CGST Section 7: Scope of Supply

Section 7 is the foundation of GST levy. It defines the scope of the term “supply”, which is the taxable event under GST. Unless a transaction qualifies as a “supply” within this section, no CGST can be levied, irrespective of consideration or invoicing. The section has undergone significant amendments to clarify legislative intent and address judicial interpretations.

Sub-section (1): Inclusive Definition of “Supply”

Sub-section (1) provides an inclusive and expansive definition of supply, covering various economic activities.

Clause (a): Supply for Consideration in the Course or Furtherance of Business

This is the core charging limb of GST.

Key elements:

• Forms: sale, transfer, barter, exchange, licence, rental, lease, disposal

• Subject matter: goods or services or both

• Condition: made or agreed to be made

• Requirement: consideration

• Nexus: course or furtherance of business

All elements must coexist. Absence of consideration or business nexus generally takes the transaction outside GST, unless specifically covered elsewhere.

Clause (aa): Supplies Between Associations and Members

Inserted retrospectively to neutralise judicial rulings based on the principle of mutuality.

Key features:

• Applies to persons other than individuals (clubs, associations, societies, co-operative bodies)

• Covers transactions between entity and its members or constituents

• Consideration may be cash, deferred payment, or other valuable consideration

Explanation to clause (aa):

• Deems the entity and its members as distinct persons

• Overrides any contrary judgment or law

• Treats inter se transactions as taxable supplies

This amendment has far-reaching implications for clubs, resident welfare associations, trade bodies, and professional associations.

Clause (b): Import of Services for Consideration

Import of services is treated as supply even if not in the course or furtherance of business.

Implications:

• Covers personal imports of services

• Enables levy under reverse charge

• Business nexus test is expressly dispensed with

This ensures parity between domestic and cross-border service consumption.

Clause (c): Activities in Schedule I (Without Consideration)

Certain activities are treated as supply even without consideration, if listed in Schedule I.

Examples include:

• Permanent transfer of business assets with ITC availed

• Supplies between related persons or distinct persons

• Principal–agent transactions

• Import of services from related persons

This clause is an exception to the general rule that consideration is mandatory.

Clause (d): Omitted

This clause originally covered certain activities but was deleted by the CGST (Amendment) Act, 2018 to remove redundancy and interpretational overlap.

Sub-section (1A): Classification as Goods or Services (Schedule II)

Sub-section (1A) clarifies that only after an activity qualifies as “supply” under sub-section (1) does Schedule II apply.

Purpose:

• Schedule II does not create a supply

• It merely classifies an existing supply as:

  • supply of goods, or

  • supply of services

This amendment addressed confusion created by earlier interpretations treating Schedule II as an independent charging provision.

Sub-section (2): Activities Neither Supply of Goods nor Services

This is a non-obstante provision overriding sub-section (1).

Clause (a): Schedule III Activities

Transactions listed in Schedule III are treated as outside the scope of supply, such as:

• Services by employee to employer

• Sale of land and completed buildings

• Actionable claims other than lottery, betting, and gambling

No GST is leviable even if consideration exists.

Clause (b): Sovereign / Public Authority Functions

Activities undertaken by:

• Central Government

• State Government

• Local authorities

in their capacity as public authorities, as notified on the recommendations of the Goods and Services Tax Council, are excluded from supply.

This preserves the sovereign character of governmental functions and avoids taxing core public administration activities.

Sub-section (3): Power to Notify Classification Overrides

This sub-section empowers the Government, on GST Council recommendation, to notify transactions to be treated specifically as:

• supply of goods (and not services), or

• supply of services (and not goods)

Scope:

• Operates subject to sub-sections (1), (1A), and (2)

• Used to resolve classification disputes with industry-wide implications

Notifications issued under this sub-section have binding statutory force.

Practical and Litigation Significance

Section 7 is central to disputes involving:

• Taxability of transactions

• Mutuality-based exemptions

• Employer–employee arrangements

• Government fees and levies

• Cross-border service imports

• Free supplies and related-party transactions

Any GST analysis necessarily begins with Section 7 read with Schedules I, II, and III.

Section 7 defines the outer boundary of GST taxation. Through layered drafting, retrospective clarifications, and delegated notification powers, it ensures that GST applies to genuine economic supplies while excluding sovereign functions and non-commercial arrangements. A precise reading of this section is indispensable for compliance planning and litigation strategy.