GST supply meaning Scope of Supply in GST: A Complete Guide to Section 7 of CGST Act

GST Section 7: Understanding the Scope of Supply under GST

       Introduction

The Goods and Services Tax (GST), introduced in July 2017, has changed India’s indirect taxation system by creating a unified, destination-based tax. To understand GST properly, one must know what is considered a “supply” under GST law, because supply is the very foundation on which GST is levied.

This is where Section 7 of the CGST Act, 2017 comes into play. Section 7 defines the Scope of Supply, i.e., what transactions are treated as supply of goods or services and are liable to GST.

In this blog, we’ll break down GST Section 7 in simple words, explore its provisions, examples, exceptions, importance for businesses, and address frequently asked questions.

 

What is Section 7 of the CGST Act?

Section 7 of the Central Goods and Services Tax (CGST) Act, 2017 defines the term “Supply”, which is the taxable event under GST.

In simple terms:

• Supply includes all forms of transactions where goods or services are provided for consideration (payment), in the course of business.
• Some activities are treated as supply even without consideration (like transactions between related parties).
• Certain transactions are considered supply by way of deeming provisions, even if they don’t look like supply in a traditional sense.

Without supply, GST cannot be levied. Hence, Section 7 forms the backbone of GST law.

 

Key Provisions of Section 7

Section 7 has several subsections explaining what is covered under the scope of supply:

1. Section 7(1): Supply Includes

Supply includes all forms of:

1. Sale – Transfer of ownership of goods for a price.
2. Transfer – Giving goods/services to another person (with or without ownership transfer).
3. Barter or Exchange – Goods or services exchanged without money. Example: Trading wheat for rice.
4. License – Allowing someone to use property, goods, or services legally. Example: Software license.
5. Rental – Renting out goods or property.
6. Lease – Granting rights to use goods or property over a period.
7. Disposal – Disposing of business assets, such as selling old machinery.

👉 All of the above qualify as supply when they are for consideration (payment) and in the course of business.

 

2. Section 7(1A): Classification of Goods or Services

The government has the power to decide whether a particular activity is considered as:

• Supply of goods, or
• Supply of services

This classification helps in applying the correct tax rate and compliance rules.

 

3. Section 7(2): Activities Excluded from Supply

Certain activities are not treated as supply under GST. These are mentioned in Schedule III of the CGST Act.

Examples:

• Services by an employee to an employer.
• Sale of land and completed buildings.
• Funeral services.
• Actionable claims (other than lottery, betting, and gambling).

This ensures that only taxable transactions come under GST.

 

4. Section 7(3): Government’s Power

The Government, on the recommendation of the GST Council, may notify specific activities as supply of goods or services.

This allows flexibility to adapt to changing business models and economic needs.

 

Schedule I: Supply Without Consideration

Section 7 also refers to Schedule I of the CGST Act, which covers activities treated as supply even without payment/consideration.

Examples include:

1. Permanent transfer of business assets (like giving machinery for free).
2. Supply between related persons or between distinct persons (e.g., transfer between head office and branch in another state).
3. Supply of goods between principal and agent.
4. Import of services from a related person or from a business outside India (for business purposes).

 

Schedule II: Supply of Goods or Services

Schedule II helps clarify whether a particular activity is to be treated as supply of goods or services.

Examples:

• Renting of immovable property → Supply of services.
• Works contract → Supply of services.
• Transfer of business assets → Supply of goods.

 

Schedule III: Activities Not Treated as Supply

As per Section 7(2), Schedule III specifies activities that are outside GST scope.

Examples:

• Services by an employee to employer (salary).
• Sale of land.
• Sale of completed building.
• Services of MPs, MLAs, Panchayat members, and other constitutional posts.
• Services by courts and tribunals.

 

Examples to Understand Section 7

Let’s simplify Section 7 with some practical examples:

Example 1: Sale of Goods

A shopkeeper sells a mobile phone for ₹20,000. This is a supply of goods, liable to GST.

Example 2: Barter Transaction

A farmer gives 50 kg rice to another farmer in exchange for 30 kg wheat. No money involved, but still considered supply under GST.

Example 3: Employee Salary

An employee receives ₹50,000 per month salary. This is an employment service, which falls under Schedule III and is not taxable under GST.

Example 4: Supply Without Consideration

A company transfers machinery worth ₹5 lakh from its head office in Delhi to its branch in Maharashtra. Even though no payment is made, this is treated as supply under GST.

Example 5: Renting a House

A property owner rents out commercial property for ₹1 lakh/month. This is considered supply of services and attracts GST.

 

Importance of Section 7 for Businesses

1. Defines Tax Liability – Businesses know what transactions are taxable.
2. Avoids Double Taxation – Clarifies whether something is goods or services.
3. Compliance Clarity – Helps businesses issue correct GST invoices.
4. Covers Modern Transactions – Barter, digital services, and free supplies are covered.
5. Prevents Disputes – Provides a structured approach for classification.

 

Challenges in Section 7

While Section 7 is comprehensive, businesses face challenges like:

1. Classification Issues
• Sometimes confusion arises on whether something is goods or services (e.g., software).
2. Free Supplies
• Businesses struggle to determine taxability of free samples or promotional items.
3. Schedule Overlaps
• Differentiating between Schedule II and Schedule III can be confusing.
4. International Services
• Import/export of services creates compliance complexities.

 

Judicial Rulings on Section 7

Courts have interpreted Section 7 in several cases:

• Barter Transactions: Courts confirmed that barter without money still counts as supply.
• Employer-Employee Relationship: Salary and employment contracts are outside GST.
• Free Samples: Some rulings clarified that free samples given for business promotion may not be taxable if covered under Schedule III.

 

Section 7 in Simple Words

To put it simply:

• If you sell, transfer, exchange, rent, lease, or license goods/services → It’s a supply.
• If you provide something free to a related party → it’s a supply.
• If you’re just paying salary or selling land/buildings → it’s not supply.

 

Practical Tips for Businesses

1. Check Schedule I, II, III before classifying transactions.
2. Maintain detailed invoices for all supplies, even barter/exchange.
3. Consult experts for complex cases like works contracts or digital goods.
4. Stay updated with government notifications about reclassification.
5. File returns carefully to avoid penalties due to wrong classification.

 

Benefits of Section 7 for the GST System

• Uniform Definition of supply across India.
• Comprehensive Coverage of traditional and modern transactions.
• Flexibility with government’s power to notify new supplies.
• Transparency for taxpayers and businesses.

 

Conclusion

Section 7 of the CGST Act, 2017 defines the Scope of Supply, making it one of the most important provisions under GST law. It determines what activities are taxable, what is exempt, and how to classify goods and services.

For businesses, understanding Section 7 is crucial for compliance, accurate invoicing, and avoiding penalties. While classification issues may arise, the detailed schedules and judicial guidance help bring clarity.

Overall, Section 7 forms the backbone of GST, ensuring that India’s indirect tax system is fair, transparent, and business-friendly.

 

FAQs on GST Section 7

Q1. What does Section 7 of the CGST Act cover?
It defines the scope of supply, i.e., what transactions are considered as supply of goods or services under GST.

Q2. What is considered supply under GST?
Sale, transfer, barter, exchange, license, rental, lease, or disposal of goods/services in the course of business.

Q3. Is salary taxable under GST?
No, services by an employee to an employer in the course of employment are excluded from supply under Schedule III.

Q4. Is barter considered supply under GST?
Yes, even without money, barter and exchange transactions are considered supply.

Q5. What is Schedule I under Section 7?
Schedule I lists supplies that are taxable even without consideration, such as transfers between related persons.

Q6. What is Schedule II?
Schedule II classifies whether a transaction is supply of goods or services.

Q7. What is Schedule III?
Schedule III lists activities that are not considered supply, such as salary, sale of land, and services of MPs/MLAs.

Q8. Can government decide what is goods or services?
Yes, under Section 7(1A), government can notify classification of specific activities as goods or services.