Library / Goods and Services Tax: The Professional's Master Guide

4. Key Definitions (Section 2)

Section 2 of the CGST Act has more than 120 definitions, and section 2 of the IGST Act adds a few more. Many disputes turn on one word: whether an item is goods or a service, whether a receipt is consideration, whether two entities are related. This chapter explains the definitions that matter most in daily work, with a short illustration of each important term.

4.1 Goods, services, money and securities

Goods (section 2(52)) means every kind of movable property other than money and securities. It includes actionable claims, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply. Services (section 2(102)) means anything other than goods, money and securities. It includes activities relating to the use of money or its conversion from one form, currency or denomination to another for which a separate consideration is charged, and facilitating or arranging transactions in securities.

Money (section 2(75)) covers Indian legal tender, foreign currency, cheques, promissory notes, bills of exchange, letters of credit, drafts, pay orders, traveller cheques, money orders, postal or electronic remittances and other instruments recognised by the RBI, when used as consideration or exchanged for legal tender of another denomination. Currency held for its numismatic value is not money; a rare coin sold to a collector is goods. Securities (section 2(101)) take the meaning in the Securities Contracts (Regulation) Act, 1956: shares, debentures, bonds, units of mutual funds and similar instruments.

Money and securities are neither goods nor services, so their transfer is not a supply. But a fee charged for dealing in them (brokerage, money-changing margin, loan processing fee) is a service. The residual definition of services means nothing escapes classification: whatever is not goods, money or securities is a service.

4.2 Actionable claims and specified actionable claims

An actionable claim (section 2(1), taking the meaning in section 3 of the Transfer of Property Act, 1882) is a claim to an unsecured debt or to a beneficial interest in movable property not in possession, which the civil courts recognise as a ground for relief. Book debts, lottery tickets and a claim to a prize are common examples. Actionable claims are goods, but Schedule III treats them as neither goods nor services, except specified actionable claims (section 2(102A), from 1 October 2023): betting, casinos, gambling, horse racing, lottery and online money gaming. From 22 September 2025 these are taxed at 40%. Assignment of a trade receivable to a factor is therefore not a supply, though the factoring charge is a service.

4.3 Business (section 2(17))

Supply is taxable only when made in the course or furtherance of business, so the width of this definition is important. "Business" includes:

• any trade, commerce, manufacture, profession, vocation, adventure, wager or similar activity, whether or not for a profit;
• any activity in connection with, incidental or ancillary to the above, including supply or acquisition of goods (including capital goods) and services at the start or closure of business;
• any activity of that nature whether or not there is volume, frequency, continuity or regularity; a one-time transaction can be business;
• provision of facilities or benefits by a club, association or society to its members for a subscription or other consideration (clause (e));
• admission of persons to any premises for consideration;
• services supplied as holder of an office accepted in the course of a trade, profession or vocation;
• activities in connection with specified actionable claims; and
• any activity or transaction undertaken by the Central Government, a State Government or a local authority in which they are engaged as public authorities (clause (i)).

Profit motive is irrelevant. A charitable trust running a paid guest house, a club serving meals to members, and a municipal corporation letting out a hall are all carrying on business for GST purposes, subject to any exemption. Clause (e) and the related section 7(1)(aa) have been struck down by the Kerala High Court; that decision is under appeal (Chapter 5).

4.4 Person, taxable person and registered person

Person (section 2(84)) is widely defined: individual, HUF, company, firm, LLP, AOP or BOI, corporations and Government companies, bodies corporate incorporated outside India, co-operative societies, local authorities, the Central and State Governments, societies, trusts and every artificial juridical person. Taxable person (section 2(107)) is a person who is registered or liable to be registered under section 22 or 24. Registered person (section 2(94)) is a person registered under section 25, but not one holding only a Unique Identity Number (such as an embassy). A person who crosses the threshold but has not applied for registration is still a taxable person and is liable to tax from the date he became liable.

4.5 Supplier and recipient

The supplier (section 2(105)) is the person supplying the goods or services and includes an agent acting on behalf of the principal. The recipient (section 2(93)) is the person liable to pay the consideration. Where no consideration is payable, the recipient is the person to whom goods are delivered or made available, or to whom the service is rendered. The recipient also includes an agent acting for the recipient. Identifying the recipient correctly matters for reverse charge, place of supply and ITC, because only the person named as recipient on the invoice can claim ITC.

4.6 Consideration

Consideration (section 2(31)) is any payment, in money or otherwise, and the monetary value of any act or forbearance, made in respect of, in response to, or for the inducement of a supply, whether by the recipient or by any other person. Three points follow.

• Third-party payment counts. If an insurer pays a garage for repairing a customer's car, the insurer's payment is consideration for the garage's supply.
• Subsidies from the Central or State Government are excluded from consideration, and section 15(2)(e) excludes them from value. Subsidies from others (for example, a manufacturer funding a dealer discount) are included where directly linked to price.
• Deposits are not consideration unless the supplier applies them as consideration for the supply. A refundable security deposit is not taxed when received; it becomes taxable when and to the extent it is adjusted against dues.

Grants and donations without any reciprocal obligation are not consideration. Penalties imposed by law and many compensation payments are not consideration either, because nothing is supplied in return. These are covered with CBIC's clarifications in Chapter 5.

4.7 Aggregate turnover (section 2(6))

Aggregate turnover decides registration, composition eligibility, e-invoicing, HSN digits, annual return and audit-type reconciliation, and many other thresholds. It is computed on an all-India basis for all registrations under the same PAN and includes:

• taxable supplies (excluding the value of inward supplies on which the person pays tax under reverse charge);
• exempt supplies, which by definition include non-taxable supplies such as sales of liquor;
• exports of goods or services; and
• inter-State supplies between distinct persons having the same PAN (stock transfers and cross charges).

It excludes CGST, SGST, UTGST, IGST and compensation cess. Transactions in Schedule III (such as sale of land) are not supplies at all and are left out. For composition eligibility, interest on deposits and loans is excluded (Chapter 9); for registration, it is included.

Because the aggregate turnover is above Rs. 1.5 crore, the company cannot opt for composition in either State, even though each registration taken alone might be under the limit. If a land sale of Rs. 50,00,000 had wrongly been included, the turnover would be overstated at Rs. 3,18,00,000. As the business grows, such an error can wrongly push it over a threshold, for example the Rs. 5 crore limit for e-invoicing, 6-digit HSN codes and GSTR-9C.

4.8 Related persons (Explanation to section 15)

Persons are related if: they are officers or directors of one another's businesses; they are legally recognised partners; they are employer and employee; any person directly or indirectly owns, controls or holds 25% or more of the voting stock or shares of both; one directly or indirectly controls the other; both are controlled by a third person; together they control a third person; or they are members of the same family. "Person" includes legal persons, and a sole agent, sole distributor or sole concessionaire is deemed related to its principal.

The definition matters for two reasons. Supplies between related persons are taxable even without consideration when made in the course or furtherance of business (Schedule I para 2), and their value is determined under rule 28 of the CGST Rules, starting with open market value, where the price may have been influenced by the relationship.

4.9 Distinct persons (section 25(4) and (5))

A person with more than one registration, whether in one State or in several, is treated as a distinct person for each registration (section 25(4)). An establishment registered in one State and an establishment in another State are establishments of distinct persons (section 25(5)). Section 8 of the IGST Act similarly treats an establishment in India and one outside India as distinct persons. The practical effect is that goods and services moving between two GSTINs of the same company are supplies, even though no sale takes place in law.

4.10 Place of business and fixed establishment

Place of business (section 2(85)) includes a place from which business is ordinarily carried on, a warehouse or godown where goods are stored, a place where books are kept, and a place where business is carried on through an agent. Every such place must be declared in the registration as principal or additional place of business; goods found at an undeclared godown are exposed to detention and penalty. Fixed establishment (section 2(50)) is a place, other than the registered place of business, with enough permanence and a suitable structure of human and technical resources to supply services, or to receive and use services for its own needs. The concept is used in the IGST Act to decide the location of the supplier and recipient of services, and so the place of supply.

4.11 Principal and agent

An agent (section 2(5)) is a person, including a factor, broker, commission agent, arhatia, del credere agent or auctioneer, who carries on the business of supply or receipt of goods or services on behalf of another. The principal (section 2(88)) is the person on whose behalf the agent acts. Schedule I para 3 treats supply of goods by a principal to an agent (or by an agent to a principal) as a supply even without consideration, where the agent undertakes to supply or receive the goods on behalf of the principal.

CBIC Circular 57/31/2018 explained the test. Where the agent issues the invoice to the customer in his own name, he is an agent under para 3 and the goods sent to him are a supply. Where the invoice to the customer is issued by the principal and the agent only brings buyer and seller together for a commission, para 3 does not apply; the agent supplies only a commission service. Chapter 5 works this out with numbers.

4.12 Electronic commerce operator

An electronic commerce operator (section 2(45)) is any person who owns, operates or manages a digital or electronic facility or platform for electronic commerce, that is, the supply of goods or services over a digital network. An ECO must register compulsorily, collect tax at source under section 52 on supplies made through it (0.5% from 10 July 2024), and in the case of services notified under section 9(5) (for example radio taxi, hotel accommodation, restaurant services and, from 22 September 2025, local delivery by unregistered persons) pay the tax itself as if it were the supplier.

4.13 Input, input service and capital goods

Input (section 2(59)) means goods other than capital goods used or intended to be used by a supplier in the course or furtherance of business. Input service (section 2(60)) means any service so used. Capital goods (section 2(19)) are goods whose value is capitalised in the books of account of the person claiming ITC and which are used or intended to be used in business. The test is accounting treatment: the same item is capital goods for one business and an input for another. ITC on both is available in full on receipt, subject to section 16 and the blocked list in section 17(5); but capital goods are subject to the rules on reversal when they are later sold or used for exempt supplies. ITC is not allowed on the tax component if depreciation is claimed on it under the Income-tax Act (section 16(3)).

4.14 Zero-rated, exempt and non-taxable supply

These three terms are often confused, but their effect on ITC is very different.

PART B: SUPPLY AND LEVY

What is taxed, at what rate, and who pays

Every GST question starts with three tests: is there a supply, what is its nature and rate, and who is liable to pay. This Part covers the meaning of supply and the three Schedules, composite and mixed supplies, the charge under forward and reverse charge, exemptions, classification and rates, and the composition scheme for small businesses.

© Vipin Nair. This guide is for reading online only. Copying, downloading, printing and redistribution are not permitted. For study and general reference; not legal, tax or investment advice.