#GSTUpdates-33-Matters to be treated as supply without consideration: Freebies or Free of Cost supplies

Probably this is one issue, which has grabbed the headlines and place in the articles on GST everywhere. Schedule I of the Draft GST Law provides that transactions mentioned therein, would be deemed to be supply even though supply has been made without consideration.

• Relevant Provision under section 3(1)(c) providing Inclusion of supply specified in Schedule I under the definition of supply:

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

Schedule I provides that following matters to be treated as supply without consideration

1. Permanent transfer/disposal of business assets.
2. Temporary application of business assets to a private or non-business use.
3. Services put to a private or non-business use.
4. Assets retained after deregistration.
5. Supply of goods and / or services by a taxable person to another taxable or nontaxable person in the course or furtherance of business.

 Provided that the supply of goods by a registered taxable person to a job-worker in terms of section 43A shall not be treated as supply of goods.

The condition regarding transaction executed in the furtherance of business or not has been attached with individual instance. Take for example, condition 5 provides that transaction should be in course of furtherance of business and rest of the other four conditions do not provide any such clause.

The detailed understanding of such clauses is as follows:

1. Permanent transfer/disposal of business assets: This would cover instances where there is permanent transfer of business asset or disposal of business asset without consideration to any person. This is a deemed provision inserted with a view to cover primarily situations, wherein Input Tax Credit has been availed by the assessee and there is permanent transfer/disposal of business assets without consideration. For eg. Goods given to any person without consideration or consumed by the owner of the business without any consideration.

2. Temporary application of business assets to a private or non-business use: This scenario covers situations where the business assets i.e. fixed assets, stock or vehicle or equipment have been used for a temporary basis for private or non-business use. For eg. Car is provided for 15 days free of cost to the director.

3.Services put to a private or non-business use: This scenario is similar to the one above with only difference being that the above clauses covered business assets and present clause covers services. An example of the same can be where the services of architect firm are provided free of cost to the partner.

4.Assets retained after deregistration: The concept is somewhat similar to the first one where the business assets are permanently transferred or disposed off. In the given case, the assets are retained after deregistration. For eg. The assessee has claimed Input Tax Credit on certain goods and has now retained the goods after deregistration. Therefore, such goods which were retained after deregistration would be treated as supply under schedule I.

5. Supply of goods and / or services by a taxable person to another taxable or nontaxable person in the course or furtherance of business: This one is of course the most contentious one. This clause provides that goods/services supplied by a taxable person in the course or furtherance of business to another taxable or non taxable person without consideration would be treated as deemed supply. Some of the instances are as follows:

• Free lunches provided to the employees
• Supply of goods between one branch situated in Rajasthan and another branch situated in Maharashtra of same person
• Services provided by an architect to his client for free
• Goods supplied by Kirana shop owner to his customer free of cost under the scheme of “buy one get one free”.

• Why such condition of taxation of free supplies and goods and/or services used for personal or non-business use

We need to understand that why it was necessary to incorporate such condition in the GST Law that transactions would be treated as supply even though no consideration has been involved. GST is a concept of Value Added Tax where each and every person has to pay tax on the value addition made by him and thus it ensures that each and every person in the supply chain pays tax to the extent of value added by him, till the goods and/or services reach the final destination.

Out of the 5 transactions covered, four conditions relate to cases where the goods and/or services are used for personal or non-business use. The Fifth condition pertains to cover the transactions carried out as Free of Cost.

In either of the cases, Input Tax Credit would have been availed by the person once the goods and/or services were procured. Therefore, the rationale of bringing the above five conditions is to either tax the personal use as Input Tax Credit has been utilized or maintain the continuity in the supply chain till the goods and/or services reach the end customer.

Thus, these transactions have been covered to ensure that the supply chain in GST is not broken and to ensure that tax is levied at every point till the goods/services reach to the end customer in the supply chain.

• Consequences of Inclusion of supplies made without consideration under Supply

The concept under Value Added Tax was that if the goods have been used otherwise than for sale, then the credit used to be reversed taken on the goods purchased during the course of business. But under GST Draft Law, the lawmakers have intended to cover every transaction in the GST Net under the meaning of supply and rather than inserting the provision for reversal of the tax credit have brought in the concept of deemed taxation of free supplies to maintain continuity in supply chain.

This would be creating lot of legal issues and valuation problems to how to value such goods and/or services provided free of cost to any person in the course of business.

Suppose, a lawyer provides services free of cost to his father. Now this transaction would also be covered under GST and how one would be valuing such transaction and supposedly valued to the best of his knowledge by the assessee, whether department would be readily accepting the valuation and why would any person pay such a tax and who would pay the tax. These are some of the issues associated with such taxation.

In the next post, I would be covering, one of the key aspects of GST wherein, the lawmakers of sought to classify goods and services. Strange Enough.