Understanding Supply under GST: Definition, Scope, and Categories

Understanding Supply under GST: Definition, Scope, and Categories
 

Under the GST regime, “supply” of goods or services (or both) is the taxable event. Section 7 of the CGST Act, 2017 defines “supply” very broadly: it includes all forms of supply such as sale, transfer, barter, exchange, license, rental, lease or disposal, whether made or agreed to be made for a consideration, by a person in the course or furtherance of business . This scope is very wide – even
the import of services for a consideration is treated as supply . Certain activities are deemed to be supply even if no money changes hands. In addition, Section 7(1A) (as amended in 2018) clarifies whether a transaction is a supply of goods or of services based on Schedule II. Conversely, Schedule III lists specific activities that are neither supply of goods nor supply of services .

The CGST/SGST Acts (and corresponding IGST provisions) thus set out the taxable scope of GST. A simplified breakdown of supply categories is as follows: 

  • Taxable Supply: A “taxable supply” is any supply of goods or services that is subject to GST under the law . This includes supplies subject to CGST/SGST (for intra-state sales) or IGST (for inter-state sales) unless specifically exempt or zero-rated.
  •  Exempt Supply: Defined in Section 2(47), an “exempt supply” means a supply of goods or services (or both) that either attracts a nil rate of tax or is wholly exempted by notification . Notably, this definition includes non-taxable supplies. In practice, exempt supplies include certain essential goods and services (e.g. fresh fruits, basic foodstuffs, healthcare, etc.) on which
    GST is not collected . A supply to be “exempt” must be specified under Section 11 or IGST Section 6 by notification.
  • Zero-Rated Supply: Under the IGST Act, a “zero rated supply” is any supply of goods or services that is taxed at 0%. Specifically, Section 16 of the IGST Act states that exports of goods/services (or services) and supplies to a Special Economic Zone (SEZ) developer/unit are zero-rated . In effect, exporters can claim refund of input tax credit. (By contrast, an export subject to IGST payment can also be refunded, making it effectively zero-rated.)
  • Non-Taxable Supply: A “non-taxable supply” (Section 2(78)) is simply a supply of goods/services which is not leviable to tax under the GST Acts. For example, sale of land is not leviable to GST (it is outside GST scope) , and thus is a non-taxable supply. Exempt supplies include all nontaxable supplies .
  • Inter-State vs. Intra-State: The place of supply determines whether a transaction is inter-state or intra-state, triggering IGST or CGST+SGST. Under the IGST Act:
  • An inter-state supply of goods is one where the supplier’s location and the place of supply are in different States/UTs (or any supply imported into India ). Similarly, an inter-state supply of services occurs when the supplier and place of supply are in different States/UTs IGST is levied on all inter-state supplies by Section 5 of the IGST Act .
  • An intra-state supply of goods is one where the supplier and place of supply are in the same State/UT (subject to certain exclusions like SEZ supply or imports ). An intra-state supply of services similarly has supplier and place in the same State/UT . Intra-state supplies are subject to CGST and SGST (or UTGST) as per Section 9 of CGST Act and corresponding State Acts.
     

Each supply must be analyzed under these categories to determine the tax treatment. For example,
selling a mobile phone to a customer in another State is an inter-state supply (IGST applies),whereas selling to a local customer is intra-state (CGST+SGST). Exports of goods/services qualify as zero-rated supply. Certain internal transactions are also treated as supply (see Schedule I below). 

Schedule I: Deemed Supplies (Even Without Consideration) 

Schedule I of the CGST Act lists activities that are “deemed supplies” even if no consideration is paid .
In other words, they are taxable under GST as if they were ordinary sales. Key items (as per Schedule I)
include:
 

  • Permanent transfer of business assets (with ITC availed): If a person permanently transfers or disposes of business assets on which input tax credit has been taken, it is treated as a supply. Example: A business gives its old machinery (for which it claimed input GST) to a subsidiary for free. This transfer is a taxable supply under Schedule I(1) .
  • Supply between related or distinct persons: Any supply of goods or services between related persons (or between “distinct persons” – separate GST registrations of the same legal entity) in the course of business is a supply, even if no payment is made . (This covers many intracompany transfers.) Exception: Small gifts by an employer to an employee (up to ₹50,000 in a year) are not considered a supply .
  • Principal–agent transfers of goods: If a principal supplies goods to his agent who undertakes to sell those goods on the principal’s behalf (or vice versa), that transfer is deemed a supply of goods . (Notably, this covers only goods – supply of services between principal and agent is treated normally, not as deemed.)
  • Import of services from related establishments: Any import of services by a taxable person from a related person or from his other establishment outside India is a supply . This ensures cross-border intra-group services are taxed.
     

By treating these transactions as supplies, GST ensures that common business practices (like asset
transfers or agency arrangements) do not escape tax simply due to lack of price. For example, India’s
tax authorities have confirmed via rulings that inter-company gifts of goods (above the ₹50,000
exemption) are taxable under Schedule I.


Schedule II: Classifying Goods vs Services
 

Schedule II clarifies when a transaction is treated as the supply of goods or services (for GST purposes)
Important illustrations include:

  • Transfer of title in goods: Any transfer of title (ownership) in goods is a supply of goods . Likewise, any agreement for future transfer of title (like an instalment sale) is supply of goods
  • Transfer of right in goods: If the transfer is of the right to use, or an undivided share in, goods without transferring title, it is a service (e.g. leasing or licensing of goods) . Example: Renting a car, or leasing machinery, is treated as supply of a service.
  • Land and building: Any lease, tenancy or licence to occupy land is a service. Similarly, leasing or letting out a building (commercial or residential) is a service . In fact, renting immovable property is explicitly listed as supply of service .
  • Treatment/process: Applying a process to someone else’s goods (e.g. job work, manufacturing on order) is a service .
  • Transfer of business assets: If goods that are part of a business’s assets are transferred or disposed so they cease to be business assets, that is a supply of goods . However, if business goods are put to private use (by owner or family), that “use” is a supply of service . Also,when a taxable person ceases business, all business assets remaining are deemed supplied (except for going-concern transfers) . 
  • Other services: Schedule II also lists certain services: renting of immovable property , construction of buildings (works contracts) , temporary transfer of intellectual property, etc. Notably, works contract (construction or building contract) is specifically treated as a service .
  • Composite supplies: Works contracts and food/beverage supplied with services are declared services .


In practice, Schedule II helps businesses determine whether to treat a transaction as sale of goods or as a service for GST. For instance, selling used machinery would be “goods”, but leasing that machinery would be a “service” (since title stays with lessor). Construction contracts, often a mix of materials and labor, are treated wholly as service (composition of works contract) .


Schedule III: Neither Goods nor Services


Schedule III lists transactions that are outside GST scope (treated as neither supply of goods nor supply
of services) . Key items include:

  • Employee services: Services provided by an employee to the employer (i.e. normal salary services) are not supply .
  • Public functions: Services by courts/tribunals and by Members of Parliament/Legislature or constitutional office-holders are not supplies .
  • Funeral services: Services of funeral, burial, cremation, including transportation of the deceased, are not supply .
    Sale of land/buildings: Sale of land is not a taxable supply. Sale of a building is also outside GST if the building is considered a principal dwelling (subject to certain conditions) . (Only under construction buildings are taxed.) 

  • Actionable claims: Most actionable claims (like debts, dividends, interest) are outside GST, except betting/gambling/lottos .


    These exclusions prevent taxation of purely public or personal transactions. For example, paying wages is not a GST event, and selling one’s house is not subject to GST (though if the house was a business asset, its sale as business assets might be taxed under Schedule II(4)).

    Composite and Mixed Supplies

    GST distinguishes composite supplies from mixed supplies, affecting which tax rate applies:

  • Composite Supply: A composite supply consists of two or more supplies (goods/services) naturally bundled and supplied together, with one supply being the principal supply . The tax rate of the principal supply applies to the whole bundle. Example: A hotel booking may include room rent (principal) bundled with free breakfast (ancillary) . Another illustration: “packing +
    transport + insurance” in one shipment – goods are principal . If the principal supply is taxable, the composite is taxed at that rate. 

  • Mixed Supply: A mixed supply is two or more individual supplies made together for a single price, which are not naturally bundled . In this case, each component could stand alone. For a mixed supply, the highest GST rate among the items applies to the entire supply. Example: A gift hamper containing chocolates, toys, gadgets sold for one price is mixed supply . Each item
    (food, toy, etc.) could be supplied separately and none is ancillary to another, so the highest-rate item (say electronics at 18%) sets the GST rate for the package .

    Understanding this distinction is crucial: if a transaction is classified as composite, lower rate can apply via the principal supply; if mixed, the highest rate dominates. Courts and rulings have emphasized identifying the principal supply in composites (e.g. medical instrument with ancillary consumables – principal medical equipment). 

    Valuation of Supply (Section 15)


    The value of supply (taxable base) is generally the transaction value: the actual price paid or payable for the goods/services . Key rules (Section 15 CGST) include: 

  • Included in value: Taxes/charges (other than GST) if invoiced separately; any cost/service paid by recipient on supplier’s behalf; incidental expenses (packing, commission); interest/late fees on delayed payment; any subsidy directly linked to price . For instance, if the seller pays freight that buyer owes, that freight amount is included in value . If the supplier gave a subsidy (like
    a manufacturer’s discount) linked to the price, that subsidy is included in the value .
  • Excluded from value: Cash discounts or incentives given before or at the time of supply (if properly recorded in invoice) . For example, a 5% trade discount on the invoice reduces the GST base if noted on the invoice . 

If the supplier and recipient are related or the price is not sole consideration (e.g. barter, gift), the law provides valuation rules (Transaction Value Rules) to determine an appropriate value.
 

Time of Supply (Tax Point)
 

The time of supply rules determine when GST becomes payable. Generally, tax is due at the earliest of the event (invoice issuance, payment received, or provision of service) as prescribed:

  • Goods (CGST Section 12): Time of supply is the earlier of (a) date of invoice (or last date to issue invoice) or (b) date of receipt of payment . For example, if a supplier issues the invoice on 5th May but receives payment on 10th May, GST is due on 5th May. If the supplier receives a payment of ₹1,000 more than invoiced, that excess is deemed supplied on the invoice date .
  • Services (CGST Section 13): Time of supply is the earlier of (a) date of invoice (if invoiced timely) or (b) date of payment . If invoice is delayed beyond the due date, then (a) becomes the date of provision of service or (b) payment date, whichever is earlier 
  • Reverse Charge (Goods): If GST is payable by recipient (RCM), time of supply is earliest of (a) date of receipt of goods, (b) date of payment, or (c) 30 days after supplier’s invoice (whichever is earlier) . For example, if a recipient receives goods on 1st June, the supply time is 1st June (even if invoice is later).
    Reverse Charge (Services): Similarly, under Section 13(3), time of supply under RCM is earliest of (a) date of payment, or (b) 60 days after invoice issuance by supplier .
     

Budget 2024 update: It is proposed to amend Section 13 so that if the recipient issues the invoice (as under RCM), the time of supply will be the recipient’s invoice date.

These rules ensure tax is accounted promptly. Businesses must track these dates: failing to pay or invoice on time can shift the tax liability.

Key Case Law and Ruling


GST law has been clarified by tribunals and advance rulings. For example, various AARs have upheld Schedule I provisions: a ruling confirmed that a free internal transfer of an asset (where ITC was claimed) is taxable supply. Similarly, authorities have treated employer gifts above ₹50,000 as taxable supply . Courts continue to interpret composite/mixed supplies and place-of-supply rules (though Indian GST jurisprudence on supply-specific issues is still evolving). Businesses often rely on such rulings for guidance, but ultimately the statutory wording (as cited above) governs taxability.


Implications for Businesses


For businesses, the broad GST supply definition means virtually all commercial transactions must be
evaluated for GST. Key implications include:

  • Identify the nature of supply: Before invoicing, classify each transaction as taxable, exempt, or non-taxable. Check if it is inter-state (IGST) or intra-state (CGST+SGST) .
  •  Check Schedule I triggers: Be aware that non-monetary transactions (like internal asset transfers, or related-party supplies) may still attract GST . Companies should revise policies on transfers/gifts to related entities. 
  • Composite/Mixed supply tax planning: When bundling products/services, ensure correct tax treatment. Misclassifying a mixed supply as composite (or vice versa) can under- or over-charge tax. Always identify the principal element in a composite package . GST valuation: Include all applicable costs in the invoice value (e.g. incidental charges) and properly show allowable discounts . Incorrect valuation can lead to notices or liabilities.  
  • Time of supply compliance: Invoice promptly and record payments carefully. Late invoicing can shift tax point to when services were provided, potentially bringing new period taxes . Under proposed law (2024), recipients issuing RCM invoices must do so within time to fix the tax point 
  • Maintain records for Schedule II/III: If selling land or providing employee services, document that these fall under Schedule III (no GST) . Conversely, if disposing of business assets, prepare to pay GST on that deemed supply. 
  • Composite supply billing: For works contracts or hospitality, ensure the invoice reflects that it is
    a supply of service (if principal supply is service) , and charged accordingly.
     

In summary, under Indian GST law, virtually any transaction (sale, lease, service, gift, etc.) can be a
“supply” and hence potentially taxable . Businesses must stay current with the law (including recent
amendments) to correctly charge GST, claim credits, and avoid unintended tax liabilities.