Scope of Supply in the regime of Goods and Services Tax – Test of Profit Motive

In the previous indirect tax regime, there was nothing like this new concept of Supply. The stage at which indirect taxes were levied varied under different tax heads and laws. Excise duty, Service tax, VAT were some of the taxes in the previous indirect-tax regime.

However, the emergence of GST has subsumed almost 17 types of similar taxes. And consequently, some new terms, such as, ‘Scope of Supply’ have come up.

Under the GST structure, the term ‘Supply’ is considered a taxable event for charging tax. One becomes liable to pay tax at the ‘time of supply of goods or services’. Henceforth, to decide GST’s applicability, determining whether or not a transaction falls under the meaning of supply, is very crucial.

Following points would bring out a detailed and clear clarification of this new concept, i.e. ‘Scope of Supply’:

GST scope of supply

  1. Let us take an example wherein a commercial property devolved upon Mrs. X, aged 65 years, in case of death of her husband Mr. X.

Mr. X had already given this property to a Bank on rent. In accordance with the terms of the agreement between Mr. X and Bank, the property would remain to be in the possession of Bank for next 10 years and the expenses for annual maintenance should be borne by Mr. X only. Apart from the maintenance expenses, brokerage of 2% of the annual rental profit was also payable to the broker whom Mr. X had appointed.

Now, there are two crucial confusions:

  • Is GST applicable on this rental income which will now be received by Mrs. X?
  • Does it simply mean that since Mrs. X did not have a profit motive, the rental services do not attract GST?
  1. Section 9(1) of the CGST Act 2017speaks about the tax levied on supply. Furthermore, the scope of “supply” has also been provided U/s 7 of this Act. The relevant part of this provision is being furnished hereunder:

Sec. 7(1) for the purposes of this Act, the term ‘supply’ includes —

All types of supply of goods or 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.

  1. Thus, all forms of supply of goods or services such as rental (in the above-mentioned case) fall under the ambit of the scope of supply. But, it must be kept in mind that the same shall be covered only if it is made or agreed to be made by an individual in the course or furtherance of business. So, a clear proposition appears that only the supplies made in the course or furtherance of business can be made applicable to tax.
  2. The term ‘business’ has been defined u/s 2(17) of the CGST Act, 2017. The relevant portion of this rule is being furnished hereunder.

Sec. 2(17) ‘business’ includes —

(a) Any trade/commerce/manufacture/profession/vocation/adventure/wager or any other similar activity, whether or not it is for a monetary benefit.

(b) Any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction.

  1. The above definition, thus, covers in sub-clause (a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar act, whether or not it is undertaken for an economic benefit.
  2. In this case, the provision of rental services is not possible to be considered as trade, manufacture, profession, vocation, adventure, wager or another similar activity. Thus, the only category that it can fit in is ‘commerce’.
  3. Now, sub-clause (a) also provides that the commercial activity shall be construed as a business whether or not such activity is undertaken for a monetary benefit or not. Does such a benefit denote an intent to gain profit?
  4. According to Black’s Law Dictionary – ‘Monetary benefits is an award or compensation or benefit that is quantifiable in monetary terms’.
  5. Henceforth, undertaking any commercial action whether or not the same is for monetary profit applies that whether or not such activity attracts the benefit which can be quantifiable or not in pecuniary terms. So, the motive behind clause (a) is to cover the commercial transactions which fall under the nature of barter or exchange, wherein the profit is in non-monetary terms.
  6. Thus, in conclusion, we can say that in the definition of ‘business’, the profit-motive test is not removed from sub-clause (a). So, in the absence of intent to generate profit, an activity can’t be considered as a business under this rule.
  7. Here, it needs to be considered that the implications of sub-clause (c) in the definition of business go hand-in-hand. This sub-clause says that any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity shall also be considered as business.
  8. Henceforth, can it be seen as the test of the profit motive in the definition of business has been vanished under sub-clause (c)? Because, sub-clause (c) covers all activities in the nature of sub-clause (a) without considering volume, frequency, continuity or regularity.
  9. So, in short, we can say that the test of profit-motive is also not removed under sub-clause (c). It only removes the test of volume, frequency, continuity or regularity through which a particular activity is carried out.
    1. Now, let us come to the main concept, it can be inferred from the circumstances that Mrs. X did not intend to run any business. The property devolved upon her before the death of her husband and even the rental agreement was also executed by her husband. So, in absence of the intent of generating any monetary profit, the rental income in the hands of Mrs. X shall not be subjected to Goods and Services Tax.
  1. Before coming to the final conclusion, we may also take reference from the CBEC Press Release No. 78/2017, wherein it has been clearly mentioned that the sale of old gold by a person should not be considered as if the course or furtherance of his/her business (because selling old gold jewellery is not the business/mode of living of that individual). Most probably, the test of profit-motive has been applied in this press release to reach the prescribed conclusion.


This discussion clarifies the point that the issue of profit-motive is alive in the GST regime. It may have perished under the previous laws but is an important part of the prescribed law for GST in India.

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