Detailed Notes on "Supply" Under GST (Section 7 of the CGST Act)
GST (Goods and Services Tax) is levied on the event of "Supply." Section 7 of the CGST Act,
2017, defines Supply, its scope, and exceptions in detail. Here's a detailed breakdown of the
concept with comprehensive explanations and examples:
1. Definition of Supply (Section 7(1))
The term Supply is broadly defined to include a variety of transactions involving goods or
services, or both. For a transaction to qualify as a supply, the following key conditions must be
met:
Consideration: The transaction should involve some form of payment (money or
otherwise).
Course or Furtherance of Business: It should be carried out as part of business
operations.
1.1 Supply Includes (Section 7(1)(a)):
This covers all forms of supply, such as:
Sale: The transfer of ownership in exchange for money.
o Example: Selling a laptop in a retail store.
Transfer: Transfer of rights without transferring ownership.
o Example: Renting out a photocopy machine for business use.
Barter: Exchange of goods or services without involving money.
o Example: A carpenter repairing furniture for a farmer in exchange for crops.
Exchange: Similar to barter but with a monetary adjustment.
o Example: Trading an old car for a new one with a balance payment.
License: Providing rights to use property or services.
o Example: Granting a license to use software.
Rental: Leasing goods or property for a fixed period and payment.
o Example: Renting out a banquet hall for an event.
Lease: Long-term rental agreements with specified terms.
o Example: Leasing an industrial machine for five years.
Disposal: Permanent removal of goods from the business.
o Example: Selling scrap material as waste.
1.2 Activities Between Members and Entity (Section 7(1)(aa)):
Introduced to clarify that activities between an entity and its members are deemed as
supply.
The law treats the entity and its members as separate persons.
Example:
o A club organizing events and charging fees from its members.
o A cooperative society providing services to its members for a fee.
Key Point: Even if these activities are governed by separate laws (e.g., Cooperative Societies
Act), GST still applies.
1.3 Import of Services (Section 7(1)(b)):
Import of services is considered supply when performed for consideration, irrespective
of its purpose.
Examples:
o A company hiring a foreign consultant for business advice.
o An individual subscribing to an international online course.
1.4 Deemed Supply Without Consideration (Section 7(1)(c) with Schedule I):
Certain activities, even without consideration, are treated as supply under Schedule I:
(a) Permanent Transfer or Disposal of Business Assets:
Applicable when ITC (Input Tax Credit) was claimed on those assets.
o Example: A business donates its old office equipment to a charity after claiming
ITC.
(b) Transactions Between Related Persons or Distinct Persons:
Related persons include branches of the same entity or close family members.
o Example: Transferring goods from the Delhi branch to the Mumbai branch of the
same company.
(c) Supply Between Principal and Agent:
Transactions involving goods handed over by a principal to their agent, or vice versa, for
sale.
o Example: A distributor receiving goods from the manufacturer for further sale.
(d) Importation of Services Without Consideration:
When services are imported for business use, they are considered supply.
o Example: A company availing free software updates from its overseas partner.
2. Exclusions: What is NOT Considered Supply (Section 7(2))
2.1 Schedule III Activities:
These activities are neither supply of goods nor services:
Services by Employee to Employer:
o Example: A salary paid to an employee for their work.
Sale of Land or Completed Buildings:
o Example: Selling a fully constructed residential house.
Actionable Claims (other than betting, gambling, or lottery):
o Example: Life insurance proceeds or claims under a will.
2.2 Government Activities as Public Authorities:
Activities performed by the government in its official capacity are excluded.
o Example: Issuing a passport or granting a trade license.
3. Classification of Supply (Section 7(1A) and Schedule II)
Certain activities are specifically classified as supply of goods or supply of services
under Schedule II.
3.1 Supply of Goods:
Transfer of Ownership in Goods:
o Example: Selling a car with full ownership rights.
Hire-Purchase Transactions:
o Example: Buying machinery on a hire-purchase agreement.
3.2 Supply of Services:
Lease or Renting of Immovable Property:
o Example: Renting office space for commercial purposes.
Works Contract:
o Example: Building a factory for a client, which involves both goods (cement,
steel) and services (construction).
4. Composite and Mixed Supplies (Section 8)
4.1 Composite Supply:
Two or more supplies naturally bundled and supplied together.
Tax Rate: The principal supply's tax rate applies.
o Example: A flight ticket that includes onboard meals.
4.2 Mixed Supply:
Two or more supplies sold together but not naturally bundled.
Tax Rate: The highest applicable rate among the items in the bundle.
o Example: A combo offer of a watch and perfume.
5. Key Examples for Understanding Supply
Type of Supply Example
Sale Selling a refrigerator in a store.
Transfer Renting out an air conditioner for a fixed period.
Providing web design services in exchange for free office
Barter
furniture.
Exchange Trading an old car for a new one and paying the price difference.
Lease Leasing a truck for transportation purposes.
Disposal Selling used machinery as scrap.
Import of Services Hiring a foreign architect for building designs.
Supply Without Donating goods from inventory to a related entity after claiming
Consideration ITC.
