TaxTMI 
TaxTMI 
TaxTMI 
The 'Consideration' under Section 2(31) of the CGST Act: The Essence of Essentials
In the grand architecture of the Central Goods and Services Tax (CGST) Act, 2017, 'Consideration' is not merely a commercial term or an accounting entry, it is a jurisdictional fact. Under the landmark mandate of the Hon'ble Supreme Court in Govind Saran Ganga Saran Versus Commissioner Of Sales Tax And Others - 1985 (4) TMI 65 - Supreme Court, a tax must have a certain 'Measure.' In the GST framework, Section 2(31) provides that precise measure.
I. The Four Pillars: The Hon'ble Supreme Court [supra] established that for any tax to be legally enforceable, four components must be certain and integrated. 'Consideration' fulfills the fourth and most critical component for valuation:
1. The Taxable Event: The Supply.
2. The Subject: The Taxable Person.
3. The Rate: The GST Percentage.
4. The Measure: The Value derived from Consideration.
II. Statutory Definition: Section 2(31) of the CGST Act, 2017
'Consideration' in relation to the supply of goods or services or both includes:
(a)Any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person (excluding Government subsidies).
(b) The monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both.
Proviso: A deposit shall not be considered payment unless the supplier applies such deposit as consideration for the said supply.
III. Deciphering the 'Triangle of Intent'
To separate a genuine economic exchange from a 'Sham Transaction,' Section 2(31) employs three surgical phrases that act as filters. If any one of them is missing, the legal 'spine' of the transaction collapses.
1.'In Respect Of': The Linkage Spine (The WHAT)
This requires a one-to-one correspondence between the payment and a specific supply. Money must be fastened to a specific reality, not just 'floating' between account.
2. 'In Response To': The Reciprocal Spine (The WHY)
This establishes the Quid Pro Quo-the contractual trigger. Under the Indian Contract Act, 1872, no prudent person parts with money without expecting a corresponding benefit. When Sections 2(31) and 7 are read together, GST applies only where there is a reciprocal exchange. Absent this reciprocity, the movement of money loses its legal character as 'consideration'. This appears to be the underlying rationale behind the 180-day condition prescribed under Section 16(2)(d) of the CGST Act, besides ensuring the integrity of supply chain. While ITC may be availed on the basis of a valid tax invoice, the law expects that the consideration for the supply, along with the tax component, must be paid within 180 days from the date of the invoice. If such payment is not made within the stipulated period, the recipient is required to reverse the proportionate Input Tax Credit, as the essential element of reciprocal consideration-the fulcrum of supply-remains incomplete. However, the credit is not permanently lost; it may be re-availed once the payment of consideration is eventually made, thereby restoring the underlying quid pro quo of the transaction.
Therefore to convert 'Input Tax' into transferable Input Tax Credit (ITC), a registered person must first transition 'input tax' into 'credit' by strictly satisfying all eligibility conditions under Section 16(2). This requires the possession of a valid tax invoice, verification of the supplier's tax payment and return filing, and the actual receipt of the underlying goods or services against payment of 'consideration' within the prescribed period. However in terms of Section 13(2)(a) of the CGST Act, the 'time of supply of service' has to be reckoned as well to determine the point of taxable event.
3. 'For the Inducement of': The Causal Spine (The MOTIVE). This captures the 'push factor,' including third-party payments.
IV. Under Section 7(1)(a) read with Section 2(31)(b) of the CGST Act, tax is attracted on supply of goods or services for a consideration in the course or furtherance of business. In this context, paragraph 5(e) of Schedule II provides that agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act shall be treated as a supply of services. Therefore, an act of tolerance or forbearance becomes taxable only where there exists a prior contractual obligation and identifiable consideration specifically for such tolerance, as also clarified by the CBIC in Circular No.178/10/2022-GST dated 03.08.2022.
V. Section 24 of the Indian Contract Act, 1872:
Agreements void, if Considerations and objects unlawful in part.
24. If any part of a single consideration for one or more objects, or any one or any part of any one of several considerations for a single object, is unlawful, the agreement is void.
Illustration
A promises to superintend, on behalf of B, a legal manufacture of indigo, and an illegal traffic in other articles. B promises to pay to A a salary of 10,000 rupees a year. The agreement is void, the object of As promise and the consideration for Bs promise, being in part unlawful.
This foundational principle mirrors the GST requirement: only lawful consideration connected with a lawful object can sustain a valid transaction.
VI. It is pertinent to refer the judgement dated 12/09/2025 of the Hon'ble Supreme Court in Shanti Devi (since deceased) through LRs Vs. Jagan Devi & Ors., arising out of SLP (Civil) No. 24821 of 2018, which examined the validity of a transaction where the alleged executant had neither executed the document nor received the sale consideration. The Court held that where a transaction lacks genuine consideration, it becomes a nullity in the eyes of law and does not create enforceable rights. This principle aligns closely with the essential requirement embedded in Section 2(31) of the CGST Act, 2017 which mandates that 'consideration' must be a payment made in respect of, in response to, or for the inducement of a supply. Therefore, unless a real nexus exists between payment and an identifiable supply, mere movement of money cannot qualify as valid 'consideration' under Section 2 (31) of the Act. In the absence of this essential element, the transaction lacks legal substance and cannot trigger a taxable event under GST, just as a contract without consideration is treated as void in law.
VII. Here it is worth to take the help of the judgement of the Hon'ble Gujarat High Court rendered in the case of Munjaal Manishbhai Bhatt Versus Union of India - 2022 (5) TMI 397 - GUJARAT HIGH COURT as regards to the validity of interpretation of 'value of supply' and consideration therefor.
IX. Under the Govind Saran mandate [supra], GST is a binary system: Real Consideration is the gravitational pull generated only by a 'Real Supply'. If the department identifies a 'payment' without an entangled 'supply activity,' it is observing a financial phantom-a transaction in money that lacks the jurisdictional spine to sustain a levy. In simple words, the taxable event under the GST Act cannot be triggered by the mechanical movement of money. A mere transfer of cash between accounts, devoid of commercial substance or an underlying supply, does not qualify as 'consideration.'
X. A 'Fake Tax Invoice' mimics the form of Section 2(31) but lacks its substance. Following the 'Economic Reality' Doctrine (seen in AAK Sourcing Ltd vs. Comm. of Central Tax, 2024). Only to a paper document, not goods/services. Driven by circular money flow (A B A). The theft of the exchequers revenue via fake ITC. Where transactions are structured to create artificial trading trails, Section 122 provides for penalty for fraudulent invoicing and Section 132 authorises prosecution of conscious beneficiaries, subject to proof of statutory ingredients.
XI. Exception:
This entire analogy excludes transactions specified under Schedule I of the CGST Act, 2017, which explicitly treats certain activities as 'supply' under Section 7 even if made without consideration.