GST implication on free embroidery services

[SUBHASISH SARKAR]

The company is in the business of importing and selling high end garments . In order to provide specialised services , the company would embross the name of the customer in embroidery on the garment and then supply . In the invoice , apart from billing the value of the product , they would like to separately indicate “embroidery charges” at a value showing 0 (zero) . My query is what would be the gst implications if they disclose in the invoice in this manner .

[KASTURI SETHI]

If there is actually no consideration, then such activity will be out of scope of "supply'' as per the parameters laid down in Section 7 of CGST Act. There must not be any benefit in any form in lieu of 'free service'' but it is subject to Schedule-1 of CGST Act (Section-7).

[YAGAY and SUN]

Under the provisions of the CGST Act, particularly Section 7, the concept of "supply" is defined broadly to include not just transactions involving a consideration but also certain activities even when no consideration is involved.

In general, for any activity to qualify as a "supply" under the CGST Act, there must be consideration in exchange for the service or goods provided. However, the law makes an important distinction when it comes to "free services."

Key Points to Consider:

1. No Consideration – General Rule:
   If there is no consideration exchanged, in the conventional sense, for a good or service, then the activity would typically not be classified as a supply under the CGST Act. In simpler terms, if an entity provides something for free, without expecting any tangible benefit, it is not considered a supply under the Act.
2. Exception Under Schedule I – Activities Deemed to be Supply:
   Even when there is no explicit consideration, certain activities are still deemed as a "supply" under Schedule I of the CGST Act. These include activities where the relationship between the parties involved suggests an inherent benefit or value exchange.

For instance:

2. • Free services provided by a business to its related parties or employees may still be considered as a supply, even if no monetary compensation is received, because these activities fall under the specified list in Schedule I.
   • Similarly, any goods or services provided as a gift to employees or related persons, when the goods or services are not used exclusively for personal use, would also fall under the scope of "supply," as outlined in Schedule I.
3. Schedule I – Specific Activities:
   Under Schedule I of the CGST Act, certain activities without consideration are still classified as supplies, such as:
   • Transfer of goods or services between related parties or between distinct persons, where the goods or services are not used exclusively for personal purposes.
   • Temporary transfer or permitting the use of intellectual property, such as patents or copyrights, where no consideration is charged, but the transaction is still deemed to constitute a supply.
4. Implication for Businesses:
   Even if a service or good is provided without consideration, businesses must carefully assess whether the transaction falls within the provisions of Schedule I. If so, even in the absence of consideration, GST may be applicable on such supplies.

[YAGAY and SUN]

In simple wordings - 

According to Section 7 of the CGST Act, a transaction is generally considered a "supply" only when there is a consideration for the goods or services exchanged. However, Schedule I, lists certain exceptions where activities without consideration can still be regarded as a supply.

For example, free services or goods provided between related parties, employees, or distinct persons may still be classified as a supply under Schedule I, even if there is no direct benefit or payment received in return. This means that even in the absence of consideration, these activities may be subject to GST.

Therefore, while the absence of consideration usually implies that the activity would fall outside the scope of supply, the provisions of Schedule I create exceptions where GST obligations may still arise, even if no money is exchanged.

In essence, it is crucial for businesses to carefully review their transactions to determine whether they fall under the "free service" or other similar provisions in Schedule I, as failure to do so may result in unintended GST liabilities.

[Shilpi Jain]

There would be no liability sicne there is no consideration. It is a in the nature of incidental charges.

AI Summary

Supply under GST: free embroidery may be outside scope absent consideration, unless Schedule I deems it a supply.
GST treatment of complimentary embroidery depends on whether the service is supplied for consideration or is a deemed supply under Schedule I. If embroidery is genuinely free and incidental with no reciprocal benefit, it falls outside supply; if it matches Schedule I criteria (transfers between related persons or non-personal use benefits), GST applies despite absence of payment.