Normally, supply requires consideration under Section 7(1)(a). Schedule I of the CGST Act, however, creates statutory exceptions where certain activities are treated as supply even if there is no consideration. This is a powerful anti-avoidance and revenue-protection provision.
Legal Basis
Finance Act 2021 inserted Section 7(1)(aa), which states that the activities referred to in Schedule I shall be treated as supply even if made without consideration. The four clauses of Schedule I cover specific business and non-arm's length situations.
Clause 1: Permanent Transfer or Disposal of Business Assets
Where a person permanently transfers or disposes of business assets on which input tax credit has been availed, the transfer is treated as a supply of goods or services even if no consideration is received.
Key points:
- The asset must have been used in the business and credit must have been claimed on it.
- If credit was not claimed on the asset, this clause may not apply, though the transaction may still be taxable under Schedule II if it involves transfer of goods.
- The supply is valued under Section 15 and the GST Rules.
- Examples include donating old machinery to a charity, giving away used furniture, or scrapping goods without sale.
Clause 2: Supply Between Related Persons or Distinct Persons
Supply of goods or services between related persons, or between distinct persons as specified in Section 25, when made in the course or furtherance of business, is a supply even without consideration.
Distinct persons arise when a single legal entity has separate registrations in different States or Union Territories. Section 25(4) requires separate registration for each State, and Section 25(5) treats these registrations as distinct persons.
Related persons are defined under explanation to Section 15. They include persons who are officers or directors of each other's businesses, legally recognised partners, employer and employee, persons directly or indirectly holding 25% or more voting rights, persons under common control, and members of the same family.
Practical impact: inter-branch stock transfers, supply of services from head office to branch, and transactions within group companies are taxable even without consideration.
Clause 3: Principal-Agent Transactions
Schedule I treats the following as supply without consideration:
- Supply of goods by a principal to an agent where the agent undertakes to supply such goods on behalf of the principal.
- Supply of goods by an agent to a principal where the agent undertakes to receive such goods on behalf of the principal.
This is common in consignment and commission arrangements. Even though the ownership of goods does not change, the transaction is deemed a supply.
Clause 4: Import of Services
Import of services by a taxable person from a related person located outside India, or from any of the taxable person's establishments outside India, in the course or furtherance of business, is treated as supply even without consideration.
This means a branch or subsidiary receiving services from its foreign parent or another foreign branch may have a GST reverse charge liability even if no payment is made.
Valuation of Schedule I Supplies
Since there is no transaction value in many Schedule I supplies, valuation must follow Rule 28 of the CGST Rules:
- Open market value of the supply.
- If open market value is not available, the value of supply of goods or services of like kind and quality.
- If both are not available, 110% of the cost of production or acquisition or cost of provision of services.
- Alternatively, a reasonable cost plus margin may be used if the first three methods fail.
For distinct persons, the supplier may issue a tax invoice and the recipient distinct person can claim ITC, subject to the invoice being uploaded and tax paid. This makes the transaction revenue-neutral in many domestic branch transfer cases but still requires documentation.
Compliance Requirements
Schedule I supplies must be reported in GSTR-1, tax must be paid in GSTR-3B, and valuation must be documented. E-way bills may be required for goods movement. Failure to report can lead to demands under Section 73 or Section 74.
How Anuj Desai & Associates Can Help
We help clients identify Schedule I exposures, value deemed supplies correctly, issue proper invoices between distinct persons, manage related-party transfer pricing alignment and defend assessments.
Contact Anuj Desai & Associates
Email: office@anujdesaiassociates.com
Phone: 9619456656
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