Updated on: Jan 12th, 2022
8 min read
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.
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 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.
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:
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.
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.
Value of supply between related persons (other than supply made through an agent) is determined as below:
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 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.
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.
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 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: