Goods and Services Tax

GST on free supplies by customers

Goods and Services Tax – GST – By: – CA Venkata prasad Pasupuleti – Dated:- 12-6-2018 – Introduction: It is common practice prevailing in many industries that certain materials are provided by the customer to the manufacturer or contractor. This is done for various business or economic reasons. For example, moulds, jigs and dies etc., are provided by the Original Equipment Manufacturers (OEM) to a component manufacturer in the automobile industry. Similarly, the client would be supplying the steel and cement to the contractor in the construction contracts. Let us say, the contract price for the building construction is 10 crores wherein the contractor has to incur all the cost. Instead of this, it may be agreed that the cement & steel are to be supplied by the client and contractor would execute the work using the same thereby bringing down the contract price to ₹ 7 crores. In the first case, the Government would be able to levy a tax on entire ₹ 10 crores thereby earn

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IGST). To determine whether free supplies are to be includible in the taxable value or not, the primary question to be answered is whether price agreed in the contract (wherein the price of free supplies is not factored) would constitute the consideration at first instance and thereby to construe the same as sole consideration and accordingly the provisions of section 15, ibid qua Transaction value can be adopted. Section 2(31) defines consideration which reads as follows: consideration in relation to the supply of goods or services or both includes- any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both,

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uable benefit passed on by the promisor to the promisee or by the transfer of to the transferee. . The rationale of this decision was discussed & applied even in the context of service tax [Bhayana Builders Pvt. Ltd. v. Commissioner – 2013 (9) TMI 294 – CESTAT NEW DELHI (LB) = 2013 (32) S.T.R. 49 (Tribunal-LB)]. A similar view was expressed under Central Excise law by the Hon ble Supreme court in case of Commissioner v. Fiat India Pvt. Ltd. – 2012 (8) TMI 791 – SUPREME COURT = 2012 (283) E.L.T. 161 (S.C.) (Para 58). Thus, any consideration whether monetary or otherwise should have flown or should flow from the payer to the payee and should accrue to the benefit of the later. The holistic reading of the definition given under GST (extracted supra) also gives similar meaning as explained by the Hon ble supreme court. The above theory remains unchanged and does not get affected even after applying the inclusive part of the consideration definition as it attempts to cover the payments/

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xes (Central Excise, VAT, service tax etc.,) the taxable events are restrictive in the gamut of entire supply chain and governed by the different laws and of course by the different Governments (Centre or State). For instance, the Central Excise can be levied only at the stage of manufacture , VAT only at the time of sale . Because of this restrictive application and in order to avoid the revenue leakage, the old laws attempted to tax the free supplies . However, as GST is levied on the common taxable event known as supply across the entire supply chain and leviable at all stages and the tax charged by the supplier is anyway available as input tax credit (ITC) to the recipient (except when the ITC is specifically restricted or recipient engaged in exempted supplies or unregistered etc.,). Thus, there is very less chance for revenue leakage. Hence, the rationale of the old laws attempts to tax the free supplies would not hold water under GST and may run against the objective of GST to a

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o a component manufacturer (the two not being related persons or distinct persons) on FOC basis does not constitute a supply as there is no consideration involved. Further, since the moulds and dies are provided on FOC basis by the OEM to the component manufacturer in the course or furtherance of his business, there is no requirement for reversal of input tax credit availed on such moulds and dies by the OEM. 1.2 It is further clarified that while calculating the value of the supply made by the component manufacturer, the value of moulds and dies provided by the OEM to the component manufacturer on FOC basis shall not be added to the value of such supply because the cost of moulds/dies was not to be incurred by the component manufacturer and thus, does not merit inclusion in the value of supply in terms of section 15(2)(b) of the Central Goods and Services Tax Act, 2017 (CGST Act for short). 1.3 However, if the contract between OEM and component manufacturer was for supply of component

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