Definition of expression “wholly exempt from tax” or “supply wholly exempt from tax” has not been provided in the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act). In reference to a supply of goods or services or both, expression “wholly exempt from tax” has been used at two places in the CGST Act. At one place, the expression “wholly exempt from tax” has been used in clause (47) of section 2 of the CGST Act, in the definition of expression “exempt supply” and at second place it has been used in section 23(1)(a) of the said Act. In the definition of “exempt supply” only those supplies which are wholly exempt from tax either under section 11 of the CGST Act or under section 6 of the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as the IGST Act) have been included whereas in section 23(1) (a) all supplies, which are wholly exempt from tax either under any provision of either CGST Act or under any provision of the IGST Act, have been included. Both these provisions run as follows:
“(47) “exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply;”
“23. (1) The following persons shall not be liable to registration, namely:––
(a) any person engaged exclusively in the business of supplying goods or services or both that are not liable to tax or wholly exempt from tax under this Act or under the Integrated Goods and Services Tax Act;”
Here it is noteworthy that scope of supply of goods or services or both wholly exempt from tax, referred to in clause (a) of section 23(1), is wider than the scope of supply of goods or services or both wholly exempt from tax referred to in the definition of the expression “exempt supply”, provided in clause (47) of section 2 of the CGST Act. In the definition of “exempt supply”, only those supplies, which are wholly exempt from tax either under section 11 of the CGST Act or under section 6 of the IGST Act, have been included whereas in clause (1) (a) of section 23 all those supplies, which are wholly exempt from tax either under any provision of the CGST Act or under any provision of the IGST Act, have been referred to.
All supplies of goods or services or both may be classified in two categories. In one category those supplies may be placed to which charging provision (provision relating to levy of tax) of the Act does not apply. Such supplies are referred to as supplies not liable to tax. Such supplies may also be referred to as supplies exempt from tax because these supplies are altogether exempt from taxation. This is one kind of exemption. Remaining other supplies may be placed in second category. Such supplies may be referred to as supplies liable to tax under the Act. Out of these supplies, the Legislature may, in respect of any supply, choose not to levy any tax. This is another type of exemption from tax. In reference to exemptions under a law providing for levy of tax on sale or purchase of goods, the Honorable Supreme Court has, in its judgment in A.V. Fernandez vs. State of Kerala, judgment dated April 2, 1957, made the following observations:
“There is a broad distinction between the provisions contained in the statute in regard to the exemptions of tax or refund or rebate of tax on the one hand and in regard to the non-liability to tax or non-imposition of tax on the other. In the former case, but for the provisions as regards the exemptions or refund or rebate of tax, the sales or purchases would have to be included in the gross turnover of the dealer because they are prima facie liable to tax and the only thing which the dealer is entitled to in respect thereof is the deduction from the gross turnover in order to arrive at the net turnover on which the tax can be imposed. In the latter case, the sales or purchases are exempted from taxation altogether. The Legislature cannot enact a law imposing or authorising the imposition of a tax thereupon and they are not liable to any such imposition of tax. If they are thus not liable to tax, no tax can be levied or imposed on them and they do not come within the purview of the Act at all. The very fact of their non-liability to tax is sufficient to exclude them from the calculation of the gross turnover as well as the net turnover on which sales tax can be levied or imposed.” (1) [1926] A.C. 37.
Here, we see that the Honorable Supreme Court has also treated cases of refund of whole tax or rebate of whole tax as exemption from tax. Other exemptions falling in second category may be exemption from tax or exemption from payment of tax. The Honorable Court has also clarified that turnover of sales falling in first category of exemption cannot be included in gross turnover for the purpose of assessment of tax and turnover of sales falling in second category of exemption can be included in gross turnover for the purpose of assessment of tax but the same cannot be included in computing taxable turnover.
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To understand the expression wholly exempt from tax, it will be helpful to know what does the word “tax” mean and how tax is levied. So far as it is related to definition of word “tax”, the Constitution Bench of Honorable Supreme Court has, in its judgment in the Commissioner, Hindu Religious Endowments, Madras vs. Sri Lakhmindra Thirtha Swamiar of Sri Shirpur Mutt., judgment dated April 10, 1954, made following observations:
“A neat definition of what “tax” means has been given by Latham C. J. of the High Court of Australia, in Matthews v. Chicory Marketing Board(1). A tax”, according to the learned Chief Justice, “is a compulsory exaction of money by public authority for public purposes enforceable by law and is not payment for services rendered”. This definition brings out, in our opinion, the essential characteristics of a tax as distinguished from other forms of imposition which, in a general sense, are included within it. It is said that the essence of taxation is compulsion, that is to say, it is imposed under statutory power without the taxpayer’s consent and the payment is enforced by law (2). The second characteristic of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. This is expressed by saying that the levy of tax is for the purposes of general revenue, which when collected revenues of the State. As the object of a tax is not to confer any special benefit upon any particular individual, there is, as it is said, no element of quid pro quo between the taxpayer and the public authority(1). Another feature of taxation it; that as it is a part of the common burden, the quantum of imposition upon the taxpayer depends generally upon his capacity to pay.” (1) 60 C.L.R. 263, 276. (2) Vide Lower Mainland Dairy v. Crystal Dairy Ltd. [1933] A.C. 168. 1041.
Principles laid down in the observations made above may be summarized as follows.
1. As the essence of taxation is compulsion, person made liable for payment of tax falls under obligation of payment of tax and he cannot be given option of not paying the tax.
2. As tax is imposed under statutory power without taxpayer’s consent and is enforced by law, any amount cannot be collected as tax if the law does not provide levy and collection of a such tax.
3. Object of tax levy is to collect money by the public authority (the Government) for public purposes.
4. As the tax is for public purposes, benefit of tax cannot be allowed to the taxpayer or any other individual.
5. Tax is common burden and quantum of imposition of tax depends generally upon the capacity of the taxpayer.
So far as it is related to levy of tax, the Honorable Supreme Court, in its judgment in Govind Saran Ganga Saran vs. Commissioner of Sales Tax And Ors, judgment dated April 26, 1985, has held as follows:
“The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If these components are not clearly and definitely ascertainable it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness in the legislative scheme defining any of those components of the levy will be fatal to its validity.”
Observations of the Honorable Supreme Court, quoted above, go to show that levy of tax requires declaration of the following:
- declaration of the event on which tax is being levied;
- declaration of rate of tax applying which amount of tax shall be calculated;
- declaration of value or measure to which rate of tax shall be applied for computing amount of tax; and
- declaration of the person who shall pay the tax or from whom tax shall be collected, if the person does not pay it voluntarily.
Object of providing levy of tax on a supply of goods or services or both is to collect some revenue for public purposes when the supply takes place and object of providing exemption from tax is not to collect any tax when a supply takes place. Where charging provision of the tax law provides that tax shall be levied on the value of the supply at such rate percentage of value as may be provided in or notified under the charging section, amount of tax is given by the expression “value * rate/100”. Value of a supply of any goods or services or both cannot be zero or nil but if rate of tax is nil or zero, amount of tax becomes nil or zero. In such a case, the supply does not contribute any amount as tax and therefore, it cannot be said that any tax is leviable on the supply. For this reason, the supply falls in the category of a supply which is exempt from tax. In respect of a supply, the Government can get tax revenue only if there is some amount of tax associated with the supply and there is a person who falls under obligation of payment of amount of tax. Amount of tax should not be nil or zero requires that rate of tax should be something greater than nil or zero. Second thing is that even where amount of tax is greater than zero or nil, the Government will not receive such tax unless a person has been made liable for payment of tax. Where liability of payment of tax has not been fixed, the inference is that tax levy does not exist. A supply, which attracts a tax rate which is greater than nil or zero and in respect of which some person has been made liable for payment of tax, can be referred to as a taxable supply.
In a fiscal statute (law dealing with tax), provisions relating to levy and collection of tax, exemption from tax, exemption from payment of tax, refund or rebate of tax provide a single scheme of levy of tax. Where a tax law allows exemption from tax, exemption from payment of tax, refund of tax or rebate of tax, these provisions have effect of amending or modifying the provision which has been enacted to provide levy of tax. Provisions which grant exemption from tax or from payment of tax or provisions which allows refund or rebate of tax have overriding effect on tax levy clause.
A taxable supply can always be made a supply exempt from tax either by reducing amount of tax to nil or by granting exemption from payment of tax to the person who has been made liable for payment of tax. This can be done in following ways, namely:-
1. by providing or notifying alternate tax rate of nil or zero;
2. by declaring a supply a zero rated supply so that the supply becomes a supply which attracts zero or nil rate of tax;
3. by granting exemption of whole amount of tax so that after allowing exemption amount of tax to be collected becomes nil or zero;
4. by granting exemption of so much amount of tax as is in excess of amount of tax computed at nil rate of tax so that after allowing exemption amount of tax to be collected becomes nil or zero;
5. by allowing refund of whole amount of tax to the taxpayer so that ultimate amount of tax to be collected becomes nil;
6. by allowing rebate of whole tax so that amount of tax to be collected becomes nil or zero;
7. by allowing exemption from payment of tax to the person who has been made liable for payment of tax so that amount of tax to be collected becomes nil.
So far as it is related to a supply wholly exempt from tax, in respect of all supplies which are exempt from whole tax, it cannot be said that those supplies are also wholly exempt from tax.
A careful reading of the CGST Act and the IGST Act reveals that expression “wholly exempt from tax” or “supply wholly exempt from tax” has neither been defined in the CGST Act nor in the IGST Act. However, the expression “wholly exempt from tax” has been used by the Honorable Supreme Court in reference to a sale of goods referred to in section 8(2-A) of the Central Sales Tax Act, 1956.The said section of the Central Sales Tax Act, 1956, as it had stood at the relevant time, had run as follows:
“8. (2-A) Notwithstanding anything contained in sub-section (1-A) of Section 6 or in sub- section (1) or clause (b) of sub-section (2) of this section, the tax payable under this Act by a dealer on his turnover insofar as the turnover or any part thereof relates to the sale of any goods, the sale or, as the case may be, the purchase of which is, under the sales tax law of the appropriate State, exempt from tax generally or subject to tax generally at a rate which is lower than four per cent (whether called a tax or fee or by any other name), shall be nil or, as the case may be, shall be calculated at the lower rate.
Explanation.- For the purposes of this sub-section a sale or purchase of any goods shall not be deemed to be exempt from tax generally under the sales tax law of the appropriate State if under that law the sale or purchase of such goods is exempt only in specified circumstances or under specified conditions or the tax is levied on the sale or purchase of such goods at specified stages or otherwise than with reference to the turnover of the goods.”
In reference to above quoted provision, a bench comprising of four Honorable Judges of the Supreme Court, in its judgment in International Cotton Corporation. (P) Ltd. vs. Commercial Tax Officer, Hubli & Ors. judgment dated October 4, 1974, has used the expression “wholly exempt from tax”. In this regard, the Honorable Court has made the following observations:
“We agree with the view of the Mysore High Court that the object of sub-section (2A) of section 8 is to exempt transaction of sale of any goods if they are wholly exempt from the tax under the sales tax law of the appropriate State and make the said sale chargeable at lower rates where under the Sales Tax Act of the State the sale transactions are chargeable to tax at a lower rate and it is not correct to say that where goods are taxable at the point of purchase or sale the transaction is exempt from tax generally. A sales tax has necessarily to be levied on a sale or purchase and ibis argument implies that all sales are exempt from tax.”
The Honorable Supreme Court had pronounced its judgment in Pine Chemicals Ltd. v. Assessing Authority on January 16, 1992. Against the said judgment, Commissioner, Sales Tax, J &K has filed review petition. While deciding the review petition, in the C. S.T. vs. Pine Chemicals Ltd., judgment dated: October 24, 1994, the Honorable Supreme Court had made following observations:
“10. In International Cotton Corpn. (P) Ltd. v. C.T.O, a Bench of this Court comprising four learned Judges observed that “the object of subsection (2-A) of Section 8 is to exempt transaction of sale of any goods if they are wholly exempt from tax under the sales tax law of the appropriate State and make the said sales chargeable at lower rates where under the Sales Tax Act of the State the sale transactions are chargeable to tax at a lower rate … “, though it is true, the point raised and determined in that case was a different one. In our respectful opinion, the decision in Indian Aluminium2 which was a decision rendered by a Bench of three learned Judges was binding upon the Bench which decided the Pine Chemicals1. —“
These judgments may provide a guideline for determining when a supply of goods or services or both can be said to be wholly exempt from tax.
In view of the discussion above, in my personal opinion, exemption from tax refers to exemption from levy of tax. Levy of tax involves the following:–
(i) Declaration of event or property on which tax shall be levied;
(ii) Declaration of value or measure of tax to which rate of tax shall be applied;
(iii) Declaration of rate of tax; and
(iv)Declaration of person on whom levy of tax shall be imposed or who shall be under obligation of payment of tax.
Where any of the aforesaid four declarations is missing it cannot be said that levy of tax exists. Also where levy has been provided in a manner that computed amount of tax for the event is nil, it cannot be said that event is leviable to any tax.
In a fiscal statute (tax law), provisions relating to levy of tax, exemption from tax, exemption from payment of tax, refund of tax and rebate of tax are read together. If the combined effect of all such provisions is that there remains no amount to be levied as tax, supply should be understood a supply exempt from whole tax. Under a law which provides levy and collection of tax on supply of goods or services or both, expressions “supply exempt from whole tax” and “supply wholly exempt from tax” do not have the same meanings. In respect of a supply of goods or services or both, exemption from whole tax may be allowed in any of the following ways, namely:–
(i) by providing or notifying nil rate of tax or by declaring the supply a zero rated supply; or
(ii) by granting exemption from so much of tax which is in excess of amount of tax computed applying nil rate of tax; or
(iii) by granting exemption from whole tax; or
(iv) by allowing rebate of whole amount of tax; or
(v) By allowing refund of whole amount of tax to the taxpayer;
(vi) by allowing exemption to the taxpayer from payment of whole tax.
In all such cases, in respect of the supply, amount of tax leviable becomes nil. Where exemption from whole tax is provided to a supply if it is made in certain specified circumstances, exemption from whole tax becomes inapplicable where supply is not made in the specified circumstances. A supply in respect of which exemption from whole tax is granted subject to fulfillment of certain specified condition(s), exemption from tax becomes inapplicable if any of the condition remains unfulfilled. Where, in respect of a supply, exemption from whole tax is available only to some specified persons, exemption does not apply to other persons. Such supplies cannot be said supplies wholly exempt from tax. Contrary, a supply of goods or services or both may be understood as a supply of goods or services or both wholly exempt from tax if,-
(i) the supply is not required to be made in some specified circumstances;
(ii) in respect of the supply, exemption from whole tax is not subject to fulfillment of some specified condition(s); and
(iii) in respect of the supply, irrespective of the person who makes the supply, neither the supplier nor recipient or any other person falls under obligation of payment of any amount as tax.
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Disclaimer: Except the quoted versions, interpretation made and all other views expressed here are my personal views and are meant only for academic discussion. Readers are advised to obey the law and to seek opinion of their legal advisors before acting upon the views expressed here. I and the publishers of this article disown any liability on account of any loss or damage that may be caused on account of use of views expressed here.
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