INDIRECT tTAX tPROJECT

TACKLING tTHE tLACUNAS tIN tTAXING tBARTER tTRANSACTIONS

SACHINDHAR tA tK

INTRODUCTION

With tthe ttectonic tshift tin tindirect ttax tparadigm tand tsubsuming talmost tall tindirect
ttaxes tinto t‘one tnation tone ttax’, tGST thas ttouched tmany tunreserved tareas twhich twere

tbarely tdealt tby tearlier ttax tregime. tOne tof tthose tareas tis t‘barter ttransaction’, ti.e.,

tinclusion tof tbarter tin tthe tdefinition tof tsupply. tAlthough tseparate tdefinition tfor tbarter

tis tnot tprovided, tit tcan tbe tinterpreted tthrough tregular teconomical tprinciples. t‘Barter’,

taccording tto tBlack’s tLaw tDictionary tis t“The texchange tof tone tcommodity tor tservice

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tfor tanother twithout tthe tuse tof tmoney”

The tnew tGST tRegime thas tincluded t‘barter’ twithin tthe tambit tof tdefinition tof tsupply
tunder tsection t7 tof tCentral tGoods tand tServices tTax tAct, t2017, tthus tmaking tit ttaxable.

tThe tsection ttalks tboth tabout tbarter tand texchange, ttwo tterms tthat tare toften tused tin

tplace tof tone tanother twhich tmakes tit tcrucial tto tdifferentiate tbetween tthe ttwo. tBarter

tin tits tmost tbasic tform, tinvolves ttwo tessentials t– t“(i) tdirect texchange tof tgoods tor

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tservices tfor tother tgoods/services tand t(ii) tno tuse tof tmoney.” t“Whereas tAs tper tLegal

tDictionary, tExchange tmeans ta ttransaction twherein tparties ttrade tgoods, tor

tcommodities, tfor tother tgoods, tin tcontrast twith ta tsale tor ttrading tof tgoods tfor tmoney.

tOnly twhen tthe tconsideration tfor ttransfer tconsists tof tother tgoods, tit tmay tbe tan

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texchange tor tbarter.”

Irrespective tof tthe tvaluation tmethods tprovided tby tGST tCouncil, tthe tlevy tof ttax ton
tbarter ttransactions tstill tremains tequivocal. tThe tmajor tissue twhich tcircumvents tthe

ttaxation tof tthese ttransactions tis twhether tto tpresume t‘barter’ tas tone tsupply tor ttwo

tsupplies tin tsingular ttransaction. tAccordingly, tthe tvaluation tand tlevy twould tchange. tIf

tit tis tconstrued tto tbe ta tone tsupply, tthen twhat tis tthe tfactor tdetermining tlocation tof

tBryan tA. tGarner, tBlack’s tLaw tDictionary, t(10th tEd. t2014) tThomas tReuters, tUK.
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tGeorge tDalton, tBarter, t16 tJOURNAL tOF tECONOMIC tISSUES t(2016).

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tDhampur tsugar tMills tLtd tv. tCommissioner tof tTrade tTax, t(2006) t5 tSCC t624. t
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 tsupplier tfor tthe tpurpose tof tGST; tAlong twith tthis tmajor tissue, tthere tare tother

tloopholes tto tbe tdealt twith. t

ISSUES tIN tCHARGING tGST tUPON tBARTER

1. Whether tbarter tconsists ttwo tsupply tor tsingle tsupply?

Section t7 tof tCGST tAct, tgives tthe tinclusive tdefinition tof t‘supply’ twhich tincludes
t‘barter’ tas ta tform tof tsupply ttaxable tunder tGST. tAs twe thave talready tseen, tunlike

tusual ttransactions, tbarter tincludes tconsideration tin tkind. tNow tfor tconsidering tthe

tbarter ttransaction tfor tlevy tof tGST, tthe tnumber tof tsupplies tis tto tbe tconstrued

tappropriately. tIn tsimple twords, twhether tbarter ttransaction tinvolves ttwo tsupplies tor

tsingle tsupply. t

GST tcouncil thas tnowhere tmentioned tor tclarified tabout tbarter ttransactions tand tthus twe
tare tstill tin tpendulum tto tdetermine tthem tone tsupply tor ttwo tsupplies. tAnd

tdetermination tof tnumber tof tsupplies tis tcrucial tas tthat twill tdecide tthe ttaxability tof

tbarter. tSo tin tsimpler twords, twhether ttwo tsupplies tin tbarter tare ttaxable tindependently

tor tconsidering tonly tone tamongst tthem tis tthe ttaxable tsupply. t

A. Now, tlet tus tconsider tthat tGST thas tintended tto tconsider ttwo ttaxable tsupplies tin tbarter
ttransaction tand tthus tboth tthe tsupplies tare ttaxable taccordingly. tBut tthere texist ta

tproblem tin tthis thypothesis tas texplained tbelow:

 Incomplete tTransaction

For tunderstanding tthe tissue tin tconcern, tlet tus tconsider tthe tsimple tillustration.

Illustration: tA ttrades t5kg tof tmangoes tto tB tin texchange tof t3 tkg tof twheat tgrains. t

In tthe tabove tcase tof tbarter, tsupplier t‘A’ tmakes tsupply tto tthe trecipient t‘B’ tand
trecipient tsupplies tgoods tin texchange. tThe tsecond tsupply tis tin tlieu tof tconsideration.
 tThe tfirst tsupply tgets tcomplete tonly twhen tsecond tsupply twhich tis tbasically ta

tconsideration tto tfirst tsupply treaches tto tthe tsupplier. tThe ttransaction tor tsupply tfrom

t‘A’ tto t‘B’ tis tcomplete tand tthus tchargeable tunder tGST. t

“But tif twe ttake tinto taccount, tthe tsecond tsupply twhere t‘B’ tsupplies twheat tgrains,
tthere texists tan tample tamount tof tscope tto targue tthat tthe tsupply tis twithout

tconsideration tas tfirst tsupply tof tmangoes tcannot tbe tconstrued tas ta tconsideration tto

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twheat tgrains tas tthe tfirst ttransaction tis talready tcomplete.” tThus tsecond tsupply

tremains twithout tconsideration tand tas tper tsection t7, tconsideration tpaid tor tagreed tto tbe

tpaid tis tone tof tthe tcondition tto tdetermine tthe tsupply. tGoing tby tthus tanalogy, tthe

ttransaction tinvolves tonly tone tsupply tand tnot tthe ttwo tsupplies.

 Second tsupply: tconsideration tor tsupply?

The tcompleteness tof tthe tsecond ttransaction tis tone targument tagainst tthe tinterpretation
tof ttwo tsupplies. tNow, tlet tus tconsider tanother targument twhich tis textension tof tthe

tfirst tone. tIn tbarter, tconsideration tto tfirst tsupply tis tconstrued tto tbe tthe tsecond tsupply.

tBecause tin tbarter tconsideration tflows tin tthe tform tof tsecond tsupply. tAs tin

tabovementioned tillustration, twheat tgrains twere tsupplied tin tconsideration tof tmangoes. t

So tGST tcouncil thas tartificially tcreated ttwo tsupplies, twhereas tin tactuality tthe tsecond
tsupply tis tthe tconsideration tto tthe tfirst tone. tThen tthe ttwo tway tinterpretation ttaken tby

tgovernment tseems tarbitrary tas twithin tone ttransaction, tone tsupply tis ttreated tas

tconsideration tand tsupply tboth tat tthe tsame ttime. t

The twhole tcontention tas tto twhy tthe tbarter tshould tbe tconsidered tas tsingle tsupply tlies
tin tthe theart tof tprevious tVAT ttax tregime tand tto tavoid tdouble ttaxation tthrough

tvaluation tmethods tprovided tby tGST trules. tIf twe tconsider tpre-GST tregime, tthere tare

tnumerous tcases tto tinterpret tbarter tas ta tsingle tsale ttransaction. tIn tthe tcase tof t‘Bhatia

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tAgency tvs. tThe tCommercial tTax tOfficer’, tthe tRajasthan tHigh tCourt theld tthat tthe

tbarter ttransaction tis tto tbe tconstrued tas tsale tand tthus tthe tsecond tsupply tis tnecessarily

twill tbe tonly tinterpreted tas tconsideration tand tnot tthe tsale. tThus tit tleads tto tsingle

tsupply tand tnot tthe tdouble tsupply tif tintended tby tGST tcouncil.

tSee talso; tBulgarian tLaw ton tVAT t(ZDDS), tArt. t130.

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tM/s tBhatia tAgency tvs. tThe tCommercial tTax tOfficer t2013 tSCC tOnLine tRaj t3306.
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t
 In tthe tparallel tAustralian tGST tregime, twhich tis tvery tmuch tsimilar tto tours, tit tis tnot
tspecifically tmentioned twhether tthe tbarter tincludes ttwo tsupplies tor tone. tThis tregime tis

tmajorly tbased tupon tthe tprobabilities tof tbarter ttransactions tas ttrade texchanges tthat

twould tusually tinvolve tbarter tcontract. tThey tenvisage tthe tbarter tscheme twhere tbarter

ttraders tare tregistered tas tmembers. tSo, tinstead tof tconsidering tsecond tsupply tas

tconsideration, t“consideration tfor ta tsupply tis tprovided tthrough ta tthird tparty t(the ttrade

texchange) ton tbehalf tof tthe trecipient tand tis tby tway tof tcrediting tthe tmembership

taccount tof tthe tsupplier. tThe tconsideration tpaid tfor tsupplies tmade tbetween tmembers

tof ta tbarter tscheme tis tthe tdebiting tof tthe trecipient’s taccount tand tthe tconsideration

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treceived tis tthe tcrediting tof tthe tsupplier’s taccount.”

In light of arguments above, if the government is interpreting the barter transaction as two
supplies and levying taxes on both of them, then it may be considered wrong as it is ethically
inappropriate to apply two meanings to the same supply within one transaction.

B. Presumption as to intention of government to tax both supplies of barter may not go well if
we interpret the statute and illustrations given under GST rules. Although it is quite logical
and reasonable to interpret it in former way which we have deduced and argued against in our
above argument, but now the question arises that what if it is construed to be a single supply?

For the purpose of establishing the intention of government, first we will anatomize section 7
of CGST Act, 2017. As per clause (a) – “all forms of supply of goods or services or both
such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to
be made for a consideration by a person in the course or furtherance of business” 7 After
battling with ambiguity in pre-GST regime regarding barter, council has tried to give as wider
definition as possible which practically includes everything. But the drafters have neglected
the contradiction in this inclusive definition. The formation of sentence –‘Supply such as
barter made or agreed to be made without consideration’ itself invites many doubts in the
minds of the readers. The definition contemplates supply such as barter made for
consideration, whereas barter is clearly identified as the transaction with no monetary
consideration. The consideration is by way of second supply. So is it safe to postulate that

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tGoods tand tServices tTax tRuling, tGSTR t2003/14 tGST, tGoods tand tservices ttax: tthe tGST
timplications tof ttransactions tbetween tmembers tof ta tbarter tscheme tconducted tby ta ttrade texchange.

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CGST Act, 2017, Sec. 7(a).
 government is considering barter as single supply with second supply as a consideration
only?
This question may have its answer in the illustrations given by the Rules as well as the other
related official documents. Illustration number one given under rule 27 deals with the
situation when consideration for new laptop is partly in money and partly in goods. Even the
second illustration states consideration of laptop in money along with the barter of printer. 8
Both of these examples contemplate part monetary consideration which is conflicting from
the very meaning of ‘barter’. And ultimately the illustrations derive at only one value for
charging the tax. Thus it is conclusive that tax is levied only upon one supply within barter
transactions.

Another example to further the contention is given under GST, that is, “when there is barter
of goods of services, the same activity constitutes supply as well as a consideration. When a
barber cuts hair in exchange for a painting, hair cut is a supply of services by the barber. It is
a consideration for the painting received.”9 This clearly amplifies our earlier argument that
the second supply is basically a consideration in form of supply and thus cannot be taken as
second supply which can be taxable. And this is what all the illustrations are postulating.

But only considering barter as single supply, although clarifies certain misconceptions, but
still susceptible to even more legal and practical problems as envisaged follow:

 Single Supply: Who is supplier and who is recipient?

Assuming the single supply is taxable amongst two transactions in barter, the biggest
requirement which should get satisfied for creation of charge, is who is the supplier and
recipient and what is the location of supplier for determining intra or inter-state supply?

Although under GST charge is created upon a transaction but is payable by the supplier and
recipient in some cases. In barter, as we have already explained, both the parties can be
termed as suppliers of goods or services. If one supply is considered as a consideration in lieu
of other supply, then which supply is consideration and which one is supply that is taxable?
Let us consider this with earlier example of mangoes and wheat grains. Whether to consider
supply of mangoes as taxable supply or supply of wheat grains as taxable supply?

There is a necessity to find out objective criteria for solving this problem as if it is left open
for the persons trading in barter to interpret then it may lead to tax avoidance. And this
8
CGST Rules 2017, Rule 27.
9
GST Flyers, CBEC (updated on Jan. 1, 2018).
 problem happens due to non requirement of adequate consideration. Let us say that market
value of 5kg mangoes is Rs.1000 and market value for 2kg wheat grains is Rs. 850, then the
feasible option is to choose second supply and tax it as the value is less as compared to the
first supply. An unequal consideration flow through barter may be misused by traders to pay
less tax.

Now after identifying the problem with respect to single supply in barter, the possible
solution that can be given is finding the source of contractual agreement. “GST cannot be
imposed on any supply, if the contractual agreement, whether written or otherwise, between
the provider and recipient is absent.”10 And as we all know, every contract has an essential
element of offer and acceptance. In case of barter, both the offeror and acceptor are suppliers
of goods or services. But offeror is the one who initiates the proposal to trade and thus he can
be construed as the supplier in case of two supplies and that supply can be made taxable.

2. Whether valuation of barter as per open market value is appropriate and without any flaws?

The valuation method as contemplated by rule 27 is a case where consideration is not wholly
in money goes in chronology and first method of valuation is ‘open market value’ method. As
per this method, when consideration of the supplied goods or services is not money but in
kind then the market value of the supplied goods should be taken into consideration for the
purpose of tax.

Now this may be termed as unfair to determine the value of supplied goods or service
whereas the value of consideration is something else. The intention behind legislature to put
forth this method is to reduce the efforts and create uniformity as in the cases of exchanges
and barter; there is a possibility of unequal consideration flow as there is no monetary value
of consideration. To make it simple, if mangoes are supplied in exchange of wheat grain, the
monetary value of both supplies need not resemble each other. Thus the market value of
supply is determined and if it is not determinable then the value of consideration which is in
kind is determined.

As per section 15 of CGST Act, value of supply, i.e., the transaction value is the price
actually paid or payable where price is the sole consideration. If this is then normal rule, then
it is unfair to create a disparity in applying different rule when consideration in not in money.
10
Rajesh Tiwari, GST: ‘barter’ and ‘exchange’ in supply, http://gsthelper.com/Blog/BlogPage/636ca82a-770d-
47b4-955f-4961aeda7f3e (Last Visited: Oct. 29, 2018 (N.T.M)).
Because ultimately, the worth of goods or services received by the supplier in lieu of
consideration is the actual consideration and thus the value of consideration in kind should be
taken into consideration first than open market value of the supplied goods or services. “One
of the EU case has supported this findings by quoting ‘equal treatment principle’ and has
clearly mentioned that barter transaction and other transaction where the money is sole
consideration are economically and commercially identical situations.”11

“Thus taxing open market value of supplied goods or services is economically inappropriate
position and can be disadvantageous to normal customers. It may also daunt the traders
trading in barter.”12 Let us take the example of Amazon exchange offer. If Amazon is
supplying mobile phone which is worth Rs. 20,000 and in exchange asking for your old
phone plus Rs. 10000. If the market value of old mobile phone is 5,000 along with the cash of
10000 equivalents to Rs. 15000 which is the consideration paid by you. But the tax will be
applicable on Rs. 20,000 as the open market value of new phone supplied to you and thus you
have bear the burden of tax payable on 20,000 rather than on 15000. This is clearly
disadvantageous to customers. The case can be vice versa as well where customers can
benefit out of this valuation.

“Even European Commission, has ruled in one of the cases that VAT should be calculated on
the monetary value of goods or services supplied in lieu of consideration. They have also
made the distinction between barter transaction and transaction between related parties. It is
justified to charge the market value of goods supplied in case of related party transaction but
not in barter transactions.”13 “Thus it is safe to conclude that GST should be charged upon the
transaction value, i.e., the value of consideration in kind received in barter and not upon value
of goods or services supplied.”14

CONCLUSION

The tinclusion tof tbarter twithin tthe tdefinition tof t‘supply’ tunder tGST thas topened tthe
tPandora tbox tfor tmany tissues twhich twe thave talready tdealt twith. tAlthough tbarter tis

11
Goldsimths Jewellers Ltd. v. Commissioner of Customs and Excise, (1997) Case C-330/95.
12
Ibid.
13
Director v. Orfrey Balgaria EOOD, (2012) Case C-549/11.
14
Australian Taxation Ruling 2668, Ref. no 86/2537-9.
tone tof tthe toldest tform tof ttrade, tadvent tof tcomplex tgovernments tand tstringent trevenue

tpolicies thave tmade tdifficult tto ttax tcollectors tas twell tas ttax tpayers tto tcharge ttax tupon

tbarter ttransactions. tFor tthe tpurpose tidentifying tthose tdifficulties, twe tanalyzed tthe

tposition tof tbarter tin tpre-GST tregime tand tpost-GST tregime tin tIndia tand tposition tof tit

tin tother tjurisdictions tas twell.

Where ton tone thand, tpre-GST tregime tconsidered tbarter ttransaction tnot tcoming twithin
tthe tambit tof tsale tbut tincorrectly tconsidered tmany ttransactions tas tnot tbarter tjust tto

tbring tthem twithin tthe tpurview tof tsales ttax tand tVAT, ton tother thand, tpost tGST

tregime tdoes tnot tclarify tthe tdefinition tof tbarter tand tpresumes tthe tposition tpre-GST.

tThis titself tis ta tdisputable tposition tas tdefinition tof tbarter tcontemplates tno tmoney

tconsideration tat tall. t

Amplifying tthe tissues tthat twere tpresent tis tVAT tregime; tGST tcame tup twith tnew tand
tmore tcomplex tproblems tto tdeal twith tbarter. tThe tinclusion tof tword tbarter tin tsupply

thas ta tcore tissue tof tdealing twith tbarter tand tdetermination tof tsingular tof tdual tsupply

twithin tthe tmeaning tof tbarter. tAs tthe tGST thas tnot tclarified twith ttheir tstance tupon tthe

tsame, twe tgave ttwo tway targuments tthat tfurther tled tto tmore tconcerns tand twe tinferred

tthe tcorrect teconomic tposition tas tto tconsider tit tas tsingle tsupply. tAnother tissue tdealt

twith tconsidering tsecond tsupply tas tconsideration tand tvaluing tthat tsupply trather tthan

ttaxing tmarket tvalue tof tsupply. tThis twas tsupported twith tjudicial tpronouncements.

Considering tGST tas ta tnewly timplemented tregime, tapart tfrom tprocedural tflaws, tthe
tmisconceptions tleading tto tclash tbetween teconomic tprinciples tand tartificial tcreation tof

tcharge tcannot tbe ttaken tlightly tand tthe tmore tsort tafter tposition tis trequired tto tbe

ttaken tby tgovernment twhen tit tcomes tto ttaxing tthe ttransactions tlike tbarter. t