Supply without consideration under GST

What is Supply Without Consideration under GST?

"Supply without consideration" refers to transactions where goods or services are provided without any monetary exchange. Under GST, certain supplies that occur between related persons, between a principal and an agent, or in specific cases like the disposal of business assets, are considered taxable supplies even if there is no consideration involved. The rationale behind this is to prevent tax evasion and ensure that all business transactions contributing to the economy are taxed fairly.

Key Scenarios of Supply Without Consideration

Transactions Between Related Persons

Under GST, transactions between related persons are treated as taxable, even if no payment is made. Related persons include entities with significant ownership or control over each other. For example, a parent company transferring goods to its subsidiary without charging a price falls under this category. These transactions are deemed taxable to prevent unfair pricing that could result from the relationship between the parties.
Related persons can include:

• Companies under common control
• Directors or officers of a business who are also directors in another business
• Individuals or entities with at least 25% ownership in both parties
• Employers and employees, under certain conditions

Example: If a parent company provides goods to its subsidiary without payment, GST will apply even though no money changes hands. This ensures that tax obligations are not avoided by related parties manipulating pricing.

Transfer or Disposal of Business Assets

When business assets, such as machinery or computers, on which Input Tax Credit (ITC) has been claimed, are transferred or disposed of without consideration, it is still considered a taxable supply. This situation typically arises when a company gives away assets or writes off items that were originally purchased using ITC. GST is applicable because these assets were previously used for business purposes and the ITC was claimed.

Example: If a company donates computers worth ₹. 3,00,000 to its employees, and it had claimed ITC on the original purchase, the donation is considered a taxable supply under GST, even though no money is exchanged.

Supply Between Principal and Agent

GST also applies to supplies made between a principal and an agent. These transactions are considered taxable even when no payment occurs. A principal might provide goods to an agent to sell on their behalf, or an agent may receive goods on behalf of the principal. Regardless of whether there is any immediate payment, these transactions are treated as taxable supplies under GST.

Example: A manufacturer supplies goods to an agent, who then sells the goods to customers. Even if the agent does not pay the manufacturer upfront, the supply is still taxable because the goods are being provided for business purposes.

Import of Services from a Related Person

When services are imported from a related person, GST is applicable even if the services are provided without consideration. This situation arises when a taxable person in India imports services from a foreign entity with which they have a relationship, such as a parent company or a branch office. If the services are imported for business purposes, GST is levied, even if no payment is made for the services.

Example: A company in India receives interior design services from its head office in Singapore. Even if the service is provided without charge, GST will apply because the services are imported for the company’s business purposes.
 

Valuation of Supply Without Consideration

When determining the GST on supply without consideration, it is essential to establish the value of the supply. The GST Act provides several methods to determine the value of such transactions:

Open Market Value
The open market value is the price that would be charged for goods or services if the transaction occurred between unrelated parties. If this value is available, it will be used to determine the GST liability.

Value of Similar Goods or Services
If the open market value cannot be determined, the value of similar goods or services can be used. This ensures that the transaction is valued fairly, based on comparable goods or services.

Cost or Residual Method
If neither the open market value nor the value of similar goods is available, the cost of production or a residual method is used. Under this method, the GST value is calculated based on the cost incurred in producing the goods or services or as per the rules specified in GST law.

Specific Valuation for Supplies Between Principal and Agent
When goods or services are supplied between a principal and an agent, the open market value or 90% of the selling price charged by the recipient (agent) to a buyer is considered the value of supply. If this is not available, the cost or residual method is used.
 

Why is Supply Without Consideration Taxable?

The primary reason for treating supply without consideration as taxable is to prevent tax evasion. Transactions between related persons or entities can be manipulated to understate the value of goods or services, leading to a reduction in GST liabilities. By ensuring that these transactions are still treated as taxable supplies, the GST system ensures fairness and consistency in the taxation process.

Furthermore, businesses involved in supply without consideration may still be eligible to claim input tax credit (ITC) if the supply is made for business purposes. This maintains the flow of credit through the supply chain and ensures that GST is paid on all business-related transactions.
 

Conclusion

Supply without consideration under GST covers a range of transactions, including those between related persons, the transfer of business assets, and the supply of goods and services between principals and agents. While these supplies may not involve direct payment, they are still subject to GST to prevent manipulation of tax obligations. Understanding the scenarios where supply without consideration applies and the methods for determining its value is essential for businesses to comply with GST regulations. By ensuring all relevant transactions are taxed appropriately, the GST system aims to maintain fairness and transparency in the taxation of goods and services.