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Generally, barter transactions are believed to have existed before the development of currency. However, barter is still fashionable, but not as a fundamental means of trade and commerce but as an inventive one. There are a variety of trade platforms, for instance, where a firm with excellent creditworthiness can engage in bartering with other businesses without using cash or assets. A business can acquire products offered by another business by deducting points, and can earn credit points anytime its own items are acquired by another business on the trading platform. In trading systems where the balance of credit and debit points is maintained, the requirement that both parties have a shared interest in their respective items is thus not present. In addition to this, barter is observed when promotional offers involve the exchange of old appliances for new ones at a large discount. It is also observed in locations where one may not initially recognise it as barter. For example, in some cooperative development agreements and with cryptocurrency.


Definition of Barter and Exchange


The term barter is not defined in the CGST Act, 2017. Barter is defined as the practise of exchanging one item for another with no set value. For instance, trading a bicycle for a scooter. Barter includes two distinct goods. According to the eighth edition of Black's Law Dictionary, barter is the exchange of one commodity for another without the use of money. Barter was more prevalent when money (a widely recognized medium of trade) did not exist, but similar forms of interactions are gaining momentum now as well. Such are clothing exchanges between a manufacturer and an advertising agency for product promotion or cooperative development agreements.


Similarly, the term exchange is not defined in the CGST Act of 2017. Similarly to barter, an Exchange transaction has two separate supplies. According to the eighth edition of Black's Law Dictionary, the exchange is the act of exchanging interests in exchange for one another. Following the determination of the value of the goods/services to be traded, an exchange will occur. The difference in the value of the products and/or services being exchanged should be paid in cash or its equivalent. For instance, a new phone is provided together with the exchange of an old phone for 30,000/-. Alternatively, if the purchase of a new phone is 34,000 rupees, the value of a new phone subject to GST shall be 34,000 rupees under rule 27. These transactions shall only be regarded as a supply if section 7 of the CGST Act is satisfied with, such as if they occurred in the regular course of business. If the old phone belonged to an employee of a private firm, it would not be deemed a supplier. Then there is only one transaction, namely giving out a new phone for Rs. 34,000/-.


Taxation of Barter Transactions


The Parliament and State legislature derive its power to levy taxes from Article 246 of the Constitution and Article 265 provide that there can be no taxation without the authority of law.

Transactions involving barter might be interpreted in two ways:

·      A barter transaction generating income

·      A barter transaction as an expenditure

Under the Central Goods and Services Tax act 2017 (hereinafter referred to as “CGST Act”), the taxable event shall be the “supply” of goods or services, or both made for consideration in business or the furtherance of it.


Scope of Supply


According to section 7(1)(a), supply comprises different actions such as sale, transfer, licence, rental, and lease, but more importantly, it includes barter and exchange made or promised to be performed in the course or advancement of business for consideration. In addition, according to section 2(31) of the GST Act, consideration encompasses both monetary and non-monetary payments. Thus, there is no question regarding the fact that barter transactions are now subject to tax on the total value, not simply the cash component.


Valuation


Moreover, once a barter event triggers taxes, it is crucial to comprehend how the tax will be calculated. There exists a tax rate, but the supply value determines how this rate is to be applied. Each fiscal legislation mandates ad valorem tax payment. In the GST statute, tax is also due on this basis, i.e. as a proportion of the value of the item or service supplied. Section 15 of the GST Act and the Goods and Services Tax (Determination of Value of Supply) Rules, 2017 specify how the value of a supply is to be determined based on the circumstances and parties involved.


Treatment of barter transactions in GST


Barter meets the requirements of Section 7 of the Act. Section 9 of the Act imposes a tax on the taxable event, namely the supply. A combined reading of sections 7 and 9 clarifies that barter is a taxable supply under GST legislation. There are two transactions involved in barter. When a bike is exchanged for a scooter, the person exchanging the bike affects the first supply, while the person exchanging the scooter affects the second supply. After finding the right HSN and tax rate applicable thereto, GST must be applied on both bicycle and scooter sales. Place of supply (POS) must be identified for both suppliers in order to define the kind of transaction, i.e., CGST+SGST (Inter-State Transaction) or IGST (Inter-State Transaction). Both Transactions must be individually recorded on the GSTR-1 or GSTR-3B by respective suppliers. Obviously, a business test must be employed to induce section 7 to classify the transaction as a supplier. If a transaction is not undertaken in the normal course of business, then there is no supply and no GST. The property cannot be valued in accordance with the criteria outlined in section 15(1) of the Act because two requirements have not been met. Price is the sole consideration, and the parties are unrelated, are spelled forth in Section 15(1). The initial requirement for these twins has not been met. In barter and trade, money is never the only factor; there is always something of equal value involved. In this circumstance, the section 15(1) value is rejected and the law directs us to the regulations. Rule 27 of the CGST Rules is applicable to the determination of value in the present circumstance. Under this criterion, the guiding force is the open market value or price of a comparable product or service. However, it would be impossible to establish the worth of services of comparable nature and quality. This will make life difficult for both taxpayers and the treasury, leading to an increase in lawsuits.


Transaction Value in Barter Transactions



There are rules for instances in which the consideration is not entirely monetary. Rule 27 specifies the sequence of values to be taken in such a circumstance:

·      Assuming the open market value is unavailable, the entire monetary value plus the monetary value of the remainder of the consideration, if such value was known at the time of provision.

·      The value of supply of similar-quality goods and services

·      Cost-based value: cost of supply + a 10% markup.

·      Best judgement method: Value determined using reasonable techniques in accordance with GST law's principles and requirements.


"Open Market Value" refers to the complete monetary value, minus GST, payable to receive the supply in question at the moment of supply, provided the transaction is between unrelated parties and price is the sole factor.

"Like quality" refers to any other supply manufactured under comparable conditions and which is either identical or substantially comparable in terms of quality, quantity, functioning, attributes, and reputation.


An Instance of a Barter Transaction An Instance of a Barter Transaction


The GST legislation allows businesses and individuals to obtain binding judgements on problems that require clarification. "M/s. Durga Projects vs Infra Structure Pvt. Ltd. 2019 (8) TMI 395" is an example of advance ruling in which a real estate transaction was judged to be a barter.


In the matter at hand, a builder/developer and landowner had engaged into a pre-GST arrangement wherein the landowner would get completed area in consideration for granting development rights of the property to the builder/developer. The building began prior to the implementation of the GST. The authorities reviewed the transaction and the applicant's service of constructing apartments and determined that the transaction was a barter, making GST relevant. Time of delivery was not a problem, as possession of the apartments was transferred when the GST went into force.


Direct Tax Treatment


In the instance of barter transactions that result in income, such revenue can be either capital gains if the transaction is not in the ordinary course of business or profits and gains from business and profession if the commodities exchanged are inventory.


Difference between Barter and Exchange in GST


The term supply has been defined in section 7 of the CGST Act of 2017. Consequently, barter and trade are two distinct kinds of supply. However, as indicated in previous queries, neither term is specified under the GST statute. To discriminate, we must thus refer to other laws or court precedents. Although both terms seem similar they have substantial distinctions.

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