Scope of Supply under GST Act: Section 7 of the CGST Act

The scope of "supply" is the starting point for determining whether an activity or transaction falls within GST. Section 7 of the Central Goods and Services Tax Act, 2017 covers supplies made for consideration in the course or furtherance of business, specified transactions between persons and members, imports of services for consideration, and Schedule I activities made without consideration.

Meaning of Supply under Section 7(1)

For GST purposes, the expression "supply" is inclusive. The principal categories presently covered by section 7(1) are:

Common Forms of Supply

1. Sale

A sale is one of the express forms of supply mentioned in section 7(1)(a). A taxable sale is ordinarily examined with reference to consideration, business nexus, classification, place and time of supply, exemptions and rate provisions.

2. Transfer

A transfer may constitute supply where the requirements of section 7 are satisfied. Transfer of business assets can also fall within Schedule I in specified circumstances even when no consideration is charged.

3. Barter

Barter involves exchange of goods or services for other goods or services rather than money. Section 7 expressly includes barter within the forms of supply.

4. Exchange

An exchange is also expressly included in section 7(1)(a). The fact that consideration is not entirely monetary does not by itself take a transaction outside GST.

5. Licence, Rental and Lease

Licence, rental and lease are expressly included as forms of supply. Schedule II is relevant for classification after the transaction has first qualified as a supply. For example, transfer of a right in goods without transfer of title is treated as a supply of services, while transfer of title in goods is treated as a supply of goods. Lease, tenancy, easement or licence to occupy land is treated as a supply of services under Schedule II.

6. Disposal

Disposal is another form expressly mentioned in section 7(1)(a). In addition, permanent transfer or disposal of business assets where input tax credit has been availed is covered by Schedule I and can therefore be treated as supply even without consideration.

Essential Tests under Section 7

For the ordinary category under section 7(1)(a), the following questions are important:

• Is there a supply of goods, services or both?
• Is the transaction a sale, transfer, barter, exchange, licence, rental, lease, disposal or another form of supply?
• Is there consideration?
• Is the supply made by a person in the course or furtherance of business?
• Does any specific inclusion in section 7(1), Schedule I or another provision apply?
• Is the activity excluded by section 7(2) or Schedule III?

Supply without Consideration: Schedule I

Schedule I identifies activities that can be treated as supply even when no consideration is charged. Important categories include:

• Permanent transfer or disposal of business assets where input tax credit has been availed on those assets.
• Supplies of goods or services or both between related persons or distinct persons under section 25 when made in the course or furtherance of business, subject to the statutory employee-gift exception.
• Specified supplies of goods between a principal and agent where the agent undertakes to supply or receive goods on behalf of the principal.
• Import of services by a person from a related person or from any of that person's establishments outside India in the course or furtherance of business.

Transactions between Clubs, Associations and Members

Section 7(1)(aa), inserted with retrospective effect from 1 July 2017, specifically covers activities or transactions by a person other than an individual to its members or constituents, or vice versa, for cash, deferred payment or other valuable consideration. For this purpose, the law treats the person and its members or constituents as separate persons.

Import of Services for Consideration

Under section 7(1)(b), import of services for consideration is a supply whether or not it is in the course or furtherance of business. Accordingly, the business-nexus requirement applicable to the ordinary category in section 7(1)(a) is not imposed by section 7(1)(b). Actual tax liability must still be examined under the IGST Act, place-of-supply rules, exemptions and other applicable provisions.

Role of Schedule II

Section 7(1A) provides that once an activity or transaction constitutes a supply under section 7(1), it is treated as a supply of goods or a supply of services as referred to in Schedule II. Schedule II therefore performs a classification function; it does not by itself create a supply where section 7(1) is not satisfied.

Activities Treated as Neither Goods nor Services: Section 7(2) and Schedule III

Section 7(2) overrides section 7(1) for specified activities. Schedule III presently includes, among other matters:

• Services by an employee to the employer in the course of or in relation to employment.
• Services by a court or Tribunal established under law.
• Specified constitutional and public-office functions.
• Funeral, burial, crematorium or mortuary services, including transportation of the deceased.
• Sale of land and, subject to Schedule II, sale of building.
• Actionable claims other than specified actionable claims.
• Supply of goods from one place outside India to another place outside India without the goods entering India.
• Specified supplies of warehoused goods before clearance for home consumption and specified high-sea-sale transactions.
• Specified apportionment of co-insurance premium and specified reinsurance/ceding commission transactions, subject to the statutory tax-payment conditions.

Specified Actionable Claims

Following the 2023 amendments, the Act uses the expression specified actionable claim for actionable claims involving betting, casinos, gambling, horse racing, lottery or online money gaming. Schedule III excludes actionable claims other than specified actionable claims from supply.

Free Samples and Promotional Schemes under GST

CBIC Circular No. 92/11/2019-GST clarifies that goods or services supplied completely free of cost and without consideration generally do not qualify as supply, unless the transaction falls within Schedule I.

The same circular explains that input tax credit is restricted under section 17(5)(h) to the extent inputs, input services and capital goods are used in relation to gifts or free samples disposed of without consideration. Where the distribution itself qualifies as supply under Schedule I, the input tax credit position is different and must be examined accordingly.

Buy One, Get One Free Offers

The circular also distinguishes genuine free samples from "buy one, get one free" promotions. Such an offer may in substance involve two or more supplies for a single price rather than a separate free supply. Tax treatment then depends on whether the arrangement is a composite supply, mixed supply or otherwise taxable under the applicable provisions.

Government and Public-Authority Activities

Section 7(2)(b) also enables specified activities or transactions undertaken by the Central Government, State Government or a local authority as public authorities to be treated neither as a supply of goods nor a supply of services when duly notified on the recommendations of the GST Council.

Practical Checklist: Does a Transaction Constitute Supply?

1. Identify the goods, services or both involved.
2. Check whether consideration exists and whether the activity is in the course or furtherance of business.
3. Check the special inclusions in sections 7(1)(aa), 7(1)(b) and Schedule I.
4. Check whether section 7(2) or Schedule III excludes the activity from supply.
5. If it is a supply, use Schedule II where relevant to classify it as goods or services.
6. Then determine place of supply, time of supply, value, exemption, rate, reverse charge and person liable to pay tax under the applicable provisions.

Official GST Resources

Author: Vaishak O