sponsorship services etc. are comparable to the ‘reverse charge
mechanism’ prescribed herein. However, the concept of partial reverse charge is not
continuing in the GST regime, viz., every supply will be liable either to forward charge or
full reverse charge, Further, under erstwhile law, the concept of reverse charge only
exists in relation to services. The GST law, however, permits the supply of goods also
to be subjected to reverse charge.
9.4 Issues and concerns
1. The activity of import of service is subjected to tax, whether or not such import is in the
course or furtherance of business. While the relaxation from obtaining registration is
provided to a ‘non-taxable online recipient’ who imports OIDAR services, relaxation to
other persons who import services for personal use flows from exemption in entry 10(a)
to notification 9/2017-Int (Rate) dated 28 Jun 2017.
2. Although, the word ‘business’ is clearly defined u/s 2(17), the phrase ‘in the course or
furtherance of business’ has not been defined in the Act. The meaning that can be
derived from this phrase is so wide that it can include every activity undertaken by a
business concern, including activities in the course of employment, since employment is
a subset of the activities undertaken in the course of business.
3. A plain reading of the meaning of the terms ‘composite supply’ and ‘mixed supply’
suggests that the concepts pre-suppose a condition that they are effected by taxable
persons. Say in case of a supply effected by a non-taxable person to a registered
person attracting tax under reverse charge, the supply would not be regarded as a
composite supply even where all the conditions are satisfied, and cannot be regarded
as a mixed supply either, for the same reason. Such an understanding would defeat the
very purpose of the legislative intent. Therefore, in case of reverse charge transactions,
154 BGM on GST

the supply must be understood to have been made by the registered person who is the
recipient of supply, i.e., even supplies effected by unregistered persons may be
qualified to be termed ‘composite supply’ or mixed supply’, subject to the normal
conditions which would otherwise apply.
4. While the concept of ‘mixed supplies’ requires that the goods and / or services supplied
in the mixed supply must be supplied for a single price, there is no such requirement in
the case of composite supplies. Therefore, a person effecting a mixed supply of goods
would certainly have an option to strategically alter the bundle of supplies so that all the
goods / services included in the mixed supply would not all be subjected to the highest
rate of tax applicable on the said supplies.
On the other hand, a supplier who effects a composite supply wishes to charge for the
supply of two or more goods or services separately, which otherwise constitute a
composite supply, a question may arise as to whether the rate of tax applicable on all
the supplies would continue to be the rate applicable to the principal supply. Say, a
supplier of air conditioners (taxable @ 28%) who always effects the supply along with
the installation service, now chooses to split the cost of the service in order to tax such
service portion at the rate of 18%. Such a split-up may be questioned, given that there
is no escape from treatment as a composite supply merely because the values are
ascertained separately. Generally, transactions that are intentionally broken up with an
intent to minimise the impact of tax would be subject to scrutiny / valuation.
9.5 FAQs
Q1. In respect of exchange of goods, namely gold watch for restaurant services, will the
transaction be taxable as two different supplies or will it taxable only in the hands of the
main supplier?
Ans. Yes, the transaction of exchange is specifically included in the scope of “supply” under
Section 7. Thus, exchange could be taxable both ways. Provided the person
exchanging gold watch is in the business of selling watches (A contrary view could also
be taken. It depends on the facts of each and every case).
Q2. What are examples of ‘disposals’ as used in ‘supply’?
Ans. “Disposals” could include donation in kind or supplies in a manner other than sale.
Q3. Will a not-for-profit entity be liable to tax (if registered under GST) on any supplies
effected by it – e.g.: sale of assets received as donation?
Ans. Yes, it would be liable to tax on value as may be determined under Section 15, for said
sale of donated assets.
Q4. Is the levy under reverse charge mechanism applicable only to services?
Ans. No, reverse charge applies to supplies of both goods and services by virtue of
Notification No.4/2017-CT(Rate) and Notification No.13/2017-CT(Rate) for goods and
services respectively.
CGST Act 155

Q5. What will be the implications in case of purchase of goods from unregistered dealers?
Ans. As per Section 9(4) of the CGST Act, 2017 as amended by The CGST Amendment Act,
2018 specified that the tax shall be payable under reverse charge by the specified class
of registered persons, in respect of supply of specified categories of goods.
9.6 MCQs
Q1. As per Section 9, which of the following would attract levy of CGST?
(a) Inter-State supplies, in respect of supplies within the State to SEZ;
(b) Intra-State supplies;
(c) Both of the above;
(d) Either of the above.
Ans. (b) Intra-State supplies
Q2. Which of the following forms of supply are included in Schedule I?
(a) Permanent transfer of business assets on which input tax credit has been
claimed
(b) Agency transactions for services
(c) Barter
(d) None of the above
Ans. (a) Permanent transfer of business assets on which input tax credit has been claimed
Q3. Who can notify a transaction to be supply of ‘goods’ or ‘services’?
(a) CBIT
(b) Central Government on the recommendation of GST Council
(c) GST Council
Ans. (b) Central Government on the recommendation of GST Council
Statutory Provisions- Effective from 1st July, 2017 to 31st January, 2019
10. Composition levy
(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,–
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(i) one per cent. of the turnover in State or turnover in Union territory in case of a
manufacturer,
(ii) 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
(iii) 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:
Provided that the 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
(2) 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:
Provided that where more than one registered persons are having the same
Permanent Account Number (issued under the Income-tax Act, 1961), the registered
person shall not be eligible to opt for the scheme under sub-section (1) unless all
such registered persons opt to pay tax under that sub-section.
(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).
(4) A taxable person to whom the provisions of sub-section (1) apply shall not collect any
tax from the recipient on supplies made by him nor shall he be entitled to any credit of
input tax.
(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.
CGST Act 157

Statutory Provisions- Effective from 1st February 2019 vide The Central Goods &
Services Tax Amendment Act,2018
10. Composition levy
(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 under sub-section (1) of section
9, an amount calculated at such rate 10as may be prescribed, but not exceeding, –
(i) one per cent. of the turnover in State or turnover in Union territory in case of a
manufacturer,
(ii) 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
(ii) 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:
Provided that the Government may, by notification, increase the said limit of fifty lakh
rupees to such higher amount, not exceeding one crore and fifty lakh rupees 11, as
may be recommended by the Council
Provided further that a person who opts to pay tax under clause (a) or clause (b)
or clause (c) may supply services (other than those referred to in clause (b) of
paragraph 6 of Schedule II), of value not exceeding ten per cent. of turnover in a
State or Union territory in the preceding financial year or five lakh rupees,
whichever is higher.
(2) The registered person shall be eligible to opt under sub-section (1), if: —
(a) save as provided in sub-section (1), he is not engaged in the supply of services;
(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
10
Substituted vide The Central Goods and Services Tax Amendment Act, 2018 w.e.f. 01.02.2019. Before
substitution, it was read as “in lieu of the tax payable by him, an amount calculated at such rate”
11
Substituted vide The Central Goods and Services Tax Amendment Act, 2018 w.e.f. 01.02.2019. Before
substitution, it was read as “one crore rupees”
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Provided that where more than one registered persons are having the same
Permanent Account Number (issued under the Income-tax Act, 1961), the registered
person shall not be eligible to opt for the scheme under sub-section (1) unless all
such registered persons opt to pay tax under that sub-section.
(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).
(4) A taxable person to whom the provisions of sub-section (1) apply shall not collect any
tax from the recipient on supplies made by him nor shall he be entitled to any credit of
input tax.
(5) If the proper officer has reasons to believe that a taxable person has paid tax under
sub-section (1) 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.
Amendment by The Finance (No.2) Act, 2019 12

In section 10 of the Central Goods and Services Tax Act, ––
(a) in sub-section (1), after the second proviso, the following Explanation shall be inserted,
namely: —
“Explanation. –For the purposes of second proviso, the value of exempt supply of
services provided by way of extending deposits, loans or advances in so far as the
consideration is represented by way of interest or discount shall not be taken into
account for determining the value of turnover in a State or Union territory.”;
(b) in sub-section (2), —
(i) in clause (d), the word ‘‘and’’ occuring at the end shall be omitted;
(ii) in clause (e), for the word ‘‘Council:’’, the words ‘‘Council; and’’ shall be
substituted;
(iii) after clause (e), the following clause shall be inserted, namely: ––
“(f) he is neither a casual taxable person nor a non-resident taxable person:”;
(c) after sub-section (2), the following sub-section shall be inserted, namely: ––
“(2A) 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, not eligible to
12
Effective date yet to be notified
CGST Act 159

opt to pay tax under sub-section (1) and sub-section (2), 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 under sub-section (1) of section 9, an amount of tax calculated
at such rate as may be prescribed, but not exceeding three per cent. of the turnover in
State or turnover in Union territory, if he is not––
(a) engaged in making any supply of goods or services which are not leviable to tax
under this Act;
(b) engaged in making any inter-State outward supplies of goods or services;
(c) engaged in making any supply of goods or services through an electronic
commerce operator who is required to collect tax at source under section 52;
(d) a manufacturer of such goods or supplier of such services as may be notified by
the Government on the recommendations of the Council; and
(e) a casual taxable person or a non-resident taxable person:
Provided that where more than one registered person are having the same Permanent
Account Number issued under the Income-tax Act, 1961, the registered person shall
not be eligible to opt for the scheme under this sub-section unless all such registered
persons opt to pay tax under this sub-section.”;
(d) in sub-section (3), after the words, brackets and figure “under sub-section (1)” at both
the places where they occur, the words, brackets, figure and letter “or sub-section
(2A), as the case may be,” shall be inserted.
(e) in sub-section (4), after the words, brackets and figure “of sub-section (1)”, the words,
brackets, figure and letter “or, as the case may be, sub-section (2A)” shall be inserted.
(f) in sub-section (5), after the words, brackets and figure “under sub-section (1)”, the
words, brackets, figure and letter “or sub-section (2A), as the case may be,” shall be
inserted.
(g) after sub-section (5), the following Explanations shall be inserted, namely: —
‘Explanation 1.––For the purposes of computing aggregate turnover of a person for
determining his eligibility to pay tax under this section, the expression “aggregate
turnover” shall include the value of supplies made by such person from the 1st day of
April of a financial year up to the date when he becomes liable for registration under
this Act, but shall not include the value of exempt supply of services provided by way
of extending deposits, loans or advances in so far as the consideration is represented
by way of interest or discount.
Explanation 2.––For the purposes of determining the tax payable by a person under
this section, the expression “turnover in State or turnover in Union territory” shall not
160 BGM on GST

include the value of following supplies, namely:––

(i) supplies from the first day of April of a financial year up to the date when such
person becomes liable for registration under this Act; and
(ii) exempt supply of services provided by way of extending deposits, loans or
advances in so far as the consideration is represented by way of interest or
discount.’.
Extract of the CGST Rules, 2017
3. Intimation for composition levy.

(1) Any person who has been granted registration on a provisional basis under clause
(b) of sub-rule (1) of rule 24 and who opts to pay tax under section 10, shall
electronically file an intimation in FORM GST CMP-01, duly signed or verified through
electronic verification code, on the common portal, either directly or through a
Facilitation Centre notified by the Commissioner, prior to the appointed day, but not
later than thirty days after the said day, or such further period as may be extended by
the Commissioner in this behalf:
Provided that where the intimation in FORM GST CMP-01 is filed after the appointed
day, the registered person shall not collect any tax from the appointed day but shall
issue bill of supply for supplies made after the said day.
(2) Any person who applies for registration under sub-rule (1) of rule 8 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.
(3) Any registered person who opts to pay tax under section 10 shall electronically file an
intimation in FORM GST CMP-02, duly signed or verified through electronic
verification code, on the common portal, either directly or through a Facilitation
Centre 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 and shall
furnish the statement in FORM GST ITC-03 in accordance with the provisions of sub-
rule (4) of rule 44 within a period of sixty days from the commencement of the
relevant financial year.
[(3A) Notwithstanding anything contained in sub-rules (1), (2) and (3), a person who has
been granted registration on a provisional basis under rule 24 or who has been
granted certificate of registration under sub-rule (1) of rule 10 may opt to pay tax
under section 10 with effect from the first day of the month immediately succeeding
the month in which he files an intimation in FORM GST CMP-02, on the common
portal either directly or through a Facilitation Centre notified by the Commissioner, on
or before the 31st day of March, 2018, and shall furnish the statement in FORM GST
ITC-03 in accordance with the provisions of sub-rule (4) of rule 44 within a period of
CGST Act 161

[one hundred and eighty days] 13 from the day on which such person commences to
pay tax under section 10:
Provided that the said persons shall not be allowed to furnish the declaration in
FORM GST TRAN-1 after the statement in FORM GST ITC-03 has been furnished] 14.
(4) Any person who files an intimation under sub-rule (1) to pay tax under section 10
shall furnish the details of stock, including the inward supply of goods received from
unregistered persons, held by him on the day preceding the date from which he opts
to pay tax under the said section, electronically, in FORM GST CMP-03, on the
common portal, either directly or through a Facilitation Centre notified by the
Commissioner, within a period of [ninety] 15 days from the date on which the option for
composition levy is exercised or within such further period as may be extended by
the Commissioner in this behalf.
(5) Any intimation under sub-rule (1) or sub-rule (3) or [sub-rule (3A)] 16 in respect of any
place of business in any State or Union territory shall be deemed to be an intimation
in respect of all other places of business registered on the same Permanent Account
Number.
4. Effective date for composition levy.

(1) The option to pay tax under section 10 shall be effective from the beginning of the
financial year, where the intimation is filed under sub-rule (3) of rule 3 and the
appointed day where the intimation is filed under sub-rule (1) of the said rule.
(2) The intimation under sub-rule (2) of rule 3, shall be considered only after the grant of
registration to the applicant and his option to pay tax under section 10 shall be
effective from the date fixed under sub-rule (2) or (3) of rule 10.
5. Conditions and restrictions for composition levy.

(1) The person exercising the option to pay tax under section 10 shall comply with the
following conditions, namely:-
(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 3;
13
Substituted for the word [ninety days] vide Notf no. 03/2018- CT dt. 23.01.2018
14
Substituted vide Notf no. 45/2017-CT dt. 13.10.2017
15
Substituted for the word [sixty] with effect from 17.08.2017 vide Notf no. 22/2017 – CT dt. 17.08.2017
16
Inserted vide Notf no. 34/2017 – CT dt. 15.09.2017
162 BGM on GST

(c) the goods held in stock by him have not been purchased from an unregistered
supplier 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;
(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.
(2) The registered person paying tax under section 10 may not file a fresh intimation
every year and he may continue to pay tax under the said section subject to the
provisions of the Act and these rules.
6. Validity of composition levy.

(1) The option exercised by a registered person to pay tax under section 10 shall remain
valid so long as he satisfies all the conditions mentioned in the said section and
under these rules.
(2) The person referred to in sub-rule (1) shall be liable to pay tax under sub-section (1)
of section 9 from the day he ceases to satisfy any of the conditions mentioned in
section 10 or the provisions of this Chapter and shall issue tax invoice for every
taxable supply made thereafter and he shall also file an intimation for withdrawal
from the scheme in FORM GST CMP-04 within seven days of the occurrence of such
event.
(3) The registered person who intends to withdraw from the composition scheme shall,
before the date of such withdrawal, file an application in FORM GST CMP-04, duly
signed or verified through electronic verification code, electronically on the common
portal.
(4) Where the proper officer has reasons to believe that the registered person was not
eligible to pay tax under section 10 or has contravened the provisions of the Act or
provisions of this Chapter, he may issue a notice to such person in FORM GST CMP-
05 to show cause within fifteen days of the receipt of such notice as to why the option
to pay tax under section 10 shall not be denied.
(5) Upon receipt of the reply to the show cause notice issued under sub-rule (4) from the
registered person in FORM GST CMP-06, the proper officer shall issue an order in
FORM GST CMP-07within a period of thirty days of the receipt of such reply, either
CGST Act 163

accepting the reply, or denying the option to pay tax under section 10 from the date
of the option or from the date of the event concerning such contravention, as the
case may be.
(6) Every person who has furnished an intimation under sub-rule (2) or filed an
application for withdrawal under sub-rule (3) or a person in respect of whom an order
of withdrawal of option has been passed in FORM GST CMP-07 under sub-rule (5),
may electronically furnish at the common portal, either directly or through a
Facilitation Centre notified by the Commissioner, a statement in FORM GST ITC-01
containing details of the stock of inputs and inputs contained in semi-finished or
finished goods held in stock by him on the date on which the option is withdrawn or
denied, within a period of thirty days from the date from which the option is withdrawn
or from the date of the order passed in FORM GST CMP-07, as the case may be.
(7) Any intimation or application for withdrawal under sub-rule (2) or (3) or denial of the
option to pay tax under section 10 in accordance with sub-rule (5) in respect of any
place of business in any State or Union territory, shall be deemed to be an intimation
in respect of all other places of business registered on the same Permanent Account
Number.
7. Rate of tax of the composition levy.

The category of registered persons, eligible for composition levy under section 10 and the
provisions of this Chapter, specified in column (2) of the Table below shall pay tax under
section 10 at the rate specified in column (3) of the said Table:-
Sl. No. Category of registered persons Rate of tax
1 Manufacturers, other than half per cent. of the turnover in the
manufacturers of such goods as State or Union territory 17
may be notified by the Government
2 Suppliers making supplies referred two and a half per cent. of the turnover
to in clause (b) of paragraph 6 of in the State or Union territory 18
Schedule II
3 Any other supplier eligible for half per cent. of the turnover of taxable
composition levy under section 10 supplies of [goods and services] 19 in
and the provisions of this Chapter the State or Union territory 20
17
Substituted with effect from 01.01.2018 vide Notf no. 03/2018- CT dt. 23.01.2018
18
19
Substituted vide Notf no. 03/2019-CT dt. 29.01.2019 wef 01.02.2019
20
164 BGM on GST


1. Notification No. 1/2018-Central Tax dated 23.01.2018 issued for revision of Rules and
for reduction of rate of composition tax;
2. Notification No. 46/2017- Central Tax dated 13.10.2017issued to increase the
threshold limit on aggregate turnover to opt for composition scheme (1 crore / 75
Lakhs);
3. Order No. 11/2017-GST dated 21.12.2017 issued to extend the time limit to furnish
intimation for opting into the Composition Scheme;
4. Order No. 01/2017-Central Tax being the CGST (Removal of Difficulties) Order, 2017
dated 13.10.2017 issued to clarify that outward supply of services for which the
consideration is in the form of interest, shall not be taken into account for composition
taxpayers;
5. GST Flyer as issued by the CBIC can be referred to for a gist of the statutory
provisions, titled ‘Composition Levy Scheme in GST’.
6. Notification No. 22/2017- Central Tax dated 17.08.2017 issued to extend the time limit
to file FORM GST CMP-03 giving details of stock, including the inward supply of
goods received from unregistered persons, held by him on the day preceding the date
from which he opts to pay tax u/s 10.
7. Notification No. 34/2017- Central Tax dated 15.09.2017 issued to insert sub section
(3A) in the GST Rules as amended through Notification No. 45/2017-CT dated
13.10.2017.
8. Notification No.8/2017 issued on 27.07.2017 as amended from time to time specifying
turnover limits for the applicability of section 10,
9. Notification No 3/2018-CT dated 23.01.2018 issued amending the rate of tax as
mentioned in rule 7 of the CGST Rules, 2017.
10. Notification No.43/2019-Central Tax dated 30.09.2019 issued to exclude manufacturers of
aerated waters from the purview of composition scheme.
Section Description
Section 9 Levy and collection
Section 2(6) Definition of Aggregate turnover
Section 2(102) Definition of Services
Section 2(78) Definition of Non-taxable supply
CGST Act 165

Section Description
Section 2(112) Meaning of Turnover in a State
Section 52 Collection of tax at source
10.1 Introduction
This Section provides for a registered person to opt for payment of taxes under a scheme of
composition, the conditions attached thereto and the persons who are entitled, but not
mandated, to make payment of tax under this Scheme. The conditions, restrictions,
procedures and the documentation in respect of this scheme are contained in Chapter II of the
Central Goods and Service Tax Rules, 2017 from Rule 3 to Rule 7 (Composition Rules).
10.2 Analysis
Tax payment under this scheme is an option available to the taxable person. This scheme
would be available only to certain eligible persons.
(a) Payment of tax: The composition scheme offers to a registered person, the option to
remit taxes on the turnover as against outward supply-wise payment of taxes. In other
words, the registered person opting to pay tax under the composition scheme needs
only to ascertain the aggregate value of outward taxable supplies, and compute the tax
thereon at a fixed rate, regardless of the actual rate of tax applicable on the said
outward supply. The rate of tax prescribed in this regard is as under:
(i) In case of manufacturers: 1% (0.5% CGST+ 0.5% SGST) of the turnover in the
State/UT (Note: The rate applicable has been reduced from 2% to 1% vide
Notification No. 1/2018-Central Tax dated 23.01.2018 effective 01.01.2018);
(ii) In case of food/restaurant services:5% (2.5% CGST+ 2.5% SGST) of the turnover
in the State/UT (i.e., in case of composite supply of service specified in Entry 6(b)
of Schedule II);
(iii) In case of other suppliers: 1% (0.5% CGST+ 0.5% SGST) of the turnover of
taxable supplies in the State/UT (such as like traders, agents for supply of goods,
etc.)
(b) Eligibility to pay tax under composition scheme: The conditions for eligibility to opt
for payment of tax under the composition scheme is as follows:
(i) Registered persons having an ‘aggregate turnover’ as defined under Section 2(6)
of the Act (i.e., aggregate of turnovers across all States under the same PAN,
including exempt supplies, supplies specified under Schedule I, etc.) does not
exceed the prescribed limit in the preceding financial year will be eligible to opt
for payment of tax under the composition scheme. Please refer to the discussion
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on aggregate turnover as explained in the definitions Chapter for a better

understanding of the expression. In this regard, the following may be noted:
1. The prescribed threshold limit is Rs. 1 crore (and Rs. 75 lacs in case of
Special Category States being Arunachal Pradesh, Assam, Manipur,
Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Himachal Pradesh);
The prescribed threshold limit is Rs. 1.5 crores (including States of Jammu &
Kashmir , Assam, Uttarakhand and Himachal Pradesh).
For Special Category States, the limit is Rs. 75 Lakh (except States of
Jammu & Kashmir, Assam, Uttarakhand and Himachal Pradesh)
Please note, changes consequent to J&K Reorganization Act, 2019 from 31
Oct 2019 are yet to be notified and the same may be referred in their
amended form in the context of applicability of limits in UT of J&K and UT of
Ladakh.
2. The aggregate turnover of the registered person should not exceed the said
prescribed limit during the financial year in which the scheme has been
availed;
3. The ‘aggregate turnover’ as computed for a composition taxpayer shall not
include any interest income, which is earned by way of supply of services
such as extending deposits, etc. where such interest or discount is exempted
under the GST Law.
Central Goods and Services Tax (Amendment) Act, 2018

The threshold limit upto which the Government has powers to notify the
eligibility limit for of Composition levy has been increased to Rs.1.50 crores
from existing Rs.1 crore.
It is effective from a date yet to be notified by the Government.
4. As per Order No. 01/2017 dated 13.10.2017 the following is clarified:-

i. A person supplying restaurant services along with the supply of any
exempt services shall not be eligible for composition scheme u/s 10 of
CGST.
ii. In computing the limit of aggregate turnover in order to determine the
eligibility of composition scheme, value of supply of any exempt service
shall not be taken into account.
(ii) The scheme cannot be opted for during the middle of a financial year, except in
the case where the person obtains registration, and opts for composition scheme
CGST Act 167

at the time of applying for registration under the GST Law:

1. Taxable Person obtaining a new registration under GST laws: Such
option can be exercised at the time of obtaining registration under section 22
in Part B of Form GST-REG-1. Such new application may also include cases
of migration from the erstwhile laws. In both cases, the option to pay tax
under composition scheme shall be effective from the effective date of
registration. [Refer Rule 3 of CGST Rules]
2. Registered person switches over to composition scheme: A person is
required to file an intimation before the commencement of the financial year
for which he opts to pay tax under the scheme. In such cases, the provisions
of section 18(4) shall stand attracted and the registered person shall be
required to file a statement containing details of stock and inward supply of
goods received from un-registered persons, held in stock, on the date
immediately preceding the date. Please refer to the discussion in Section 18
for a better understanding.
(iii) In order to be eligible to opt for the scheme, the registered person must not be in
possession of stock of goods which has been purchased from unregistered
persons. In any such case, due tax ought to have been paid thereon under
Section 9(4);
Note: In case of migrated registrations from the erstwhile laws, the GST Law
imposes an additional condition that the stock of goods held on the GST
appointed day (01.07.2017) does not include any goods which have been
procured in the course of inter-State trade or commerce or received from his
branch / his agent /his principal situated outside the State or imported from a
place outside India.
(iv) The registered person would not be eligible to effect any:
1. Supply of goods through an e-commerce operator who is liable to collect
tax at source (TCS) – while there is no restriction on goods supplier through
a portal owned and operated by the same person;
In this regard, it may be noted that the provision for TCS has been notified
recently to be effective form 01.10.2018.
2. Supply of non-taxable goods, i.e., alcoholic liquor for human consumption,
petroleum crude, high speed diesel, motor spirit (commonly known as petrol),
natural gas and aviation turbine fuel;
3. Supply of services, other than services specified in Entry 6(b) to Schedule II.
This would mean, a trader opting for composition scheme will not be entitled
to provide any after-sales support services, howsoever trivial they may be
168 BGM on GST

(unless such supply is a composite or mixed supply of goods). In this regard,

it must be noted that the Government has issued an order for the removal of
difficulties to clarify that any services provided by a composition taxpayer
shall not be taken into account where the consideration for the said service is
by way of “interest” which is exempted from tax under the GST Law.
Removal of Difficulty Order
One of the difficulties which was initially faced by such persons was is that if
he earns any interest income (particularly in a proprietorship firm) then that
would will have been deemed to be a supply against service under GST and
therefore, any registered person receiving interest income in course of
furtherance of business shall be deemed to be supplying services. Thus,
such registered person shall not be eligible for opting composition scheme.
To overcome such difficulties an order was passed, The Central Goods and
Services Tax (Removal of Difficulties) Order, 2017 to clarify as under:
“(i) it is hereby clarified that if a person supplies goods and/or services referred
to in clause (b) of paragraph 6 of Schedule II of the said Act and also
supplies any exempt services including services by way of extending
deposits, loans or advances in so far as the consideration is represented by
way of interest or discount, the said person shall not be ineligible for the
composition scheme under section 10 subject to the fulfilment of all other
conditions specified therein.
(ii) it is further clarified that in computing his aggregate turnover in order to
determine his eligibility for composition scheme, value of supply of any
exempt services including services by way of extending deposits, loans or
advances in so far as the consideration is represented by way of interest or
discount, shall not be taken into account.”
Central Goods and Services Tax (Amendment) Act, 2018

A registered person under Section 10 is allowed to supply services upto a
value not exceeding 10% of the turnover in a State or UT in preceding
financial year or 5 lakhs whichever is higher. This has been inserted
through a proviso to Section 10.
4. Inter-State outward supplies, including supplies to SEZ unit / developer.

Please note that this condition implies that the registered person will not be in a
position to effect inter-State stock transfers to its own establishments located
outside the State. It is also important to note that the condition is not limited to
taxable supplies alone, and extends to exempt supplies as well.
CGST Act 169

(v) Shall not collect tax: Taxable person opting to pay tax under the composition
scheme is prohibited from collecting tax on the outward supplies. Care must be
taken when composition taxable persons are involved in supply of MRP-goods.
MRP includes output tax and selling at MRP violates this condition. The impact is
far more severe as the composition facility gets rejected and full output tax is
liable to be paid but input tax credit (otherwise available) would not have been
availed within the relevant time permitted.
(vi) Not entitled to input tax credit: Taxable person opting to pay tax under the
composition scheme will not be eligible to claim any input tax credits.
However, if the taxable person becomes ineligible to remain under composition
scheme, the taxable person will become entitled to take input tax in respect of
inputs held in stock (as inputs, contained in semi-finished or finished goods) on
the day immediately preceding the date from which he becomes liable to pay tax
under Section 9. (Refer Section 18(1)(c) for the provision. A statement of stock
shall be filed in Form GST ITC-1 within 30 days from the date from which the
option is withdrawn or the order cancelling the composition option is passed).
(vii) The registered person must not be:
1. A manufacturer of such goods as may be notified by the Government
(based on the recommendations of the GST Council), in the year for which
he opts for the scheme, or in the preceding financial year (E.g. Ice cream,
pan masala, tobacco). However, there is no restriction in trading of such
goods, i.e., where the person has not manufactured the goods.
2. A casual taxable person;
3. A non-resident taxable person;
(viii) All the registrations obtained under a single PAN are also mandated to opt for
payment under the composition scheme, i.e., all the registered persons under the
PAN will also be mandated to comply with all the conditions mentioned above,
including the business verticals having separate registrations within the same
State under the same PAN. The scheme would become applicable for all the
registrations and it cannot be applied for select verticals only. E.g.: Say a
company has the following businesses separately registered:
— Sale of mobile devices (Registered in Kerala)
— Franchisee of branded restaurant (Registered in Goa)
The scheme would be applicable for the said 2 units. The company cannot opt for
composition scheme for the registration in Kerala and opt to pay taxes under the
regular scheme for the registration in Goa.
170 BGM on GST

(ix) The scheme will be applicable to all the outward supplies. The option of the
scheme will be qua-person and not qua-class of goods – once opted it will be
applicable for all supplies by effected by the registered person; it must be noted
that a taxable person cannot opt for payment of taxes under composition scheme
for supply of one class of goods and opt for regular scheme of payment of taxes
for supply of other classes of goods or services.
(c) Conditions applicable on a composition supplier: Once a person has opted to pay
tax under the composition scheme, the following conditions would stand attracted:
(i) Every notice or signboard in every registered place of business, displayed at a
prominent place, shall carry the words “Composition taxable person”;
(ii) Every bill of supply issued by the composition suppliers shall carry the
declaration “Composition taxable person, not eligible to collect tax on supplies”
on top of the bill;
(iii) RCM on inward supplies: The composition supplier shall be liable to make
payment at the rate applicable on the supply in respect of every inward supply
liable to tax under the reverse charge mechanism, regardless of the rate of tax
that is applied by him on the outward supplies effected by him. It may be noted
that the value of such inward supplies would not be included in the aggregate
turnover of the composition taxpayer although the liability is discharged by him on
such inward supplies;
(iv) Not entitled to collect tax: The composition taxpayer is prohibited from collecting
any GST / Cess applicable on the outward supplies effected by him. Accordingly,
the recipients of supply would also not be eligible to claim any credits where the
inward supply is from a composition taxpayer;
(v) Not entitled to claim credit of taxes paid: The composition taxpayer is not entitled
to claim credit in respect of taxes paid by him on any of the inward supplies
effected by him, including inward supplies on which he pays tax under reverse
charge mechanism.
(vi) A Composition supplier shall not be entitled to issue any tax invoice. However, to
effect supplies of goods/services the supplier will have to issue “Bill of Supply”
without indicating any tax amount on it.
However, if the composition taxpayer switches over to become a regular taxpayer, he
will be entitled to take input tax in respect of inputs held in stock (as inputs, contained in
semi-finished or finished goods) on the day immediately preceding the date from which
he becomes liable to pay tax under Section 9 (regular taxpayer). Refer the discussion in
Section 18(1)(c) for a better understanding of the provisions.
CGST Act 171

(d) Important Note: The option to pay tax under the composition scheme will remain valid
so long as the registered persons comply with all of the aforesaid conditions in (b) and
(c) above. The composition suppliers will be treated as any other registered supplier
with effect from the date on which any of the said conditions cease to be complied with.
The composition suppliers would not be entitled to re-enter the scheme until the expiry
of the financial year.
(i) The registered person would be required to file an intimation (suo motu) for
withdrawal from the scheme within 7 days of the non-compliance;
(ii) The registered person may also file an intimation if he wishes to withdraw from
the scheme, before the effective date of withdrawal, and such withdrawal can be
applied for anytime during the financial year.
Once granted, the eligibility would be valid unless the permission is cancelled or
is withdrawn or the person becomes ineligible for the scheme.
(iii) Cancellation of permission: Where the proper officer has reasons to believe that
the taxable person was not eligible to the composition scheme, the proper officer
may cancel the permission (in order CMP-7) and demand the following:
a. Differential tax and interest – viz., tax payable under the other provisions of
the Act after deducting the tax paid under composition scheme;
b. Penalty determined based on the demand provisions under Section 73 or 74.
(e) Comments specific to migration cases (transition from the erstwhile law to the
GST regime): In case of migration of old registration into registration under GST, option
to avail composition scheme under GST Laws can be exercised only if the goods held in
stock by such taxable person, 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.
(i) As per rule 3(1) of the CGST Rules, in cases involving migration, there is need to
exercise such Option for composition in Form GST CMP 01 prior to appointed
date or within 30 days after the appointed date. In this case, the option to pay tax
under composition scheme shall be effective from the appointed date. This date
has further been extended to 16.08.2017. Such person would be required to file
stock statement under Rule 3(4) in Form GST-CMP03 within a period of 90 days
(extended from 60 days to 90 days by Notification No.22/2017) from the date on
which the option for composition levy is exercised or within such further period as
may be extended by the Commissioner in this behalf. However, the due date was
extended further till 31.01.2018 vide Order No. 11/2017-GST dated 21.12.2017.
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(ii) A new sub-rule (3A) was inserted by Notification No.34/2017 – Central Tax
dtd.15.09.2017 which has an overriding effect on provisions of sub-rule (1), (2)
and (3). It may be noted that, the purpose of rule (3A) is only to enable the
persons to opt for composition scheme in the first year of GST implementation,
without making them to wait up to the next financial year. This is on account of
the fact that, the threshold limit for the purposes of Composition scheme u/s 10
was enhanced twice i.e. once on 27.06.2017 and then again on 13.10.2017.
Hence, sub-rule (3A) would only cover cases, where the application is made prior
to 31.03.2018. For all applications made during the financial year 2018-19, the
matter would be governed by Rule 3(3).
Under the erstwhile tax laws, the scheme of composition is provided for in most State level
VAT laws. The conditions prescribed under the GST law for composition scheme is broadly
comparable to the conditions / restrictions under the State level VAT laws.
10.4 Issues & concerns
1. While it is clear that a composition supplier is not entitled to effect a supply of services,
there is no specific provision in case of a composite supply / a mixed supply which are
taxed as supply of goods. Therefore, based on the principles specified in Section 8 of
the Act, it may be safe to infer that a supplier opting for composition scheme would be
entitled to effect a composite supply containing services, where the principal supply is
goods, considering that the “supply shall be treated as a supply of such principal
supply”. On the other hand, a mixed supply shall be treated as a “supply of that
particular supply which attracts the highest rate of tax”. Given this position, there is
no clear case for mixed supplies wherein both services and goods contained in the
mixed supply suffer the highest rate of tax, from amongst the rates of tax applicable on
each of the individual supplies contained in the mixed supply. Due care must be
exercised in this regard.
2. An amendment of the rate applicable to the supplies effected by composition suppliers
was made with effect from 01.01.2018. In this regard, attention is drawn to the rate
applicable to traders which reads as follows – “half per cent of the turnover of taxable
supplies of goods in the State or Union territory”. It must be noted that the highlighted
expression, more specifically, “of taxable supplies” is missing in the rate entries
applicable to manufacturers and restaurant service providers. Therefore, the said 2
classes of persons would be liable to pay tax on the turnover in State, whether or not
the supplies are exempted from tax.
10.5 FAQs
Q1. Will a taxable person be eligible to opt for composition scheme only for one out of 3
branches, duly registered?
CGST Act 173

Ans. No. Composition scheme would become applicable for all the business verticals /
registrations which are separately held by the person with same PAN.
Q2. Can composition scheme be availed if the taxable person has inter-State inward
supplies?
Ans. Yes. Composition scheme is applicable subject to the condition that the taxable person
does not engage in making inter-state outward supplies, while there is no restriction on
making any inter-State inward supplies.
Q3. Can the taxable person under composition scheme claim input tax credit?
Ans. No. Taxable person under composition scheme is not eligible to claim input tax credit.
Q4. Can the customer who buys from a taxable person who is under the composition
scheme claim composition tax as input tax credit?
Ans. No. customer who buys goods from taxable person who is under composition scheme is
not eligible for composition input tax credit.
Q5. Can composition tax be collected from customers?
Ans. No. The taxable person under composition scheme is restricted from collecting tax.
Q6. What is the threshold for opting to pay tax under the composition scheme?
Ans. The threshold for composition scheme is up to 1.50 crores of aggregate turnover in the
preceding financial year.
Q7. How to compute ‘aggregate turnover’ to determine eligibility for composition scheme?
Ans. The methodology to compute aggregate turnover is given in Section 2(6). However,
since composition scheme is applicable only to suppliers making intra-state supplies,
‘aggregate turnover’ means ‘Value of all taxable supplies (excluding the value of inward
supplies on which tax is payable by a person on reverse charge basis), exempt supplies
(except interest income as discussed above), exports of goods or services or both or
inter-state supplies of a person having the same PAN (i.e., across India) excluding
CGST, IGST, SGST, UGST and cess.
Q8. What does a person having the same PAN mean?
Ans. “Person having the same PAN” means all the units across India having the same PAN
as is issued under the Income Tax Law.
Q9. What are the penal consequences if a taxable person is not eligible for payment of tax
under the Composition scheme?
Ans. Taxable person who is not eligible for the said scheme, could be imposed penalty as
determined under Section 73 or 74.
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Q10. What happens if a taxable person who has opted to pay taxes under the composition
scheme crosses the threshold limit of `1.50 crores during the year?
Ans. In such case, from the day the taxable person crosses the threshold, the permission
granted earlier is deemed to stand withdrawn, and he shall be liable to pay taxes under
the regular scheme i.e. section 9, from such day.
10.6 RELEVANT CASE LAWS

1. Vaishno Associates vs. CCE, Jaipur
Assessee classified activity carried out by it under category of 'works contract services' - It
claimed benefit of Works Contract Composition Scheme - Adjudicating Authority denied
benefit of Composition Scheme on plea that assessee had failed to file any intimation or
option to department opting for payment of service tax in respect of works contract under
Composition Scheme - Whether denial of benefit of Composition Scheme for sole reason for
failure to file intimation prior to payment of service tax was justified - Held, no.
2. ABL Infrastructure (P.) Ltd. vs. CCE, Customs & Service Tax
Assessee was engaged in providing works contract service - It opted to discharge service tax
liability under Works Contract (Composition Scheme for Payment of Service Tax) Rules,
2007 - It did not include value of material supplied by service recipient free of cost in gross
value of works contract - Whether value of free supply material also be added in gross value
of works contract - Held, yes.
SPECIAL SCHEME IN CASE OF INTRA-STATE SUPPLY OF GOODS OR SERVICES OR
BOTH WITH TAX RATE OF 6%
The Central Government vide Notification No. 2/2019-Central Tax (Rate) dated 07th March,
2019 notified Composition scheme in case of intra-State supply of goods or services or both,
at the rate along with the conditions specified below:
Description of supply Rate Conditions

(per cent)
First supplies of goods or 3 1. Supplies are made by a registered person,
services or both up to an (i) whose aggregate turnover in the preceding
aggregate turnover of Rs. financial year was Rs. 50 lakh or below;
50 lakhs made on or after (ii) who is not eligible to pay tax under sub-
the 1st day of April in any section (1) of section 10;
financial year, by a
(iii) who is not engaged in making any supply
registered person.
which is not leviable to tax;
(iv) who is not engaged in making any inter-
State outward supply;
(v) who is neither a casual taxable person nor
CGST Act 175

a non-resident taxable person;

(vi) who is not engaged in making any supply
through an electronic commerce operator
who is required to collect tax at source
under section 52; and
(vii) who is not engaged in making supplies of:
(a) Ice cream and other edible ice,
whether or not containing cocoa.
(b) Pan masala
(c) Tobacco and manufactured tobacco
substitutes
2. Where more than one registered persons
are having same PAN, central tax on
supplies by all such registered persons is
paid at the given rate.
3. The registered person shall not collect
any tax from the recipient nor shall he be
entitled to any credit of input tax.
4. The registered person shall issue, instead
of tax invoice, a bill of supply.
5. The registered person shall mention the
following words at the top of the bill of
supply, namely: -
‘Taxable person paying tax in terms of
Notification No. 2/2019-Central Tax (Rate)
dated 07.03.2019, not eligible to collect tax
on supplies’.
6. Liability to pay central tax at the rate of 3%
on all outward supplies notwithstanding
any other notification issued under
section 9 or section 11 of said Act.
7. Liability to pay central tax on inward
supplies on reverse charge under sub-
section (3) or sub-section (4) of section 9
of said Act.
Explanation: For the purposes of this
notification, the expression “first supplies
of goods or services or both” shall, for the
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purposes of determining eligibility of a

person to pay tax under this notification,
include the supplies from the first day of
April of a financial year to the date from
which he becomes liable for registration
under the said Act but for the purpose of
determination of tax payable under this
notification shall not include the supplies
from the first day of April of a financial year
to the date from which he becomes liable
for registration under the Act.
Important Note: It may be noted that while computing aggregate turnover in order to
determine eligibility of a registered person to pay central tax at the rate of 3%, value of supply
of exempt services by way of extending deposits, loans or advances in so far as the
consideration is represented by way of interest or discount, shall not be taken into account.
Analysis:
With effect from 1st April 2019 a new composition scheme has come into force in case of intra-
State supply of goods or services or both, at the rate of 6% (3% CGST + 3% SGST) for first
supplies of goods or services or both up to an aggregate turnover of Rs. 50 lakhs made on or
after the 1st day of April in any financial year by a registered person subject to certain
conditions.
This is an optional facility through a rate notification that is ‘notwithstanding’ any other rate
notification issued. Therefore, the notification overrides Notification No. 11/2017-Central Tax
(Rate). As it is optional, registered person should carefully consider the conditions before
opting for the same. This facility and composition scheme under section 10 operate as
mutually exclusive. Thus, traders and manufacturers of goods and restaurant service
providers who are eligible for composition (even if not opted) will not enter this facility.
Eligibility to pay tax under composition scheme:
Supplies are made by a registered person, -
1. whose aggregate turnover in the preceding financial year was Rs. 50 lakh or below;
2. who is not eligible to pay tax under sub-section (1) of section 10;
3. who is not engaged in making any supply which is not leviable to tax;
4. who is not engaged in making any inter-State outward supply;
5. who is neither a casual taxable person nor a non-resident taxable person;
6. who is not engaged in making any supply through an electronic commerce operator who
is required to collect tax at source under section 52; and
CGST Act 177

7. who is not engaged in making supplies of:

 Ice cream and other edible ice, whether or not containing cocoa.
 Pan masala
 Tobacco and manufactured tobacco substitutes
 Aerated Water 21
Conditions applicable on a composition supplier: Once a person has opted to pay tax
under the composition scheme, the following conditions would stand attracted
1. Where more than one registered persons are having same PAN, central tax on supplies
by all such registered persons is paid at the given rate.
2. The registered person shall not collect any tax from the recipient nor shall he be
entitled to any credit of input tax.
3. The registered person shall issue, instead of tax invoice, a bill of supply.
4. The registered person shall mention the following words at the top of the bill of supply,
namely: -
‘Taxable person paying tax in terms of Notification No. 2/2019-Central Tax (Rate) dated
07.03.2019, not eligible to collect tax on supplies’.
5. Liability to pay central tax at the rate of 3% on all outward supplies notwithstanding any
other notification issued under section 9 or section 11 of said Act.
6. Liability to pay central tax on inward supplies on reverse charge under sub-section (3)
or sub-section (4) of section 9 of said Act.
Where any registered person who has availed of input tax credit opts to pay tax under this
notification, he shall pay an amount, by way of debit in the electronic credit ledger or electronic
cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs
contained in semi-finished or finished goods held in stock and on capital goods as if the supply
made under this notification attracts the provisions of section 18(4) of the said Act and the
rules made there-under and after payment of such amount, the balance of input tax credit, if
any, lying in his electronic credit ledger shall lapse.
Classification and Exemption
Introduction
Unlike Customs law, GST law does not contain a commodity classification tariff, these are
contained within the notification which prescribes the rate of tax. Classification, therefore, is
an exercise that is inevitable to identify the specific entry in any of the 6 schedules for
determining the rate of tax on the supply of goods or services. The revenue department could
21
Inserted vide Notification No.43/2019-Central Tax dated 30th September 2019
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object to the rate adopted or exemption claimed when the error is observed at the time of
assessment, investigation or revenue audit. This could lead to multiple demands at all stages
of supply and also denial of credit. The customer may object to the classification or the rate.
The assessee himself may come to know of the error due to competitors using different rates,
paying or not paying, attending some awareness session, reading articles, books. Errors may
also come to light at the time of due diligence, internal audit, statutory audit, outsourced
consultant changing, etc.
Errors in GST classification – Impact
Many assessees could suffer loss of business in period of uncertainty till proper classification
is arrived at as they may have adopted some rate for their supplies since they could not afford
to stop business for want of HSN. After that they may be following the same incorrect
classification unless there is any objection.
The cost of errors would include the following:
1. In case of higher tax being charged, assessee may have to suffer the loss of orders and
cost of re-establishing business with the customers, the loss of credibility with
customers. The cost of discounts given to retain the customer due to incorrect rate is
inevitable.
2. In case of goods or services supplied which are nil rated or exempted the non-
availability of credit can be fatal for the business if this claim for exemption is not
accurately made by the supplier. In other words, where exemption is availed
erroneously, demand for output tax will be made without any facility to allow credit that
could have been availed. Similarly, where exemption is omitted to be claimed, there
would be a scenario of recovery of input tax credit being ineligible from the start.
Demands maybe made at multiple stages of the supply chain. This is a major departure
from the earlier regime.
3. In case of short charge due to incorrect classification or claim of exemption which is not
available, would result in non-recoverability of taxes from the customers and cost of
interest. In business, breaking the credit chain could make business unviable.
4. Valuation methods prescribed for certain categories of goods and or services would be
dependent on the classification of such goods and/or services. Wrong classification
would lead to wrong payment of tax.
5. On certain goods and/or services GST is to be discharged by the recipient of supply
under reverse charge mechanism. Wrong classification may result in non-payment of
tax or un-necessary payment of tax.
6. Denial of benefits under FTP such as duty drawback and incentives being provided for
various goods and/or services at varied rates can be the result of incorrect classification
of goods/services.
CGST Act 179

7. Non-payment of compensation Cess, if any, applicable on specified goods and or

services which may result in penal proceedings over and above the interest liability.
8. Calculating incorrect liability on import of goods / services or not claiming the ITC (Input
Tax Credit) benefit of export on goods/service exports due to improper classification
could also happen. This could happen when the alternative headings available have
different import/export criterion being applicable to them.
In case of revenue raising the short charge or ineligible exemption issues, in addition to the
above costs: the cost of penalty, denial of credit availed, cost of dispute resolution at
adjudication, appeal, Court stages also would arise. It would also result in internal manpower
resources getting substantially involved to resolve the issue inspite of the fact that a specialist
in GST may be outsourced to prepare the reply, appearance etc.
Analysis
(i) Classification of Goods or Services:
In order to apply a particular rate of tax, one needs to determine the classification of the
supply as to whether the supply constitutes a supply of goods or services or both. Once
the same is determined in terms of Section 7 and 8, a further classification in terms of
HSN of goods and services has to be made so as to arrive at the rate of tax applicable
to the supply. At the outset, it is important to note that HSN for goods are contained in
Chapters from 1 to 98 and HSN for Services are contained as Chapter 99 Notified as
the ‘Scheme of Classification of Services’ provided as an Annexure to the Notification
issued for rate of tax (CGST) applicable to services (i.e., Annexure to Notification No.
11/2017-Central Tax (Rate) dated 28.06.2017).
The Classification of Goods is older and is based on knowledge gathered from
precedents on HSN classification, as an adaptation from that formulated by the World
Customs Organisation. The suggested steps for determination of proper classification of
goods are as under:
1. The classification of each supply has to be made separately for every individual
supply, regardless of the form of supply (such as sale / transfer / disposal
including by-products, scraps etc.)
2. Identify the description and nature of the goods being supplied. One must confirm
that the product is also more specifically covered in the Customs Tariff. The
Section Notes and Chapter Notes specified in the Customs Tariff would squarely
apply to the Tariff Schedules under the GST Law, and ought to be read as an
integral part of the Tariff for the purpose of classification.
3. If there is any ambiguity, first reference shall be made to the ‘Rules of
Interpretation’ of the First Schedule to the Customs Tariff Act 1975.
(a) As per the Rules, first step to be applied is to find the trade understanding
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of the terms used in the Schedule, if the meaning or description of goods is

not clear.
(b) If the trade understanding is not available, the next step is to refer to the
technical or scientific meaning of the term. If the tariff headings have
technical or scientific meanings, then that has to be ascertained first before
the test of trade understanding.
(c) If none of the above are available reference may be made to the dictionary
meaning or ISI specifications. Evidence may be gathered on end use or
predominant use.
4. In case of the unfinished or incomplete goods, if the unfinished goods bear the
essential characteristics of the finished goods, its classification shall be the same
as that of the finished goods.
5. If the classification is not ascertained as per above point, one has to look for the
nature of goods which is more specific.
6. If the classification is still not determinable, one has to look for the ingredient
which gives the goods its essential characteristics.
(ii) Rate of tax for goods or services
Purpose of Supply of Goods Supply of Services
Notification
Prescribing the 1/2017-Central Tax (Rate) 11/2017-Central Tax (Rate)
rate of tax (As amended from time to time) (As amended from time to time)
Granting the 2/2017-Central Tax (Rate) 12/2017-Central Tax (Rate)
exemption (As amended from time to time) (As amended from time to time)
A screenshot of the website hosted by the Central Board of Indirect Taxes and Customs
(CBIC – Source link: http://www.cbec.gov.in/htdocs-cbec/gst/central-tax-rate-notfns-
2017) containing the list of notifications is provided below:
CGST Act 181

(iii) Requirement of Classification

It may seem like classification may not be so cumbersome, and tools such as
experience, logic and common sense are sufficient to identify the classification, and to
interpret the tariff notifications. However, a quick look at some examples would drive
home the need to pay close attention to the principles of classification. Let us consider
the following examples:
(1) a ‘watch made of gold’ – an article of gold or a watch, albeit an expensive one?
(2) a confectionary product ‘hajmola’ – an ayurvedic medicaments or remains
confectionary sweets?
(3) serving of ‘brandy with warm water’ – classified based on its curative effect on
common cold, or dismissed as alcoholic liquor for human consumption?
(4) surgical gloves – latex products or accessories to healthcare services?
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(5) mirror cut-to-size for automobiles – article of glass or accessories to motor

vehicles fitted as rear-view mirror?
As can be seen from the few instances mentioned above, classification is not one that is
free from doubt. When coupled with differential rates of tax, the scope for
misclassification is bound to be reinforced with motivation to either reduce the tax
incidence / or to pay a higher tax to circumvent any possible interest and penalty. Both
these motivations can work on either sides – industry as well as tax administration.
Classification cannot, therefore, be left to the whims and fancies of each person, and
reference must be made to the guidance provided in the law itself.
(iv) Approach to Classification
The notifications prescribing the rate of tax in respect of goods as well as services
contain explanations as to how the classification must be undertaken. Extracts of some
of those explanations are provided below for ease of reference:
Notification 1/2017-Central Tax (Rate) dated 28 June, 2017
Notification 11/2017-Central Tax (Rate) dated 28 June, 2017

As can be seen from the above, the notification prescribing the rate of tax itself specifies
the approach that is to be followed for purposes of classification, namely:
(a) in respect of goods, the notification requires reference to be had to the First
Schedule to Customs Tariff Act 1975: A quick look at these would help us to
recognize the approach that needs to be followed for classification.
CGST Act 183

The above table is an adaptation of the Harmonized System of Nomenclature

(HSN) established for aiding in uniformity in Customs classification in
international trade between member countries of World Customs Organization. It
was drafted under the aegis of Customs Cooperation Council Nomenclature,
Brussels. It was adopted for Customs purposes by India in 1975 and readapted
(with some changes) for Central Excise in 1985 and now for purposes of GST in
2017. Please bear in mind that reference to the original HSN would be of much
help in understanding the scope of any entry to understand the full extent of
meaning implied in any entry found while reading Customs Tariff Act. Refer
www.wcoomd.org where the HSN is available for purchase or subscription
from World Customs Organization.
(b) in respect of services, the notification requires reference to the Annexure which
contains the Scheme of Classification: The Annexure is appended to the CGST
rate notification and contains entries under Chapter 99 (although there is no such
chapter for services in the HSN prescribed under the Customs Law).
Additionally, Explanatory Notes to such classification were recently issued to
assist in interpretation of various entries in the Annexure to the rate notification:
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(v) In this regard, it may also be noted that the tariff entries in case of certain services refer
to the rate of tax applicable to the relevant goods. In the following cases of supply of
services, the rate of tax applicable as on a supply of like goods involving transfer of title
in goods, would be applicable on the supply of services:
Chapter, Section or Heading Description of Service
Heading 9971 (ii) Transfer of the right to use any goods for any
(Financial and related purpose (whether or not for a specified period) for
services) cash, deferred payment or other valuable
consideration.
(iii) Any transfer of right in goods or of undivided share

in goods without the transfer of title thereof.
Heading 9973 (iii) Transfer of the right to use any goods for any
(Leasing or rental services, purpose (whether or not for a specified period) for
with or without operator) cash, deferred payment or other valuable
consideration.
(iv) Any transfer of right in goods or of undivided share

in goods without the transfer of title thereof.
(vi) Leasing or rental services, with or without

operator, other than (i), (ii), (iii), (iv) and (v) above.
CGST Act 185

The only exception to the above table is leasing of motor vehicle which was purchased
by the lesser prior to July 1, 2017, leased before the GST appointed date (i.e.,
01.07.2017) and no credit of central excise, VAT or any other taxes on such motor
vehicle had been availed by him. If all these conditions are fulfilled, then the lessor is
liable to pay GST only on 65% of the GST applicable on such motor vehicle. – Refer
Notification No.37/2017- Central Tax (Rate) dated 13.10.2017.
(vi) Customs Tariff Act – Rules of Interpretation
The rules of interpretation are contained in the Customs Tariff Act provides guidance
regarding the approach to be followed for reading and interpreting tariff entries. These
rules are merely summarized and listed below for convenience, whereas a detailed
study of the rules is advised from commentaries and value-added updated tariff
publications. Please refer to Customs Tariff Act for full set of Rules of Interpretation
 Rule 1: headings are for reference only and do not have statutory force for
classification;
 Rule 2(a): reference to an article in an entry includes that article in CKD-SKD
condition;
 Rule 2(b): reference to articles in an entry includes mixtures or combination;
 Rule 3(a): where alternate classification available, specific description to be
preferred;
 Rule 3(b): rely on the material that gives essential character to the article;
 Rule 3(c): apply that which appears later in the tariff as later-is-better;
 Rule 4: examine the function performed that is found in other akin goods;
 Rule 5: cases-packaging are to be classified with the primary article;
 Rule 6: when more than one entry is available, compare only if they are at same
level.
(vii) Role of ‘Manufacture’ in Classification
Classification would be well understood by applying the above rules of interpretation.
Now, the process that goods are passed through can impact their classification. For
example, cutting, slicing and packing pineapple in cans in sugar syrup has primary input
of pineapple and the output is canned fruit with extended shelf-life. Now, the input and
output are not identical, but it has been held in the case of “Pio Food Packers” that this
is not a process amounting to manufacture. But, would it be possible to regard the input
and the output to retain the same classification. The answer lies in knowing the scope
of each entry applicable to classification. Another example, Kraft paper used to make
packing boxes may be sold as it is or after laminating them. It has been held in the case
of Laminated Packaging that this process is manufacture even though the input and
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output fall within the same classification entry. GST Law has adopted, in section 2(72),
the general understanding of manufacture that is very similar to that in Central Excise.
The real test from this definition – is the input and output functionally interchangeable or
not in the opinion of a knowledgeable end-user – and not based on the classification
entry. Change in classification entry from one to the other, that is, classification entry for
input is not the same as that of the output, could only arouse suspicion about the
possibility of manufacture. Please note that ‘manufacture’ is included in the definition of
‘business’ (in section 2(17)) but it is not included as a ‘form of supply’ (in section 7(1)(a)
or anywhere else). Hence, the nature of the process that inputs are put through may not
be manufacture but yet may appear to move the output into a different entry compared
to the input. So, would change of classification entry be relevant or degree of change
produced in the input due to the process carried out must be considered. With the
adoption of HSN based classification from Custom Tariff Act, it is imperative to carefully
consider whether one entry has been split and sub-divided into categories even if they
both carry the similar rate of tax. Hence, the key aspects to consider are:
 Identify the scope of an entry for classification of input or output
 Study the nature of process carried out on the inputs
 Examine by the ‘test’ (above) if result of the process is manufacture
 Now identify the classification applicable to the output
For example, Is ‘desiccating a coconut’ a process of manufacture? If yes, the
desiccated coconut ought not to be considered as eligible to the same rate of tax as
coconut. Drying grains may not appear to be a process of manufacture but frying them
could be manufacture as the grains are no longer ‘seed grade’ although it resembles the
grain.
Manufacture need not be a very elaborate process. It can be a simple process but one
that brings about a distinct new product – in the opinion of a knowledgeable end-use –
and not just any person with no particular familiarity with the article. Manufacture need
not be an irreversible process. It can be reversible yet until reversed it is recognized as
a distinct new product, again, in the opinion of those knowledgeable in it. Processes
such as assembly may be manufacture in relation to some articles but not in others. So,
caution is advised in generalizing these verbs – assembly, cutting, polishing, etc. – but
examining the degree of change produced and the identity secured by the output in the
relevant trade as to the functional inter-changeability of the output with the input. If a
knowledgeable end-use would accept either input or output albeit with some
reservation, then it is unlikely to be manufacture. But, if this knowledgeable end-user
would refuse to accept them to be interchangeable, then the process carried out is most
likely manufacture. Usage of common description of the input and output does not
assure continuity of classification for the two.
CGST Act 187

(viii) Role of ‘Supplier Status’ in Classification

This is best explained with an illustration – a restaurant buys aerated beverage on
payment of GST at 28% +12% including cess and on resale of this beverage as part of
food served as a combo with ‘composition status’ under Section 10 of CGST Act, the
rate of tax on this beverage would be 5%. Therefore, it is important to note that
classification can undergo a change depending upon the ‘status’ of the Supplier.
Another illustration could be medicaments which are taxed at 5% would be exempt from
tax when they are administered by the hospital to casualty/emergency admissions and
to in-patients even if billed separately in the invoice issued to patient by the hospital.
(ix) Classification for Exemptions
In GST law the exemptions are set out under section 11 of the whole of the tax payable
or a part of it. In granting exemptions, it is not necessary that the exemption be made
applicable to the entire entry. In other words, exemption notifications are capable of
carving out a portion from an entry so as differentially alter the rate of tax applicable to
goods or services within that entry. Exemptions can take any of the following forms:
 Supplier may be exempt – here, regardless of the nature of outward supply,
exemption apply to the supplier. Conditions specified may make such exemption
be applicable to the supplier but when the supplies are made to specified
recipients
 Supplies may be exempt – here, the supplier is not as relevant and all supplies
that are notified would enjoy the exemption. Conditions specified may help to
determine the supplies that are to be allowed the exemption.
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(x) Role of ‘Conditions’ in Exemptions

It is well understood that conditions in exemption notifications tend to convert the
exemption into an option, that is, the exempted / concessional rate of tax would apply
when the conditions are fulfilled and by deviating from the conditions, the full rate of tax
would apply. This principle has been tested in the context of Section 5A of the Central
Excise Act. However, a quick look at the Explanation to Section 11 of the CGST Act
(reproduced below) appears to indicate that unless an express option is granted in the
exemption notification, the concessional or exempted rate of tax along with attendant
conditions must be availed without any discretion to opt out of it.
Explanation.––For the purposes of this section, where an exemption in respect of any
goods or services or both from the whole or part of the tax leviable thereon has been
granted absolutely, the registered person supplying such goods or services or both shall
not collect the tax, in excess of the effective rate, on such supply of goods or services
or both.
While there may be alternate views that the above explanation applies only when the
exemption is ‘granted absolutely’ and not in all cases, such a view may find the
contradiction where one entry in an exemption notification prescribes a concessional
rate of tax that applies its restriction on input tax credit, while another entry in the very
same notification prescribes two rates of tax where one of them enjoins restriction on
input tax credit.
And the reason for resisting the view that – exemption with the condition is an option –
is when the Government felt free to specify two alternate tax consequences in respect
of a given entry in one case (GTA, in above illustration), there is no justification to make
an assumption about the existence of an option even when in the very same notification
that government opted to notify only one tax consequence. Accordingly, it would be a
reasonable construction that – exemption is a condition is not an option – and all court
decisions under earlier laws to the contrary are rendered otiose in view of the
explanation to section 11.
Illustration below shows a style where exemption would ‘not be option’:
CGST Act 189

The following illustration is a style of drafting exemption entries that is ‘not optional’:
(xi) Composite Supply vs. Mixed Supply

Reference can also be made to the discussion on Composite Supply and Mixed Supply
which can assist in classification of the supply into goods based on the principal supply
in a transaction or that part of the transaction which carries the highest rate
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(xii) CGST Amendment Act, 2018

The CGST Act, 2017 has been retrospectively amended from July 1, 2017 to provide
that transactions covered under Schedule II are not supplies but if they qualify as
supplies then such transactions are to be ‘treated’ for the purpose of determining the
relevant rate notification, HSN Code, Time of Supply, Place of Supply and other
consequential implications.
(xiii) Classification of Works Contract
Schedule II provides that works contract would be taxed as services and hence
irrespective of the value of goods involved in the contract, works contract would be
treated as services. Works Contract has been defined at Section 2(119) of the CGST
Act to provide that construction, commissioning, fabrication etc related to immovable
property would only be treated as works contract. Thus, any activity related to movable
property though understood as works contract under the erstwhile laws would not be
treated as works contract under the GST law and will have to be classified based on the
concept of composite supply
(xiv) Conclusion
In light of the foregoing discussion, the following points of learning can be summarized:
(a) transactions involving goods are, in certain cases, required to be treated as supply
of services. As such, the fundamental classification to be undertaken is the
differentiation between goods and services;
(b) classification of goods and services cannot be made based on logic, experience or
common sense. But, recourse to rules of interpretation in the first schedule to
Customs Tariff Act is mandatory in relation to classification of goods. And
reference to the scheme of classification (contained in the annexure) is inevitable
in relation to classification of services. There can be no interchange in the use of
the relevant classification rules between goods and services;
(c) classification in GST requires a deep appreciation of the technical understanding
of words and phrases in each domain and any urge to use the common meaning
of such words and phrases must be actively discouraged. In other words, even if
the common meaning of certain words and phrases appears reasonable, it must
be understood that government has deliberately and mindfully words that each and
in the case and specific interpretation in the relevant trade;
(d) classification is not only required to determine the rate of tax applicable but also
examine the availability of exemptions. There is no compulsion for an exemption
notification to exempt” correctly what is the carveout from an entry a subset of
transactions – supplies or suppliers – to attract a different rate of tax;
(e) exemptions are not optional as are the conditions prescribed in respect of such
exemption. Violation of the condition contracts consequences and not options.
CGST Act 191

‘Absolutely exempt’ does not mean ‘wholly exempt’ and it does not require to be
‘unconditionally exempt’ to be ‘absolutely exempt’.
Common Errors in Classification
The errors/ deliberate action which could lead to exposure should the extent possible be
avoided. The errors would include many some of them illustrated below:
(i) Classifying the supply for lower rate of GST without merit- This maybe due to
competition or due to fact that the buyer is unable to avail the credit.
(ii) Classifying the supply under higher slab to avoid dispute – Though there may not be
any demand- customer may have some objection and raise a debit note in future. It lead
to higher working capital
(iii) Classifying under wrong heading considering applicability of the same rate- This may
not have any commercial impact as there is no rate difference. However when the rate
changes there may be a problem.
(iv) Classifying the supplies based on convenience of operation – This may not be
advisable as it is bound to lead to disputes for self as well as the customers.
(v) Classifying the supplies incorrectly to claim of exemption – This would also be
disastrous as demands if any can cripple the enterprise.
(vi) Classifying the services considering the place of supply to claim as export etc – This
can lead to a) demand for GST as supply is liable b) denial of credit due to time lapse or
if longer period invoked and c) Demand for excess refund with interest and penalties.
(vii) Similar to above classifying differently to avoid Reverse charge mechanism. – This
could also lead to demand.
(viii) Classifying under residuary entry when specific entry or general entry is available.
Illustrative rulings by Authority for Advance Rulings relevant for classification of
goods/services
1. AUTHORITY FOR ADVANCE RULINGS, DAMAN, DIU AND DNH in case of Western
Cable Engineering (P.) Ltd.,
Classification of goods (NR) - Heat shrinkable cable jointing kits - Applicant-company is
engaged in clearing of their manufactured good, 'Heat Shrinkable Components' under
Chapter 854790 in existing law, i.e., under Central Excise Tariff Act, 1985 and were
paying duty at rate of 12.5 per cent - However, in GST regime, they have changed their
classification and started clearing their goods under Chapter 854690 - Whether since
with introduction of GST law, no change is effected in basic characteristics of said
product a sudden change in their classification without having legal and reasonable
backing is not tenable and, thus, Heat Shrinkable Cable Jointing Kits assembled from
various components is to be classified under HS 8547 - Held, yes [Para 5] [In favour of
revenue
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2. AUTHORITY FOR ADVANCE RULINGS, MAHARASHTRA in case of Shree

Construction,
Classification of services (NR) - Works contract services to main contractor - Whether
sub-contractor providing works contract services by way of construction, erection,
commissioning, or installation to main contractor in respect of original contract works
pertaining to railways would be covered for concessional rate of GST at rate of 12 per
cent as given under Serial No. 3 of Notification No. 11/2017 as amended - Held, yes
[Para 5] [In favour of assessee
3. AUTHORITY FOR ADVANCE RULINGS, HARYANA in case of Epcos India (P.) Ltd
Classification of goods (NR) - Battery for mobile handset - Whether product 'Battery for
Mobile Handset', whether it be separable or non-separable i.e., whether it be
detachable or non-detachable, when sold to mobile handset manufacturers who use
same to make mobile handset, form part of mobile handset, will qualify to be classified
under heading 85 having description 'Parts for manufacture of telephones for cellular
networks or for other wireless networks' attracting GST Rate of 12 per cent - Held, yes -
Whether product 'Battery for Mobile Handset', when sold to customers other than mobile
handset manufacturers who does not use same in manufacture of mobile handset, will
qualify to be classified under heading 8507 having description Electric accumulators,
including separators thereof, whether or not rectangular (including square), attracting
GST at rate of 28 per cent - Held, yes [Para 5] [In favour of applicant.
4. AUTHORITY FOR ADVANCE RULINGS, UTTARAKHAND in case of Ginni Filament
Ltd.-
Whether wet baby wipes consist of wadding felt and non-woven fabric coated or
covered with perfume or cosmetic and falls under HSN 3307, taxable at 18 per cent
GST under Notification No. 41/2017-Central Tax (Rate) - Held, yes - Whether since,
basic nature and working of product wet face wipes is almost same as that of wet baby
wipes i.e. gently cleaning skin by removing dirt and moistening it and on comparing
basic functions of ingredients which is coated in form of lotion over non-woven fabric in
respect of wet baby wipes, accordingly same are also classified under HSN 3307 -
Held, yes - Whether as regards classification of bed and bath towels also it is observed
that basic nature and working of product is almost same as that of wet face wipes, i.e.,
gently cleaning skin by removing dirt and moistening it; therefore, same merits
classification under HSN 3307 - Held, yes
II. Classification of goods (NR) - Shampoo towels - Product shampoo towel consists of
non-woven spun lace fabric of 40-60 grams per square meter of standard size 300 mm
x 240 mm - Basic function of shampoo towels is to clean and shampoo hair which may
be used for a bed-ridden person or who requires partial assistance - Product in question
has undergone a process which makes it a preparation for use on hair - Package of
shampoo towels indicate that it is meant for application on hair and said product is
CGST Act 193

indeed manufactured for use on hair only - Whether thus, product 'shampoo towel',
merits classification under Chapter 3305 and rate of GST applicable on said product is
18 per cent - Held, yes
5. AUTHORITY FOR ADVANCE RULINGS, WEST BENGAL in case of MD Mohta
Whether 'Rakhi' is an independently identifiable product which may be made up of
innumerable materials of no fixed or predetermined ratio, and yet retain its specific
identity as a symbol of a bond involving potential care of sister by brother, and not
merely an assemblage of discrete materials - Held, yes - Whether Rakhi cannot be
termed as a 'handicraft' item under GST under Notification No 32 of 2017-Central Tax
dated 15-9-2017 - Held, yes - Whether Rakhi's, which applicant intends to manufacture
will not be restricted to mere yellow and red yarn of 'Kalava', hence, Rakhi is not purely
puja samagri and will not attract NIL rate of duty under Serial No 92(2) of TRU
Clarification - Held, yes - Whether applicant has to classify 'Rakhi' as per its constituent
materials in accordance with rule 3(c) of Rules for Interpretation of Customs Tariff Act,
1975, as laid down in Explanatory Notes (iv) of Notification No. 1 of 2017-CT(Rate),
dated 28-6-2017 attracting GST in accordance to its classification and exemption under
Notification No. 2 of 2017-Central Tax (Rate), dated 28-6-2017 is not applicable for
'Rakhi' - Held, yes
Conclusion
The proper classification is the foundation to avoid disputes with customers as well as
demands form the revenue. The applicability of rates (which have changed in between) and
exemptions (have been notified and withdrawn) requires the updated knowledge as well as the
information of the past changes.
11. Power to grant exemption from tax
(1) Where the Government is satisfied that it is necessary in the public interest so to do,
it may, on the recommendations of the Council, by notification, exempt generally,
either absolutely or subject to such conditions as may be specified therein, goods or
services or both of any specified description from the whole or any part of the tax
leviable thereon with effect from such date as may be specified in such notification.
(2) Where the Government is satisfied that it is necessary in the public interest so to do,
it may, on the recommendations of the Council, by special order in each case, under
circumstances of an exceptional nature to be stated in such order, exempt from
payment of tax any goods or services or both on which tax is leviable.
(3) The Government may, if it considers necessary or expedient so to do for the purpose
of clarifying the scope or applicability of any notification issued under sub-section (1)
or order issued under sub-section (2), insert an explanation in such notification or
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order, as the case may be, by notification at any time within one year of issue of the
notification under sub-section (1) or order under sub-section (2), and every such
explanation shall have effect as if it had always been the part of the first such
notification or order, as the case may be.
Explanation. ––For the purposes of this section, where an exemption in respect of
any goods or services or both from the whole or part of the tax leviable thereon has
been granted absolutely, the registered person supplying such goods or services or
both shall not collect the tax, in excess of the effective rate, on such supply of goods
or services or both.
11.1 Introduction
This provision confers powers on the Central Government to exempt either absolutely or
conditionally goods or services or both of any specified description from whole or part of the
central tax, on the recommendations of the Council. It also confers power on the Central
Government to exempt from payment of tax any goods or services or both, by special order,
on recommendation of the Council.
11.2 Analysis
The Central or the State Governments are empowered to grant exemptions from tax, subject
to the following conditions:
(i) Exemption should be in public interest;
(ii) By way of issue of notification;
(iii) On recommendation from the Council;
(iv) Absolute / conditional exemption may be for any goods and / or services of any
specified description. In this regard, it may be noted that the exemption would be in
respect of the supply and not specifically for any classes of persons. E.g.: An absolute
exemption could be granted in respect of supply of water. Whereas, a conditional
exemption could be granted for supply of goods to canteen stores department.
(v) Exemption by way of special order (and not notification) may be granted by citing the
circumstances which are of exceptional nature.
(vi) The GST Law specifies that a registered person supplying the goods and / or services is
not entitled to collect a tax higher than the effective rate, where the supply enjoys an
absolute exemption.
Effective date of the notification or special order:
The effective date of the notification or the special order would be date which is so mentioned
in the notification or special order. However, if no date is mentioned therein, it would be:
— Date of its issue for publication in the official gazette;
CGST Act 195

— Date on which it is made available on the official website of the Government

Department.
The analysis of above provision in a pictorial form is summarised as follows:
Exemption under one GST Law and the effect on another GST Law:
An exemption issued under the CGST Act will ‘automatically’ exempt the same supply from the
levy of tax under the SGST/UTGST Act. This is provided under the SGST/UTGST Act. But the
converse is not necessarily applicable, that is, exemption under an SGST/UTGST Act will not
exempt levy of tax under the CGST Act.
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Deemed to be exempt under SGST Act

Exemption under CGST Act Deemed to be exempt under UTGST Act
No auto-application of exemption under IGST Act
Exemption under IGST Act No auto-application of exemption under CGST Act
Clarification on a Notification / Special Order

The law also provides for the Government to embed a clarification to such notification or
special order, by way of an “Explanation”, at any time within a period of 1 year from the date of
the said notification or special order. Such explanation inserted within the timelines would
have a retrospective effect, viz., from the effective date of the relevant notification or special
order.
Section11 – Illustrations
1. Absolute exemption: Exemption to following taxable services from tax leviable thereon:
• Services by way of renting of residential dwelling for use as residence.
• Services by Reserve Bank of India.
• Services by a veterinary clinic in relation to health care of animals or birds.
Notification No. 12/2017 - Central Tax (Rate) dt.28.06.2017
2. Conditional Exemption: The Central Government has exempted the tax payable under
the CGST/ UTGST/ IGST Acts by any taxable person on supply of "Services by a hotel,
inn, guest house, club or campsite, by whatever name called, for residential or lodging
purposes, having declared tariff of a unit of accommodation less than ` 1000/- per day".
Notification No. 12/2017 - Central Tax (Rate) dt.28.06.2017
3. Conditional, partial exemption: Intra-State supplies of goods or services or both
received by a registered person from an unregistered person is exempted from payment
of tax under reverse charge provided the aggregate value of such supplies received by
a registered person from all or any of the suppliers does not exceed ` 5000/- in a day.
Notification No. 08/2017-Central Tax (Rate) dated 28.06.2017 (Please note that this
Notification has been amended various number of times vide various notifications.
Presently the above said exemption has been extended till 30.09.2019).
Glimpse of notifications issued for exemption from payment of tax
Notification No. Particulars Comments
02/2017 - Central Exempted supplies of around 149 The notification was issued in
Tax (Rate) dated items of goods in terms of Section exercise of powers conferred
28.06.2017 11(1) of the CGST Act, 2017. Ex. u/s 11(1). The notification was
Electricity, Salt, fresh fruits, plastic made applicable retrospectively
CGST Act 197


bangles, passenger baggage etc. w.e.f 01.07.2017.The said
Amended vide Notification No. notification has been amended
28/2017, 35/2017,42/2017, 7/2018 various number of times to
- Central Tax (Rate) include as well as exclude
various items from the
notification.
Notification No. Goods specified in the List annexed Although petroleum products
03/2017-Central required in connection with various are outside the purview of GST.
Tax (Rate) dated kinds of petroleum operations But, the notification seeks to
28.06.2017 undertaken are given concessional provide a concessional rate of
rate i.e. at the rate of 2.5% under tax supplies relating to
CGST i.e. 5% IGST. petroleum operations.
Notification No. Exemption to supplies by CSD to The notification came into effect
07/2017-Central Unit Run Canteens and supplies by retrospectively w.ef.01.07.2017
Tax (Rate) dated CSD / Unit Run Canteens to
28.06.2017 authorised customers
Notification No. Exemption granted from levy of Exemption in respect of all
08/2017-Central CGST under RCM on supplies supplies has been granted up to
Tax (Rate) dated received from unregistered 31.03. 30.09.2019 by
28.06.2017 persons. (if value of supplies does Notification No.22/2018
not exceed ` 5000 from any or all dated.06.08.2018. However,
the suppliers in a day) given that a notification
Amended vide Notification No. corresponding to Notification
38/2017 and 10/2018-Central Tax No.08/2017 is missing in the
(Rate) IGST Law, it may be understood
Scope of this exemption has been that all inter-State supplies
enhanced to all supplies without remain taxable under Section
any monetary limit, by way of an 5(4) of the IGST Act, 2017 upto
amendment, upto 31.06.2018. 13.10.2017, from which date, all
supplies, without any monetary
limit, are exempt upto
30.09.019.
Notification No. Exemption granted to supplies to a This exemption notification is
09/2017-Central TDS deductor by a unregistered not available under IGST
Tax (Rate) dated supplier (Rate).
28.06.2017
Notification No. Exemption to Supplies of This exemption notification is
10/2017 - Central second hand goods received by not available under IGST
Tax (Rate) dated registered person dealing in buying
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28.06.2017 & selling of second hand goods (Rate).
from unregistered person provided
the dealer pays central tax on
supply of such second-hand goods
as per CGST Rules
Notification No. Exemption to supply specified The notification contains nearly
12/2017-Central services under the CGST Act. 79 entries exempting various
Tax (Rate) dated Almost, all the exemptions were
supply of services from GST.
28.06.2017 available earlier under the erstwhile
The notification has been
regime also under service tax amended various number of
Amended vide Notification No. times either to include or
21/2017, 25/2017, 32/2017 and exclude various services from
47/2017, 2/2018 - Central Tax the exemption.
(Rate)
Notification Exemption to supply of heavy water The Exemption notification
No.26/2017- and nuclear fuels falling in Chapter provided absolute exemption
Central Tax 28 of the First Schedule to the from whole of the Tax Payable.
(Rate) Customs Tariff Act, 1975 (51 of
dated.21.09.2017 1975) by the Department of Atomic
Energy to the Nuclear Power
Corporation of India Ltd
Notification Exempting supply of services The notification was issued as
No.30/2017- associated with transit cargo to an amendment of Notification
Central Tax Nepal and Bhutan No.12/2017.
(Rate)
dated.29.09.2017
Notification Exempting the Central
No.5/2018- Government’s share of Profit
Central Tax Petroleum as defined in the
(Rate) dated contract entered into by Central
25.01.2018 government in this behalf
Notification Exemption from IGST to SEZs on Corresponding Notification
No.18/2017- import of Services by a would not apply in case of intra-
Integrated Tax unit/developer in an SEZ State supplies, given that all
(Rate) dated supplies by SEZ are inter-State
05.07.2017 supplies
CGST Act 199


The provisions relating to exemption are broadly similar to the exemption provisions under the
erstwhile tax regime. There are no significant differences.
11.4 Issues and concerns
1. The law provides that tax shall not be collected at a rate higher than the effective rate of
tax applicable on a supply enjoying an absolute exemption. In this regard, there is one
school of thought wherein it is inferred that this provision is specific to absolute
exemptions only, and in case of conditional exemptions, there is an option available to
the registered supplier to collect tax from a recipient (Such a methodology, if adopted
by suppliers, would imply that the requirement for input tax credit reversals under
Section 17(2) of the Act would not stand attracted). The other view is that the
conditional exemptions are not optional, but are mandatory when the conditions relating
to the exemption are satisfied.
2. On similar lines, it is to be noted that the restriction imposed by law is upon the
“collection” of tax. Therefore, certain registered suppliers may resort to payment of tax
without collection thereof, in order to effect only taxable supplies whereby they would
not be required to undergo the hassle of reversal of input taxes. However, the issue
would arise as regards the documentation. A registered supplier may consider issuing a
tax invoice instead of a bill of supply, against a supply that is wholly exempt, and
specifying in the tax invoice prominently, that the recipient is not required to pay the tax
charged on the invoice on the basis that the supply is exempted under law. However,
this practice is frowned upon, as this methodology is not entirely in compliance with the
provisions of the law. It is also important to note that the GST Law casts an obligation
on the supplier to prove that he has not collected taxes in such situations.
11.5 Relevance of Section 11 in GSTR-9, 9A and 9C
1. Pt. 5D of GSTR-9 requires details comprising of Taxable Value, CGST, SGST, IGST
and Cess as applicable, in respect of “Exempted Outward Supplies”. Further, the
instructions annexed to the form also clarify that Table 8 of Form GSTR-1 may be used
for filling up the above-mentioned details.
2. Pt. 6B of GSTR-9A also requires details comprising of Turnover, Rate of Tax, CGST,
SGST, IGST and Cess as applicable, in respect of “Exempted Outward Supplies” as
declared in returns filed during the financial year.
3. Pt. 7B of GSTR-9C requires the value of Exempted, NIL Rated, Non-GST supplies, No
Supply turnover. Further, the instructions annexed to the form contain a clarification that
the figure so reported shall be net of credit notes, debit notes and amendments if any.
11.6 FAQs
Q1. When exemption from whole of tax leviable on goods and/or services has been granted
unconditionally, can taxable person collect tax?
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Ans. No, the taxable person providing goods and/or services shall not collect the tax on such
goods and/or services in respect of those supplies which are notified for absolute
exemptions.
Q2. Under what circumstances can a special order be issued?
Ans. The Government may in public interest, issue a special order on recommendation of
GST council, to exempt from payment of tax, any goods and/or services on which tax is
leviable. The circumstances of exceptional nature would also have to be specified in the
special order.
Q3. What shall be the effective date in case of issue of notification?
Ans. The Notification shall be effective from the date as mentioned in the notification.
However, in case no date is mentioned in the notification the effective date shall be the
date of issue of the notification.
11.7 MCQs
Q1. Which of the following can be issued by Central Government/ State Government to
exempt goods and/or services on which tax is leviable in exceptional cases?
(a) Exemption Notification
(b) Special order
(c) Other notifications
Ans. (b) Special Order
CGST Act 201

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Chapter 3

Levy and Collection of Tax

authorities, as may be notified by the Government on the recommendations of

(a) renting of immovable property;

Relevant circulars, notifications, clarifications issued by Government

Related provisions of the Statute

Section or Rule Description

Section 15 Value of taxable Supply

necessary so as to substitute the object of supply from goods to services while

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CGST Act 101

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CGST Act 103

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vi. Contract awarded by a customer to an entity at the corporate office from

CGST Act 105

iii. It cannot be demanded as a matter of right by the employee and the

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• Section 2(5) of the Act – “Agent means a person, including a factor,

CGST Act 107

vii. It is pertinent to note that the Agent shall be required to issue an

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arrangement were a ‘trading transcation’ by fiction in para 3 of sch I.

CGST Act 109

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emphasised that the activity of

4. Import of services by a person from a related person or from any of

CGST Act 111

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CGST Act 113

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option to purchase (actually, option to reject) is granted on payment of last installment

CGST Act 115

Entry in Schedule II Analysis

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Entry in Schedule II Analysis

CGST Act 117

Entry in Schedule II Analysis

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Entry in Schedule II Analysis

CGST Act 119

Entry in Schedule II Analysis

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Entry in Schedule II Analysis

CGST Act 121

Entry in Schedule II Analysis

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Entry in Schedule II Analysis

CGST Act 123

Entry in Schedule II Analysis

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Activities listed in Schedule III Analysis

CGST Act 125

Activities listed in Schedule III Analysis

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Activities listed in Schedule III Analysis

CGST Act 127

Activities listed in Schedule III Analysis

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