Abdulla Pettiwala

The Goods and Services Tax (‘GST’) seeks to levy tax on supply of all goods and services.

  • Supply under GST Law

The term “supply” has not been defined under the GST Law. The scope of supply has been provided under section 7 as

7. (1) For the purposes of this Act, the expression “supply” includes––

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

(b) import of services for a consideration whether or not in the course or furtherance of business;

(c) the activities specified in Schedule I, made or agreed to be made without a consideration; and

(d) the activities to be treated as supply of goods or supply of services as referred to in Schedule II.

(2) Notwithstanding anything contained in sub-section (1),––

(a) activities or transactions specified in Schedule III; or

(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.

(3) Subject to the provisions of sub-sections (1) and (2), the Government may, on the recommendations of the Council, specify, by notification, the transactions that are to be treated as—

(a) a supply of goods and not as a supply of services; or

(b) a supply of services and not as a supply of goods.

We shall now take up each of the components, viz. (a) Goods and (b) Services individually

  1. Goods under GST Law

“Goods” has been defined u/s 2(52) as

(52) “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;

  • Services under GST Law

“Services” has been defined u/s 2(102) as

(102) “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;

Explanation. – For the removal of doubts, it is hereby clarified that the expression “services” includes facilitating or arranging transactions in securities.

This Explanation was included wef 01-Feb-19.

Broadly,

  • all movable property other than money and securities is goods and
  • anything other than goods, money and securities is defined as services.

Money and Securities have been excluded from the definition of goods as also services. However, activities relating to the use of money or its conversion from one form to another for which a separate consideration is charged is included under the definition of services.

The definition of services includes activities in relation to money or its conversion since 01-Jul-17

The ‘clarificatory explanation’ inserted vide CGST(Amendment)Act 2018, effective 01-Feb-19 seeks to include facilitating or arranging transactions in securities within the definition of services.

Thus, the activities in relation to money and the facilitation or arrangement of transactions in securities come within the ambit of the GST Law.

The path which money and securities take under the GST law thus become distinct and this is the course we shall be navigating in this article, with an attempt to reach a common or different destination(s).

  • Other relevant Definitions

The other relevant definitions under Section 2 of CGST Act, required for this article, are “taxable supply”, “non-taxable supply” and “exempt supply”

(47) “exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply;

(78) “non-taxable supply” means a supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act;

(108) “taxable supply” means a supply of goods or services or both which is leviable to tax under this Act;

  • Value of taxable supply

The “value of taxable supply” has been provided u/s 15 of the CGST Act:

15. (1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

(2) …..

(3) ……

(4) Where the value of the supply of goods or services or both cannot be determined under sub-section (1), the same shall be determined in such manner as may be prescribed.

(5) Notwithstanding anything contained in sub-section (1) or sub-section (4), the value of such supplies as may be notified by the Government on the recommendations of the Council shall be determined in such manner as may be prescribed.

  • Money:

“Money” is defined u/s 2(75) of the CGST Act as

(75) “money” means the Indian legal tender or any foreign currency, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value;

Exchange of money on its own is excluded from the scope of GST other than the activities relating to the use of money or its conversion from one form to another for which a separate consideration is charged.

“Consideration” has been defined u/s 2(31) as

(31) “consideration” in relation to the supply of goods or services or both includes––

(a) 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;

(b) 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, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:

Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;

Activities in relation to use of money would cover all financial activities including the business of banking and finance companies including interest on loans and advances.

Notification 12/2017 dated 28-Jun-17 is an exemption notification which exempts interest on loans and advances as also sale or purchase of foreign currency between banks and dealers.

Sl. No. Chapter, Section, Heading, Group or Service Code (Tariff) Description of Services Rate (per cent) Condition
(1) (2) (3) (4) (5)
27 Heading 9971 Services by way of— (a)   extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount (other than interest involved in credit card services); (b)   inter se sale or purchase of foreign currency amongst banks or authorised dealers of foreign exchange or amongst banks and such dealers. Nil Nil

Para 2 (zk) defines “interest” as

(zk) “interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised;

Interest charged on credit cards loans is taxable supply.

Interest on other loans and advances is exempt from GST.

Conversion from one form to another where a separate consideration is charged would include the buying and selling of foreign currency between dealer and customer.

The value of supply in sale of foreign currency has been prescribed under Rule 32 of CGST Rules relating to Determination of value in respect of certain supplies

32. (1) Notwithstanding anything contained in the provisions of this Chapter, the value in respect of supplies specified below shall, at the option of the supplier, be determined in the manner provided hereinafter.

(2) The value of supply of services in relation to the purchase or sale of foreign currency, including money changing, shall be determined by the supplier of services in the following manner, namely:—

(a) for a currency, when exchanged from, or to, Indian Rupees, the value shall be equal to the difference in the buying rate or the selling rate, as the case may be, and the Reserve Bank of India reference rate for that currency at that time, multiplied by the total units of currency:

Provided that in case where the Reserve Bank of India reference rate for a currency is not available, the value shall be one per cent of the gross amount of Indian Rupees provided or received by the person changing the money:

Provided further that in case where neither of the currencies exchanged is Indian Rupees, the value shall be equal to one per cent of the lesser of the two amounts the person changing the money would have received by converting any of the two currencies into Indian Rupee on that day at the reference rate provided by the Reserve Bank of India:

Provided also that a person supplying the services may exercise the option to ascertain the value in terms of clause (b) for a financial year and such option shall not be withdrawn during the remaining part of that financial year.

(b) at the option of the supplier of services, the value in relation to the supply of foreign currency, including money changing, shall be deemed to be—

(i) one per cent of the gross amount of currency exchanged for an amount up to one lakh rupees, subject to a minimum amount of two hundred and fifty rupees;

(ii) one thousand rupees and half of a per cent of the gross amount of currency exchanged for an amount exceeding one lakh rupees and up to ten lakh rupees; and

(iii) five thousand and five hundred rupees and one tenth of a per cent of the gross amount of currency exchanged for an amount exceeding ten lakh rupees, subject to a maximum amount of sixty thousand rupees.

(3) …….

(4) ………

(5) ……..

(6) ……..

(7) The value of taxable services provided by such class of service providers as may be notified by the Government, on the recommendations of the Council, as referred to in paragraph 2 of Schedule I of the said Act between distinct persons as referred to in section 25, where input tax credit is available, shall be deemed to be NIL.

Thus, GST on exchange of foreign currency would be:

18% on (Rate of exchange (-) RBI reference Rate)

OR

18% on (1% of the INR value of currency exchanged)

OR

i) For exchange upto INR 1 lac – 18% on {(1% of INR value) [Min 250]}

ii) For exchange upto INR 10 lacs – 18% on (1000 (+) 0.5% of INR value)

iii) For exchange above INR 10 lacs – 18% on {(2500 (+) 0.1% of INR value) [Max 6000]}

  • Securities:

“Securities” is defined u/s 2(101) as

(101) “securities” shall have the same meaning as assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956;

Section 2(h) of the Securities Contracts Regulation Act


(h) “securities” — include

(i)  shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ia) derivative;

(ib) units or any other instrument issued by any collective investment scheme to the investors in such schemes;

(ic) security receipt as defined in clause (zg) of section 2 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(id) units or any other such instrument issued to the investors under any mutual fund scheme;

Explanation —

For the removal of doubts, it is hereby declared

that “securities” shall not include any unit linked insurance policy or scrips or any such instrument or unit, by whatever name called, which provides a combined benefit risk on the life of the persons and investment by such persons and issued by an insurer referred to in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938);

  • Input Tax Credit  

Section 17 of the CGST Act in relation to Apportionment of Credits and Blocked Credits

17. (1) Where the goods or services or both are used by the registered person partly for the purpose of any business and partly for other purposes, the amount of credit shall be restricted to so much of the input tax as is attributable to the purposes of his business.

(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

(3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

(4) A banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or

advances shall have the option to either comply with the provisions of sub-section (2), or avail of, every month, an amount equal to fifty per cent. of the eligible input tax credit on inputs, capital goods and input services in that month and the rest shall lapse:

Provided that the option once exercised shall not be withdrawn during the remaining part of the financial year:

Provided further that the restriction of fifty per cent. shall not apply to the tax paid on supplies made by one registered person to another registered person having the same Permanent Account Number.

(5) …….

(6) ……

  • Input tax credit in relation to Securities

Securities per se is excluded from the scope of GST other than the facilitating or arranging transactions in securities.

The inclusion of transaction in securities as exempt supply for the purpose of apportionment of ITC leads us to Chapter V of the CGST Rules to determine the value of securities that needs to be included as exempt supplies.

Explanation 2 (b) to Chapter V of CGST Rules gives a deemed value to transaction in securities for the purpose of Sec 17(3)

Explanation.- For the purposes of this Chapter,-

(1) the expressions ―capital goods‖ shall include ―plant and machinery‖ as defined in the Explanation to section 17;

(2) for determining the value of an exempt supply as referred to in sub-section (3) of section 17

(a) the value of land and building shall be taken as the same as adopted for the purpose of paying stamp duty; and

(b)the value of security shall be taken as one per cent. of the sale value of such security.

In respect of securities the law takes a presumptive methodology to deny credit.

  • Input Tax Credits in relation to Money

Transaction in money whilst being excluded as such includes activities in relation to money and conversion within the definition of services.

Further, a specific exemption from levy of GST has been provided for interest on loans and advances as also transactions between banks and/or dealers for conversion of foreign currency.

Due to this exemption, Sec 17(2) gets triggered and hence in respect of transaction in money the law takes an apportionment route.

  • Divergence
  • The treatment of money and securities under the GST law is distinct even though both are sought to be excluded
  • The transaction in money is excluded however activities in relation to the use of money are services
  • The exemption on account of interest as per Notification 12/2017 leads to the ITC disallowance u/s 17(2) with some saving grace for lending business of banking and finance company u/s 17(4)
  • Securities was excluded from services until the clarificatory explanation introduced in Feb-19 whereby the transactions facilitation or arrangement in relation to securities was bought into the ambit of definition of services.

Thus, the common ITC would not suffer the ratio in case of income from securities as opposed to the income from interest on loans and deposits.