Supply Under GST Explained: Section 7, Schedule I, II, III & Composite vs Mixed Supply

Meaning of Supply in GST

There are two sections in this chapter read with schedules. Supply is the taxable event to levy GST i.e. It is the backbone for levying GST.

Section 7: Defines: It deals with the concept of “Supply” under GST and can be understood in three parts:

1. Part A – Meaning of Supply - Defines the term “Supply” and should be read together with Schedule I, which specifies certain activities that are treated as supply even if made without consideration.
2. Part B – Classification of Supply - Once a transaction qualifies as a supply, it must be determined whether it is a supply of goods or a supply of services. This distinction is provided under Schedule II.
3. Part C – Activities Neither Treated as Supply of Goods nor Supply of Services - Certain activities or transactions are specifically excluded from the scope of supply under Schedule III and are therefore not liable to GST.

Section 8: Part D- It describes treatment of composite and mix supply treatment.

Part C – Schedule III: Activities Treated as “No Supply” 

The following activities or transactions are neither treated as a supply of goods nor a supply of services and hence are not liable to GST:

1. N – Services by an Employee to Employer in the course of employment. 
2. E – Services by Courts and Tribunals. 
3. W – Services by Government Officials such as the President, Prime Minister, Chief Minister, Ministers, MPs, MLAs, MLCs, part-time directors of government bodies, etc. 
4. M – Mortuary, burial, crematorium, and funeral services. 
5. A – Actionable claims other than lottery, betting, and gambling (i.e., non-actionable claims). 
6. G – Sale of land and, subject to Schedule II, sale of completed building. 
7. I – Supply of goods from one Non-Taxable Territory (NTT) to another NTT without such goods entering India. 
8. C – Sale of warehoused goods before clearance for home consumption (custom bonded warehouse transactions). 
9. L – Liquor license services by State Government/local authority. 
10. W – Functions/activities entrusted to Panchayats or Municipalities under Article 243G and 243W of the Constitution.

Part D – Section 8: Tax Liability on Composite and Mixed Supply

Section 8 provides the rules for determining the tax treatment of composite and mixed supplies:

1. Composite Supply (Natural Bundle) - A composite supply shall be treated as a supply of the Principal Supply. (Example: Supply of goods with transportation and insurance — taxed as the principal supply of goods.)
2. Mixed Supply (Not a Natural Bundle) - A mixed supply shall be treated as a supply of that particular item which attracts the highest rate of GST among all the supplies forming part of the bundle. (Example: Gift hamper containing taxable items with different GST rates — taxed at the highest applicable rate.)

Section 7(1) – Part A: Meaning of “Supply” under GST

For any transaction to qualify as a “Supply” under GST, it must satisfy the following three essential conditions (A/B/C Test):

A. There must be an Activity or Transaction

The transaction should involve any form of activity such as:

• Sale 
• Transfer 
• Barter 
• Exchange 
• License 
• Rental 
• Lease 
• Disposal 
• Any similar transaction 

B. The Activity Must Be in the Course or Furtherance of Business

The activity should be carried out:

• During the course of business, or 
• In relation to business activities 

C. There Must Be Consideration

The transaction should involve consideration, which may be:

• Monetary consideration (money), or 
• Non-monetary consideration (barter, exchange of goods/services, etc.) 

Transactions Between Clubs/Associations and Members With effect from 01.07.2017, activities or transactions by a person (other than an individual) to its members, or vice versa, for consideration shall be treated as a supply.

Explanation

For GST purposes:

1. The person (e.g., club, association, society) and its members are deemed to be two separate persons. 
2. Therefore, supplies between them are taxable supplies. 
3. The doctrine of mutuality is not applicable under GST in such cases. 

Import of Services

1. Import of Services for Business Purpose - Import of services for a consideration and used in the course or furtherance of business shall be treated as a supply.
2. Import of Services for Personal Purpose - Even if the imported service is used for personal purposes, it is still treated as a supply under GST if consideration is involved.

However, such personal import of services is exempted through Notification No. 9/2017.

Schedule I – Activities Treated as Supply Even Without Consideration

Under Schedule I of the CGST Act, certain specified activities are treated as “Supply” even when made without consideration (i.e., Free of Cost / F.O.C.).

The following activities are covered:

(i) Permanent Transfer or Disposal of Business Assets

Permanent transfer or disposal of business assets shall be treated as supply only when Input Tax Credit (ITC) has been availed on such assets.

Important Point:

• If ITC has not been availed on the asset, the transaction shall not be treated as supply. 

Example:

• A machine on which ITC was claimed is permanently transferred free of cost → Taxable supply. 
• Furniture on which no ITC was claimed is given away → Not a supply. 

(ii) Supply Between Related Persons or Distinct Persons

Supply of goods or services between:

• Related persons (e.g., spouse, brother, sister, employer–employee, etc.), or 
• Distinct persons under GST (e.g., multiple GST registrations under the same PAN, Head Office–Branch Office transactions, branch-to-branch transfers) 

shall be treated as supply even if made without consideration.

Exception:

Gifts by an employer to an employee up to ₹50,000 in a financial year shall not be treated as supply.

(iii) Supply Between Principal and Agent

Supply of goods between:

• Principal to Agent, or 
• Agent to Principal 

shall be treated as supply even when made without consideration.

Important Condition:

This provision applies only where the invoice is issued:

• By the principal to the agent, or 
• By the agent to the principal. 

If the invoice is issued directly to the customer, the transaction will not be covered under this clause.

(iv) Import of Services from Related Person or Own Establishment Outside India

Import of services by a person in India from:

• A related person located outside India, or 
• Any of his own establishments outside India, 

for business purposes shall be treated as supply even if made without consideration.

Important Points: Thus, Schedule I creates certain deemed supplies, where consideration is not required for levy of GST. The next step is to determine whether the transaction constitutes: • Supply of Goods, or • Supply of Services because the GST provisions relating to time of supply, place of supply, tax rate, and valuation depend upon this classification.

SCHEDULE II – Activities to be Treated as Supply of Goods or Supply of Services

1. Goods Related Transactions

Where, in a transaction, the ownership of goods is transferred immediately (for example, a sale transaction) or is agreed to be transferred at a future date (for example, a hire-purchase transaction), such transaction shall be treated as a supply of goods.

2. Land and Building Transactions

• Renting, leasing, licensing, or letting out of land and buildings (immovable property) shall be treated as a supply of services. 
• However, the sale of land and the sale of a completed building shall neither be treated as a supply of goods nor as a supply of services. 
• The sale of an under-construction property shall be treated as a supply of services. 

3. Job Work

Any treatment or process carried out by a job worker on goods belonging to another person shall be treated as a supply of services, commonly known as job work service.

4. Transfer of Business Assets

• Permanent Transfer of Business Assets - Permanent transfer or disposal of business assets shall be treated as a supply of goods.
• Temporary Transfer for Non-Business Use - Temporary application or use of business assets for non-business purposes shall be treated as a supply of services.
• Transfer of a Going Concern - Transfer of a business as a going concern by way of sale or succession shall be treated as a supply of services. However, such transfer is generally exempt from GST.
• Closure of Business - Upon closure of a business, the business assets shall be deemed to be supplied by the taxable person to himself and shall be treated as a supply of goods.

5. Activities Treated as Supply of Services

The following activities shall be treated as a supply of services:

• Temporary transfer or permitting the use of an Intellectual Property Right (IPR). 
• Supply of customized software. 
• Agreeing to refrain from an act, tolerate an act or situation, or undertake an obligation (for example, cancellation charges or negative obligations). 
• Leasing, renting, or hiring of assets. 

6. Works Contract

A composite supply involving transfer of property in goods along with services in the execution of a works contract shall be treated as a supply of services, known as works contract service.

7. Supply of Food and Drinks

Supply of food, beverages, or drinks (including soft drinks) for human consumption as part of a service shall be treated as a supply of services.

No Supply – Section 7(2) of CGST Act

(A) Activities treated as Neither Supply of Goods nor Supply of Services

• Functions performed by Government Authorities - Activities undertaken by the Central Government, State Government, or Local Authority as entrusted under Article 243G or 243W of the Constitution (such as land consolidation, sanitation, public health, etc.) shall not be treated as supply. Therefore, GST is not applicable on such activities.
• Grant of Liquor Licence - Services provided by the State Government by way of granting a licence for alcoholic liquor for human consumption shall not be treated as supply.

(B) Transactions specified in Schedule III

The following activities or transactions shall be treated as neither supply of goods nor supply of services:

• High Sea Sales / Merchant Trade Transactions - Supply of goods from one Non-Taxable Territory (NTT) to another NTT without the goods entering India shall not be treated as supply.
• Employer–Employee Services - Services provided by an employee (including a whole-time director) to the employer in the course of employment shall not be treated as supply.
• Transactions involving Warehoused Goods - The following shall not be treated as supply:
• Supply of goods kept in a custom bonded warehouse before clearance for home consumption. 
• Transfer of ownership documents of goods after dispatch from a place outside India but before clearance for home consumption in India. 
• Funeral, Burial and Mortuary Services - Mortuary services, including transportation of a deceased person, shall not be treated as supply.
• Actionable Claims - Actionable claims, other than lottery, betting, and gambling, shall not be treated as supply.
• Services by Constitutional and Government Functionaries - The following shall not be treated as supply:
• Functions performed by MPs, MLAs, MLCs, Members of Municipalities, Panchayats, etc. 
• Duties performed by persons holding constitutional posts (such as the Prime Minister, President, Chief Minister, Governor, etc.) 
• Duties performed by a part-time Chairperson or Member of a government or local authority body who is not deemed an employee. 
• Sale of Land and Completed Buildings
• Sale of land, and 
• Sale of building after issuance of completion certificate or after first occupation,  shall not be treated as supply.
• Services by Courts and Tribunals - Services provided by any Court or Tribunal established under any law shall not be treated as supply.

Section 8 – Classification of Composite and Mixed Supplies

(a) Composite Supply

In the case of a composite supply, the tax treatment shall be based on the principal supply.

• The entire bundle shall be classified according to the principal supply. 
• The GST rate applicable to the principal supply shall apply to the whole composite bundle. 

Example:

Supply of goods along with transportation and insurance. Here, supply of goods is the principal supply; therefore, the entire transaction will be treated as supply of goods and taxed accordingly.

(b) Mixed Supply

In the case of a mixed supply, the principal supply cannot be identified because each item can be supplied separately and independently.

• The entire bundle shall be classified according to the supply attracting the highest rate of GST. 
• Accordingly, the highest GST rate among all items in the bundle shall apply to the whole mixed supply. 

Example:

A festive gift hamper containing chocolates, dry fruits, soft drinks, and perfumes sold for a single price. Since no principal supply exists, the entire hamper will be taxed at the GST rate applicable to the item having the highest rate of tax.

Clarifications under GST

Whether supply of books, pamphlets, brochures, envelopes, annual reports, leaflets, cartons, boxes, etc., printed with design, logo, name, address, or other contents supplied by the recipient, would constitute a supply of goods or supply of services?

In the case of printing books, pamphlets, brochures, annual reports, and similar items, where only the content is supplied by the copyright owner while the paper used for printing belongs to the printer, the principal supply is the printing service. Hence, such transactions are treated as a supply of services. 

However, in the case of printed envelopes, letter cards, printed boxes, tissues, napkins, and similar items, where the design, logo, or content is supplied by the recipient but the paper, box, or card belongs to the printer, the principal supply is the supply of goods. Therefore, such transactions are treated as a supply of goods.

What is the GST implication on inter-state movement of various modes of conveyance carrying goods or passengers, or sent for repairs and maintenance, between distinct persons?

If the movement of a motor vehicle is in the nature of a stock transfer (i.e., transfer from one balance sheet to another balance sheet), it shall be treated as a supply of goods under GST. 

However, where the movement/removal of a motor vehicle is for any other reason, such as use as a conveyance, transportation, repairs, or maintenance, and there is no transfer from one balance sheet to another, such movement shall not be treated as a supply.

Whether GST is leviable on the entire quantity of Superior Kerosene Oil (SKO) supplied by a refinery to LAB manufacturers, or only on the quantity retained for extraction of n-Paraffin? Further, whether the return of remaining SKO attracts GST?

LAB manufacturers receive Superior Kerosene Oil (SKO) from refineries through dedicated pipelines. Generally, about 15%–17% of the SKO is retained for extraction of Normal Paraffin, which is used in the manufacture of Linear Alkyl Benzene (LAB), while the remaining 83%–85% is returned to the refinery. 

Since consideration is paid only for the quantity of SKO retained by the LAB manufacturer, GST shall be payable by the refinery only on the value of the net quantity of SKO retained for the manufacture of LAB. 

Accordingly: 

• GST is payable only on the retained quantity of SKO used for extraction of n-Paraffin. 
• The return of the remaining SKO to the refinery does not separately attract GST at that stage.
• However, if the refinery subsequently supplies the returned SKO to any other person, GST shall apply on such supply.

Whether retreading of tyres is treated as a supply of goods or supply of services?

Retreading of tyres is a composite supply involving both goods (rubber and other materials) and services (retreading process). Since the principal supply is the process of retreading, it is treated as a supply of services. However, where re-treaded tyres are supplied and the old tyres belong to the supplier himself, such supply shall be treated as a supply of goods.

Is GST leviable on fees or penalties charged by Consumer Disputes Redressal Commissions?

The following amounts are not liable to GST: 

1. Fees paid while registering complaints before Consumer Disputes Redressal Commissions and their subordinate offices, which are credited to the State Consumer Welfare Fund. 
2. Penalties collected by such Commissions. 

 Although Consumer Disputes Redressal Commissions may not strictly fall within the literal definition of a “tribunal,” they possess the essential characteristics of a tribunal established under law. Therefore, services provided by them are treated as neither a supply of goods nor a supply of services under GST.

What is the GST implication on displaying the name of donors or placing nameplates in the premises of charitable organisations receiving donations or gifts?

No GST is applicable where the display of the donor’s name is merely a recognition of donation and does not amount to advertisement or promotion of business activity. Examples include: 

• “Good wishes from Mr. Rajesh” printed below a digital blackboard donated to a charitable yoga institution. 
• “Donated by Smt. Malati Devi in memory of her father” inscribed on a room or part of a temple complex constructed through such donation. 

In such cases, there is no commercial promotion or business advertisement benefiting the donor; therefore, the transaction does not constitute a taxable supply under GST.

Whether the activity of a holding company holding shares in its subsidiary company amounts to a supply of service and attracts GST?

The purchase or sale of shares or securities is neither a supply of goods nor a supply of services under GST law. Merely holding shares in a subsidiary company does not amount to rendering any service by the holding company to the subsidiary company. Therefore, such activity does not attract GST.

Whether supply of food or beverages in a cinema hall is taxable as restaurant service or as part of exhibition of cinematography service?

Where food or beverages are supplied independently in a cinema hall, such supply shall be treated as a restaurant service and taxed accordingly. However, where the sale of cinema tickets and supply of food and beverages are bundled together and qualify as a composite supply, the entire transaction shall attract GST at the rate applicable to the service of exhibition of cinematographic films.