# Section 7(1A) & Schedule II – Classification of Supply

## Purpose of Schedule II

Where an activity already qualifies as 'supply' under Section 7(1), Schedule II classifies whether it is a supply of goods or a supply of services. This avoids ambiguity and the double-taxation issues that existed under the earlier VAT/Service Tax regime.

## 1. Transfer

Transaction	Goods / Services
Transfer of title in goods	Supply of Goods
Transfer of right in goods / undivided share without transfer of title	Supply of Services
Transfer of title under agreement where property passes at a future date on full payment (e.g., hire purchase)	Supply of Goods

## 2. Land and Building

Lease, tenancy, easement, licence to occupy land → Supply of Services.
Lease/letting out of building (commercial, industrial, residential complex) for business/commerce, wholly or partly → Supply of Services.

## 3. Treatment or Process (Job Work)

Any treatment/process applied to another person's goods → Supply of Services.

## 4. Transfer of Business Assets

Situation	Classification
Business assets transferred/disposed of so they no longer form part of business assets	Supply of Goods
Business assets put to private use or used for non-business purpose	Supply of Services
Stock of taxable person who ceases to be taxable	Deemed Supply of Goods immediately before cessation

Exceptions: Business transferred as going concern, OR carried on by personal representative deemed to be taxable person.

## 5. Specific Activities Deemed Supply of Services

(a) Renting of immovable property.

(b) Construction of complex/building/civil structure intended for sale — except where entire consideration is received after issuance of completion certificate (or first occupation, whichever is earlier).

(d) Development, design, programming, customisation, adaptation, upgradation, enhancement or implementation of IT software.

(e) Agreeing to refrain from / tolerate / do an act (e.g., non-compete fees).

(f) Transfer of right to use any goods for any purpose.

Competent Authority for Completion Certificate (where no government authority required):

Architect registered under Architects Act, 1972; OR
Chartered engineer registered with Institution of Engineers (India); OR
Licensed surveyor of the local body.

## 6. Composite Supplies (Always Services)

Works contract [Section 2(119)]: Building, construction, fabrication, completion, erection, installation, fitting-out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property where transfer of property in goods is involved.
Restaurant service: Supply of food / drink (other than alcoholic liquor for human consumption) by way of or as part of any service, for cash or other consideration.

Worked example

### Example 1

Hire Purchase: Dhruva Capitals supplies goods on hire purchase where title passes on full payment. → Supply of GOODS (title will transfer on a future date).

### Example 2

Machinery on Rent: Genius Equipments Ltd. gives machinery on rent to Suhaasi Manufacturers (no title transfer). → Supply of SERVICES.

### Example 3

Job Work: Damani Dying House dyes clothes of Shubham Textiles on job work basis. → Supply of SERVICES (treatment on another's goods).

### Example 4

Private Use of Business Asset: A furniture manufacturer takes one chair from inventory for use at home. → Supply of SERVICES (business asset put to private use).

### Example 5

Construction (Pre-CC consideration): Rathi Builders received ₹90 lakh per unit before issuance of CC and ₹30 lakh after. Since part of consideration was received before CC, the entire ₹1.2 crore is treated as supply of services.

### Example 6

Construction (Post-CC consideration): If entire ₹1.2 crore had been received after CC/first occupation, it would have been outside the scope of supply (sale of building under Schedule III).

### Example 7

Non-compete: Cable operator Sakharam agrees with Aatmaram not to operate in specified areas for consideration. → Supply of SERVICES under Para 5(e).

⚠️ Common exam mistakes

Treating works contracts as supply of goods — they are always supply of SERVICES under Schedule II.
Forgetting the CC / first-occupation rule for construction — if any rupee is received pre-CC, the transaction is taxable.
Treating job work as supply of goods — it is supply of services even though goods physically move.
Treating renting of land/building as transfer of immovable property — Schedule II classifies it as supply of services.
Ignoring 'transfer of right to use goods' (Para 5(f)) — it is supply of services, distinct from hire purchase (which is supply of goods).
Missing alcoholic liquor exclusion — restaurant supply of alcoholic liquor is NOT covered as service under Schedule II.

Bare-Act text Section 7(1A) read with Schedule II · CGST Act, 2017 · click to expand

Section 7(1A) – Where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.

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Activities Treated as Supply of Goods or Services [Section 7(1A) & Schedule II]

Worked example

⚠️ Common exam mistakes