Introduction

There is a common misconception among people that only those who earn pay taxes, but this is not always the case. Taxes are broadly categorized into two types: direct taxes and indirect taxes. These taxes are governed by the Income Tax Act of 1961, which lays down distinct rules and regulations for each. Direct taxes are progressive in nature, meaning that as an individual's income increases, the amount of tax they pay also increases. For example, an individual earning INR 5 lakhs will pay less tax compared to someone earning INR 10 lakhs.

However, this is not the case with indirect taxes. Indirect taxes are regressive in nature, which means they do not differentiate between individuals based on their income levels. Whether it is a wealthy individual like Mukesh Ambani or someone with no earnings, everyone pays the same tax on goods and services they purchase. This fundamental difference highlights the varied impact of direct and indirect taxes on different segments of society.

What Constitutes a Supply under GST?

Under the Goods and Services Tax (GST) regime, the concept of 'supply' is central. GST is levied on the supply of goods and services. As per Section 7 of the Central Goods and Services Tax (CGST) Act, 2017, the term 'supply' is broadly defined to include all forms of supply of goods and services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Here the person refers to those who are liable to pay tax.

Deemed Supply under GST

Deemed supply refers to certain transactions that, while not constituting an actual supply in the conventional sense, are treated as supply under GST. This concept ensures that even transactions without consideration are taxed, provided they fall within specific categories outlined by the GST law. The scope of deemed supply is provided under Schedule I of the CGST Act, which includes activities such as:

1. Permanent transfer or disposal of business assets**: If a business asset on which input tax credit (ITC) has been availed is permanently transferred or disposed of, it is treated as a supply, even if there is no consideration.

2. Supply between related persons or distinct persons**: Transactions between related persons or different business establishments of the same entity, located in different states, are treated as supply, even if made without consideration.

3. Supply under agent-principal relationship* Any supply of goods by an agent on behalf of a principal or by a principal to his agent, where the agent undertakes to supply the goods on behalf of the principal, is deemed a supply.

4. Import of services from a related person or any of the business establishments of the same entity

Import of services by a taxable person from a related person or from any of their other establishments outside India, in the course or furtherance of business, is also considered as supply without consideration.

Import of Services and Reverse Charge Mechanism

Under GST, the import of services is a critical area that ensures the tax net encompasses services acquired from outside India. As per Section 7(1)(b) of the CGST Act, import of services, whether or not for a consideration and whether or not in the course or furtherance of business, is considered as supply. This broad inclusion ensures that services imported by individuals or businesses are subject to GST, thereby ensuring a level playing field between domestic and international service providers.

The reverse charge mechanism (RCM) is particularly relevant in the context of the import of services. Under RCM, the recipient of goods or services is liable to pay GST instead of the supplier. This mechanism is crucial for ensuring tax compliance and collection in cases where the supplier is not located in India and, therefore, outside the direct tax jurisdiction. RCM is applicable not only for the import of services but also for certain notified goods and services transactions within India.

The primary rationale behind the reverse charge mechanism is to ensure tax compliance and ease of administration. By shifting the tax liability to the recipient, the government ensures that GST is paid on cross-border transactions, which might otherwise be difficult to enforce. This mechanism also helps in maintaining a seamless flow of input tax credit within the GST framework.

Negative supply:- Schedule III of the CGST Act

Schedule III lists activities or transactions that shall be neither treated as a supply of goods nor a supply of services. This schedule ensures that certain activities are explicitly excluded from the scope of GST.

Services by an Employee: Services provided by an employee to the employer in the course of or in relation to his employment.

Court or Tribunal Functions: Services provided by any court or Tribunal established under the law

Sale of Land and Building: The sale of land and, subject to paragraph 5(b) of Schedule II, sale of building.

Actionable Claims: Other than lottery, betting, and gambling.

Funeral Services: Services by way of any activity in relation to a funeral, burial, crematorium, or mortuary including transportation of the deceased.

Conclusion

The distinction between direct and indirect taxes is fundamental to understanding the broader tax system. While direct taxes are progressive and linked to an individual's income, indirect taxes are regressive and impact all consumers equally, irrespective of their earning levels. Under the GST regime, the concept of 'supply' is central, encompassing a wide range of economic activities. The inclusion of deemed supplies and the import of services ensures that GST captures a broad spectrum of transactions, minimizing tax evasion and broadening the tax base.

The reverse charge mechanism further strengthens the GST framework by ensuring tax compliance in cross-border transactions and certain notified transactions within India. Together, these provisions ensure that the GST system is comprehensive, equitable, and efficient, contributing to the overall objective of creating a unified and robust tax system in India.