“Applicability of GST on supplies without consideration – An Analysis”

1
Customer Care No. 91-11-45562222
Applicability of GST on supplies without
consideration An Analysis
www.taxmann.com
2

• Introduction
• 1. We all understand that taxable event in case
  of GST is 'supply' of goods and/or services. The
  term 'supply', for all good reasons, is
  considered to be of much wider import than the
  term 'sale' or 'manufacture,' which is the
  taxable event in current indirect tax
  legislation. To cap it all, the term 'supply' has
  been defined in an inclusive manner under the
  Model GST Law. Therefore, we further need to look
  into the ordinary and natural meaning of the term
  supply, besides the prescribed inclusion list.So
  it won't be incorrect to say that sky probably is
  the limit. Is the apprehension justified or are
  we reading too much into something!

Customer Care No. 91-11-45562222
www.taxmann.com
3

• 2. The applicability of GST on specific business
  transactions made without consideration
• Free supplies on goods and/or services
• 2.1 Schedule I to the Model GST Act specifies the
  list of transactions which are considered as
  taxable supply, even if made without
  consideration. Amongst other transactions in the
  said list, "the supply of goods and/or services
  by taxable person to another taxable person or
  non-taxable person in course of or furtherance of
  business" are also considered as taxable.
• Now the general perception is that the free
  supplies will be separately valued and will get
  taxed in the hands of the consumer. However, one
  must understand that nothing in this world comes
  for free. The value of all the freebies, as a
  matter of fact, is already factored in while
  arriving at the transaction value of non-free
  goods and/or services. The onus, however, would
  be on the taxpayer to prove that the cost of free
  supplies has already been included in the
  transaction value of non-free supplies and
  corresponding GST has been discharged.
• Furthermore, as per clause 15(1) of the Model GST
  Law, the value of a supply of goods and/or
  services shall be the transaction value, that is
  the price actually paid or payable for the said
  supply of goods and/or services where the
  supplier and the recipient of supply are not
  related and the price is the sole consideration
  for supply. Going by the stated provision, it can
  squarely be said that where buyer and seller are
  not related and where price is the sole
  consideration, the value of the goods and/or
  services is the value which is paid or payable by
  the buyer, which happens to be ZERO in this case.
  If the value of taxable supplies is zero, the
  corresponding GST shall also be ZERO.

Customer Care No. 91-11-45562222
www.taxmann.com
4

• This view is squarely in line with the current
  service tax law, where section 67(1)(iii) of the
  Finance Act, 1994 and the Service Tax
  (Determination of Value) Rules, 2006, finds
  application only when consideration is not
  ascertainable. Therefore, if consideration is
  zero, i.e., in case of free services, section 67
  and service tax valuation rules, cannot apply as
  consideration is ascertainable but zero. Thus, no
  service tax is payable when value of services is
  ZERO, as the charging section 66B provides that
  service tax is chargeable on the value of taxable
  service. However, the principle applies only when
  there is really a free service and not when its
  cost is recovered through other means.
• Notice pay recovery from employee
• 2.2. It is a supply of service of "tolerating an
  act or a situation" provided by an employer to an
  employee (clause 5(e) of Schedule II, which
  covers matters to be treated as deemed supply of
  goods and/or services). What when the employer
  does not enforce notice period recovery from an
  employee. In such a situation, it squarely gets
  covered under Schedule I and is to be considered
  as a free supply, as it is a supply of services
  by a taxable person to a non-taxable person in
  course of or furtherance of business, as
  discussed above. Further, drawing analogy from
  the above discussion, can this be considered as
  supply with zero transaction value and,
  accordingly, zero tax or maybe not. The supplier
  and the recipient in this case are the related
  parties as defined under clause 2(82) of the
  Model GST Law. Therefore, one has to consider the
  valuation rules to ascertain the taxable value.
  There is a good chance that this transaction will
  get valued at the actual recovery due from the
  employee and will get taxed. Moreover, recovering
  such amount from the employee would be as harsh
  as anything or in case of a buyout will the
  buying company get the credit of the Service Tax,
  is something which remains to be seen. May be
  yes, if such buyout amount becomes a part of
  employee's salary.
•  

Customer Care No. 91-11-45562222
www.taxmann.com
5
To read more, please click here
Customer Care No. 91-11-45562222
www.taxmann.com