INTRA-FAMILY TRANSACTION: SUPPLY BETWEEN RELATED PERSONS UNDER SCHEDULE I

Intra-Family Business Transactions under GST: Supply between “related persons” under Schedule I

1. The Architecture of “Supply” – A Structural Departure in Indirect Taxation

The taxable event under the Central Goods and Services Tax Act, 2017 is “supply.” Section 7 adopts an expansive formulation, encompassing sale, transfer, barter, exchange, licence, rental, lease or disposal of goods or services or both, provided such transactions are undertaken for consideration in the course or furtherance of business. Two structural innovations distinguish GST from earlier indirect tax regimes:

A. Import of services for consideration is treated as supply even when received for personal use.

B. Certain transactions are deemed to be supply even without consideration, by virtue of Section 7(1)(c) read with Schedule I.

At the same time, Section 7(2) read with Schedule III carves out specific exclusions, reinforcing that GST is not merely transactional, but conceptually structured. Within this statutory design, the taxation of supplies between related persons—including members of the same family—emerges as a deliberate anti-avoidance mechanism

2. Related Persons: Legislative Expansion beyond Commercial Control

The Explanation to Section 15 defines “related persons.” While it includes directors, partners, controlling shareholders, and employer-employee relationships, the most socially significant inclusion is: Members of the same family. This inclusion marks a conscious legislative choice. Unlike corporate control or shareholding, family relationships are personal. Their inclusion reflects a policy concern that business arrangements within closely connected persons could be structured to suppress taxable value or bypass tax altogether.

3. Meaning of “Family” under Section 2(49): Section 2(49) defines “family” as: The spouse and children of the person; and the parents, grandparents, brothers and sisters, if wholly or mainly dependent on such person. Thus spousal transactions automatically fall within the related-person framework. In the case of other relatives, dependency becomes determinative. The statute, therefore, does not treat family as a vague sociological concept; it is legally circumscribed.

4. Schedule I: The Legal Fiction of Supply without Consideration

Under classical contract theory, consideration is indispensable. GST disrupts that orthodoxy. Paragraph 2 of Schedule I provides: Supply of goods or services or both between related persons, when made in the course or furtherance of business, shall be treated as supply even if made without consideration. This deeming fiction rests on three pillars: Existence of related persons, Supply of goods or services and Course or furtherance of business. Thus, intra-family transfers of business assets, shared infrastructure, leasing of commercial property, deputation of manpower, or provision of managerial services—if undertaken in business context—may attract GST even where no consideration flows. The law, therefore, pierces the veil of familial proximity to examine economic substance.

5. The Critical Limiting Factor: “Course or Furtherance of Business”

Taxability does not arise merely because two persons are related. Section 2(17) defines “business” expansively, covering trade, commerce, profession, vocation and incidental activities, irrespective of profit motive. However, the existence of a business nexus remains indispensable. A purely domestic arrangement—devoid of commercial character—falls outside GST. The jurisprudential balance is thus clear:  family relationship alone does not create taxability, business character alone does not suffice without relatedness for Schedule I purposes and it is the convergence of both that triggers the deeming provision.

6. Valuation Discipline: Rule 28 as the Anti-Abuse Engine

Once deemed supply is established, valuation assumes central importance. Since related persons are involved, Section 15(1) (transaction value between unrelated parties) becomes inapplicable. Valuation must proceed under Rule 28 of the CGST Rules. Sequential Valuation Framework:, Open Market Value (OMV), Value of like kind and quality, Cost plus 10% (Rule 30), Best judgment method (Rule 31). This structured hierarchy prevents artificial undervaluation in intra-family transactions. Where the recipient is eligible for full input tax credit, the invoice value shall be deemed to be the open market value. This embodies the principle of revenue neutrality. If the entire tax paid becomes creditable to the recipient, there is no loss to the exchequer. Hence, valuation rigidity yields to fiscal pragmatism. This principle was recently reaffirmed by the Authority for Advance Ruling, Andhra Pradesh in M/s Sri Lakshmi Ganesh Cement and Iron General Stores [2025 (11) TMI 107]. The Authority held that: Supplies to unrelated persons are valued under Section 15(1) at transaction value where price is sole consideration. Supplies to related persons eligible for full ITC may adopt the declared invoice value under Rule 28.

7. Policy Rationale: Why family transactions are taxed?

The inclusion of family members in related persons is neither accidental nor symbolic. Historically, tax avoidance structures often relied on informal transfers within closely connected persons. By deeming such supplies taxable when connected to business, GST ensures: Horizontal equity between related and unrelated transactions, Prevention of base erosion, Neutral treatment of economic activity irrespective of personal ties. The statute thereby aligns with modern tax policy that prioritizes substance over form.

8. Doctrinal Synthesis, A harmonious reading of:

Section 7 (Scope of Supply),

Schedule I (Deemed Supplies),

Section 15 (Related Persons),

Section 2(49) (Definition of Family), and

 Rule 28 (Valuation Rules)

reveals a coherent legislative design. GST does not tax relationships. It taxes economic activity within relationships. Familial proximity neither grants immunity nor creates automatic liability. The tax consequence flows from business substance coupled with statutory deeming fiction.

9. Concluding Reflections

The GST regime represents a decisive shift from formalistic taxation toward economic realism. Intra-family business transactions are scrutinized not through the lens of personal association but through the prism of fiscal accountability. Where goods or services are supplied between family members in the course or furtherance of business, Schedule I operates to deem such transactions taxable even in the absence of consideration. Rule 28 ensures disciplined valuation while the full ITC proviso preserves revenue neutrality.

In essence, the law proclaims a simple but powerful principle: “Business transactions do not lose their taxable character merely because they occur within the family”.