Consideration is the basis for deciding the value of supply of goods or services or both and thus is essentially the basis for determination of the tax liability. Since the term consideration has been defined in several laws like the Indian Contract Act, 1872, the lawmakers deemed it fit to lay down the definition of this crucial term in GST Act to prevent any misinterpretation of the definition. This can be in various forms like monetary, non-monetary, deposits, and subsidy and thus we need to understand whether the amount is to be treated as consideration or not.
Consideration – Definition
The term “consideration” has been defined u/s 2(31) of the CGST Act, 2017 in relation to the supply of goods or services or both include:-
- 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 subsidies given by the Central Government or 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, whether by the recipient or by any person but shall not include any subsidies given by the Central Government or 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.
Types of Consideration
The consideration for the supply of goods or services or both can either be in monetary form or in non-monetary form. The monetary form includes payments received in cash, cheque, credit and debit cards, bank transfers and auto-debit from bank. The non-monetary form is the payment in kind i.e. payment can include goods or services being provided as payment. The value of this non-monetary payment is usually the monetary value of its equivalent.
For example – Mr. Amit provides architecture services to an unrelated person Mr. Sushil. In lieu of his services, Mr. Sushil gave him 10 grams of gold, thus this will be treated as a non-monetary form of payment.
Treatment for deposits received
The basic condition for a deposit to be included as consideration is that it must form part of the payment for the supply. Let us understand this in detail in light of the following nature of deposits:-
- The deposit is in the nature of forfeiture deposit i.e. payment for non-completion or non-performance of the contract – This will not be included since there is no supply in this case.
- Security deposits will not be included since these deposits are only for security purposes and for no real supply of goods or services.
Therefore, the amount of deposit is not to be treated as a part of payment unless adjusted as consideration.
Subsidy – Government or Non-Government Subsidies
A subsidy is a form of financial aid or support offered to institutions or individuals, often by the government. It can be provided in the form of cash payments or tax reductions. It is aimed at promoting the economic and social objectives of the government, ultimately benefiting the public.
Any subsidy received from the Central or State Government will not be included as a part of consideration.
For example – Subsidy for gas received from the government will not form part of consideration.
Subsidies received from any non-government institutions having a direct link with the supply of goods or services or both, will be treated as a part of consideration. However, if received from any non-government institutions without having a direct link with the supply of goods or services or both, will not be treated as a part of consideration. Thus, establishing a direct link with the supply is crucial for including the amount
For example – Subsidies received from a non-government trust for flood relief to a farmer will not be treated as consideration.
Payment can be received from any person
It is not mandatory that the payment for the supply of goods or services is from the recipient of the supply. The payment received from any person with whom a direct link can be established can also be treated as consideration for the supply.
Fines and Penalties Charged
Generally, the fines or penalties charged are not treated as consideration; however, in a case where the fine or penalty has been levied for additional payment for the delayed supply or for the fulfillment of the agreement, it will be included.
For example – Fine for littering tourist places will not be treated as consideration however; fine or penalty charge for delayed return of hired goods will be treated as consideration.
Grants or Charitable Activities
The basis for determining whether the grants are to be treated as consideration or not depends on if the person giving the grant is receiving benefits in return or no such benefit is being received by him.
If the person giving the granting is not receiving any benefit in return, then this will not be included; however, if the person giving the granting is receiving any benefit in return, then this will be included.
For example – A pharmaceutical company has given a grant to a lab for studying the impact of the constituents of its medicine under research phase. Here, the benefit will be received by the pharmaceutical company only and thus this grant will be treated as consideration.
Important Case Study – M/s Abbott Healthcare Private Limited
M/s Abbott Healthcare Private Limited placed its own diagnostic instruments at the premises of unrelated hospitals, labs etc. for their uses for a specified period of time without any consideration as per the agreement. The customers only had the right to use the instruments and these instruments were returnable at the end of such specified period or at the earlier termination of the agreement. As per the agreement, the customers were required to purchase the re-agents and disposables at the prices specified in the agreement. The company only charged GST on supply of these disposables.
Initially the AAR, Kerala held that this would be a composite supply where the principal supply was the right to use the instruments for any purpose and was accordingly liable to GST. However, the High Court quashed the order and remanded the order back to AAR for fresh determination of the question asked by the assesse.
Finally, the AAAR concluded that the act of assurance from the part of the customers for exclusive usage of re-agents and disposables in the instruments according to the approved directions of the assesse and the obligation to purchase minimum assured quantity on the agreed price from the appellant assesse constituted a valid consideration for inducement of the supply of these services against the activity of placement of the instruments by the assessee at the customer’s premises.