Supply without consideration under the GST and its taxability
As per Schedule 1 of GST, some specified transaction between the related person for no consideration shall be treated as supply under GST. The normal GST provisions are applicable to these supplies too.
Generally, the supply is between the related person that may be between a principal and agent or agent and principal etc. As these transactions between related parties are treated as a supply the taxpayer has to pay tax. However, they can claim input tax credit depending upon the criteria.
The following articles discuss about the cases where the transaction made without consideration under GST shall be deemed as supply.
The transactions between related person are important as the prices of the goods or services or both can be unfair when compared with the transactions between the two parties that are not related. As per GST, all the transactions are not deemed as supply without consideration between related parties until it is for the furtherance of business.
As per explanation to Section 15 of CGST Act, the following list consists of persons that are deemed to be related persons
• When the persons are the director or officer of a business/businesses are also the director or officer of another business/businesses
• Any persons who are legally recognized as partners in business
• When such person has employer and employee connection
• Any person who owns, controls and hold 25% share or voting power of both of them either directly or indirectly.(for example, the recipient holds the 25% of equity of the supplier’s business)
• When the affairs of business are controlled by one of the person either directly or indirectly.
• If both the persons involved in the transaction are in the control of a third person either directly or indirectly.
• If both the persons involved in the transaction controls the third person either directly or indirectly.
• When the persons are members of the same family.
The term “Person” also includes
• Legal persons
• Persons shall be deemed to be related who are associated in the business of one another where one is the sole agent/sole distributor/sole concessionaire or howsoever described of the other.
Moreover, there are some conditions that are applicable on the employer and employee relation that is if an employer gives a gift to the employee than it shall not be treated as supply without consideration providing that the value of gift shall be less than 50,000 INR.
The transactions between distinct person hold the same importance as in these transactions also the prices of the goods or services or both can be unfair when compared with the transactions between the two parties that are not related. As per GST, all the transactions are not deemed as supply without consideration between distinct persons until it is for the furtherance of business.
As per Schedule 1, the transfer of goods or services or both between distinct persons as specified in Section 25 without consideration shall be treated as supply.
Any imports carried out by a taxable person who receives the supply from a related person or from any outside/ abroad establishment whether for the furtherance of the business or not shall be treated as supply and the supply of such goods or services or both shall be taxable.
Assuming that XYZ is a company situated abroad, incorporated an X Ltd company in India. Then, XYZ supplied some goods to X Ltd in India for the furtherance of business. Such import shall be taxable.
Irrespective of threshold limit an agent shall be registered under GST. Any supply shall be considered as supply without consideration if it meets the following requirement:
• In case there is a supply from principal to an agent and where the agent agrees to supply goods on behalf of the principal.
• When there is a supply from agent to principal and where the agent accepts to receive such supply on behalf of the principal.
Any transfer or disposal of business assets where ITC was already taken/availed also falls under the supply without consideration criteria. The assets can be transferred or disposed from one business to another by any means which may include gifting, write-off, impairment etc. The transfer so made shall be permanent in nature in other words the goods shall be permanently transferred.
There are two cases where the value of supply is determined between related person
The open market value* of the product or services shall be considered as the value of supply between related persons. As the value of the supply can be influenced in the case of a related person. or
In case if the open market value of goods and services cannot be determined that the value of like quality and kind of goods and service shall be considered. or
Further, if the value of supply cannot be determined using the above two methods then the value of goods and services shall be determined either by cost or residual method as given in rule 30 and 31.
Note: In case if the person is eligible for 100% ITC then the invoice value is deemed to be the open market value.
Option: If the goods or services are further sold by the recipient then 90% selling price charged by the recipient to the buyer shall be considered as the value of supply.
To determine the value of supply in case if the goods are supplied between principal and agent then Open market value* of supply shall be considered.
If in case Open market value is not available then 90% of selling price charged by recipient to buyer.
Note: Even if the value cannot be determined using the above two methods then the value shall be determined as per rule 30 and 31.
*Open market value is the value of supply between supplier and recipient where these two entities are not related.