Transactions Treated as Supply under GST Even If Made Without Consideration

Transactions between related persons and other activities of the Schedule I under the CGST Act will be treated as supply even if made without any consideration. This article deals with transactions between related persons and other such activities that are treated as ‘Supply’ under GST even if made without consideration. GST will be applicable to these transactions. 

These activities are listed in the Schedule I of the CGST Act. These transactions are mostly between parties which are related or between an agent and a principal. The parties pay GST and can later claim it as input tax credit.

Latest Updates on Supply under GST

21st December 2021
Paragraph 7 under Schedule II has been removed and included within Section 7 as a new clause (aa). Accordingly, the supply of goods by any unincorporated association or body of persons to its members will be designated as supply.

1st February 2021
Union Budget 2021:
Section 7 of the CGST Act was amended to include a new clause under the definition of supply. Activities or transactions involving the supply of goods or services by any person, other than an individual, to its members or constituents or vice-versa, for cash, deferred payment or other valuable consideration. Earlier, this supply would have been considered as only supply of goods under schedule II. So, the scope is expanded now for levy.

Transactions between Related Persons

Transactions between related parties are of special importance under any law as the pricing methodologies and arriving at them are challenging. When parties are related, the prices are controlled and they would not sometimes be the prices that would have otherwise been charged, had the transaction taken place between unrelated parties.

Let’s understand how to treat transactions between related persons under GST, when would such a supply be taxable and how it is valued as per the GST laws.

Who is a related person under GST?

Related persons are defined u/s 2(84) of the GST Act. Persons shall be deemed to be related if they fall under any of the categories below:

• Officer or director of one business is the officer/ director of another business
• Businesses legally recognised as partners
• An employer and an employee
• Any person who holds at least 25% of shares in another company, either directly or indirectly
• One of them controls the other directly or indirectly
• They are under common control or management
• The entities together control another entity
• The promoters or managerial persons are members of the same family

Persons include a legal person who can be individuals, HUF, company, firm, LLP, co-operative society, a body of individuals, local authority, government, or an artificial juridical person. It also includes entities incorporated outside India. Persons who are associated with one another’s business or is a sole agent or sole distributor or sole concessionaire shall be deemed to be related.

What is the taxability of supply made between related persons?

Supplies between the related persons with consideration in arm’s length shall constitute as ‘Supply’ like any other transaction. Whereas, the supply made between related persons for inadequate or no consideration is covered under Schedule I of the GST Act. Such transactions shall be treated as ‘Supply’ only if it happens in the course or furtherance of business.

Further, when an entity makes an import of service from a related person or establishment outside India (without consideration) but for doing business, it shall be considered as a supply. 

Exception: Relief has been given where an employer gifts his employee and the value of the gift is less than Rs. 50,000. It is not considered a supply.

Valuation of transactions between related persons?

Value of supply between related persons (other than supply made through an agent) is determined as below:

• Open market value of such supply- Open market value is the value of the supply between two unrelated entities. When a supply is between two related entities, there is a high possibility that the prices will be influenced by their relationship.

For example, A Ltd. sells goods to B Ltd. (related entity) at Rs. 1,000 and to C Ltd. (unrelated entity) at Rs. 1,500. In this case, we can say that the relationship has influenced the pricing of A Ltd. Hence, for the purpose of valuation, Rs. 1,500 will be considered.

• If the open market value cannot be determined, then the value of goods of like kind and quality shall be considered.

If A Ltd. was making entire sales to B Ltd, then the above method of valuation would not be appropriate. Then, we could consider D Ltd. who sells similar goods as A Ltd. at Rs. 1,200. Hence, the valuation for this purpose would be Rs. 1,200.

• If both the above methods do not give an appropriate value, then a value based on cost (total cost of production) or under the residual method can be taken.

Supply of Goods via Agent

1. By a principal to his agent and the agent will supply them on behalf of the principal. For example, a company based in Mumbai employs an agent in Pune (Maharashtra) and sends goods to him. GST is applicable. 

2. By an agent to his principal when the agent receives these goods on behalf of the principal. 

For example, a company in the suburbs employs an agent in the city. The agent buys goods from the city and sends them to the principal to sell in the suburbs. Any supplies between agent and principal will be liable to GST. Both agent and principal will be liable to pay GST jointly & severally. The person paying GST can later claim the input tax credit.

The value of supply to an agent is also based on the above provisions for related persons.

Taxable Person Importing Services From a Related Person

Import of services by a taxable person from a related person or from any of his other establishments outside India, for business purposes, will be treated as supply. For example, ABC Inc. is incorporated in the US by A Ltd. along with B Ltd. both from India. Services are imported by B Ltd from ABC Inc. without any consideration, the import will be deemed to be a supply. GST will be paid by B Ltd. on a reverse charge basis.

Permanent Transfer of Business Assets where ITC has Been Availed on Such Assets

Permanent transfer or sale of business assets on which input tax credit has been availed will also be treated as supply even if there is no consideration received. GST is applicable to the sale of business assets only. It does not apply to the sale of personal land or building and other personal assets. “Permanent transfer” means transfer without any intention of receiving the goods back. 

Goods sent on job work or goods sent for testing or certification will not qualify as supply as there is no permanent transfer. Donation of business assets or scrapping or disposal in any other manner (other than as a sale – i.e., for a consideration) would also qualify as ‘supply’, where input tax credit has been claimed. 

For better understanding, Read  more related articles:

• Distinct persons under GST, It’s taxability and Importance
• Cases when Supply without consideration between some persons is taxable