Exemption of Goods and Services from Goods and Services Tax

Goods and services tax is a tax which is levied on supply of goods or services, or both. Due to federal nature of India, a supply of goods, or services, or both may be any supply of goods, or services, or both which takes place-

(i) inside a State; or

(ii) inside a Union Territory; or

(iii) in the course inter-State trade or commerce; or

(iv) in the course of import of goods, or services, or both into the territory of India; or

(v) in the course of the export of goods, or services, or both out of the territory of India; or

(vi) in coastal waters of India.

All supplies of goods, or services, or both, referred to in clauses (i) to (vi) of foregoing paragraph, are supplies of goods, or services, or both, and all of them are mutually exclusive.

Clause (12A) of Article 366 of the Constitution of India defines expression ‘goods and services tax’ as any tax on supply of goods, or services, or both except taxes on supply of alcoholic liquor for human consumption.

Article 246A (2), and Article 269A of the Constitution of India give power to Parliament to make law to provide levy and collection of goods and services tax on supply of goods, or services, or both where such supply takes place-

(i) in the course of inter-State trade or commerce; or

(ii) in the course of import into the territory of India.

Barring two supplies of goods, or services, or both referred to above, in respect to all other kinds of supplies of goods, or services, or both, Article 246A (1) gives powers to Parliament to make law with respect to goods and services tax. Thus we see that in view of provisions of the Constitution, tax leviable on all kinds of supplies of goods, or services, or both is goods and services tax.

Exemption from goods and services tax may be of two types as follows:-

(i) instead of exempting all possible supplies of any goods or services, or both, only specified supply(s) of any goods, or services, or both (not all possible supplies of such goods, or services, or both) may be exempted from goods and services tax; and

(ii) all possible supplies of any goods, or services, or both may be exempted from goods and services tax.

Where all possible supplies of any goods, or services are exempt from goods and services tax, goods and services tax cannot be levied on any supply of such goods or services. In this case, we can say that such goods, or services, as the case may be, are exempt from goods and services tax. Where all possible supplies of any goods or services or both are not exempt from goods and services tax, i.e. only one or more specified supplies of such goods or services are exempt from goods and services tax, it cannot be said that such goods or services, as the case may be, are exempt from goods and services tax. We can take example of various kinds of supplies of refrigerator. Since, supply of any goods, or services, or both in the course of export of the goods out of the territory of India is, being zero rated supply, exempt from levy of goods and services tax, therefore, supply of refrigerator in the course of the export of the refrigerator will be exempt from goods and services. In this example, –

(i) supply of refrigerator in the course of export of the goods out of the territory of India shall be exempt from goods and services tax; and

(ii) all other supplies of refrigerator will not be exempt from goods and services tax.

Here it cannot be said that refrigerator is exempt from goods and services tax. What can be said is that supply of refrigerator in the course of export of the goods out of the territory of India is exempt from goods and services tax.

Article 279A of the Constitution of India relates to constitution and functioning of the Goods and Services Tax Council (hereinafter referred to as the ‘GST Council’). Clause (4) of the said Article 279A of the Constitution requires the GST Council to make its recommendations to the Union and the States on subject matters mentioned in various sub-clauses of said clause (4). Sub-clause (b) of said clause (4) runs as follows:-

“(4) The Goods and Services Tax Council shall make recommendations to the Union and the States on—

(a) —

(b) the goods and services that may be subjected to, or exempted from the goods and services tax;”

Clause (4) (b) of the said Article 279A of the Constitution requires the names or description of goods and services which may be exempted from goods and services tax. The provision does not specify the nature of any supply of goods, or services, or both which may be exempted. The Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as the IGST Act), has been enacted by the Parliament for the Union. In the said Act, all kinds of supplies of goods, or services, or both have been classified in two categories, viz. (i) intra-State supply, and (ii) inter-State supply. The said IGST Act provides levy and collection of integrated goods and services tax on inter-State supply. Similarly, Parliament has enacted the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act), to provide levy and collection of central goods and services tax on intra-State supply. Sub-section (1) of section 11 of the CGST Act runs as follows:–

“11. Power to grant Exemption.— (1) Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by notification, exempt generally, either absolutely or subject to such conditions as may be specified therein, goods or services or both of any specified description from the whole or any part of the tax leviable thereon with effect from such date as may be specified in such notification. ”
In similar terms, sub-section (1) of section 6 of the IGST Act runs as follows:-

“6. Power to grant Exemption from tax. — (1) Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by notification, exempt generally, either absolutely or subject to such conditions as may be specified therein, goods or services or both of any specified description from the whole or any part of the tax leviable thereon with effect from such date as may be specified in such notification.”

For exempting goods from levy of tax on intra-State supply, the Government of India, in exercise of its powers under sub-section (1) of section 11 of the CGST Act, has, on recommendation of the GST Council, issued Notification No.2/2017-Central Tax (Rate), Dated 28th June, 2017. Paragraph 1 of the said notification runs as follows:-

“G.S.R. (E).- In exercise of the powers conferred by sub-section (1) of section 11 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, hereby exempts intra-State supplies of goods, the description of which is specified in column (3) of the Schedule appended to this notification, falling under the tariff item, sub-heading, heading or Chapter, as the case may be, as specified in the corresponding entry in column (2) of the said Schedule, from the whole of the central tax leviable thereon under section 9 of the Central Goods and Services Tax Act, 2017 (12 of 2017).”

Similarly, for providing exemption to goods from levy of integrated goods and services tax on inter-State supply, the Government of India, in exercise of its powers under sub-section (1) of section 6 of the Integrated Goods and Services Tax Act, 2017, has, on recommendation of the GST Council, issued Notification No.2/2017-Integrated Tax (Rate), Dated: 28th June, 2017. Paragraph 1 of the said notification runs as follows:–

“G.S.R. (E).- In exercise of the powers conferred by sub-section (1) of section 6 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017), the Central Government, being satisfied that it is necessary in the public interest so to do, on the recommendations of the Goods and Services Tax Council, hereby exempts inter-State supplies of goods, the description of which is specified in column (3) of the Schedule appended to this notification, falling under the tariff item, sub-heading, heading or Chapter, as the case may be, as specified in the corresponding entry in column (2) of the said Schedule, from the whole of the integrated tax leviable thereon under section 5 of the Integrated Good and Services Tax Act, 2017 (13 of 2017).”

Tables of both notifications contain identical items in 149 categories. Conjoint reading of Sub-section (1) of section 11 of the CGST Act, sub-section (1) of section 6 of the IGST Act, and two notifications referred to above reveal that all kinds of supplies of notified goods have been exempted from tax. States have also exempted such goods from levy of tax on intra-State supplies of such goods. Since, all possible supplies of notified goods have been exempted from tax, therefore, it can be said that notified goods are exempt from goods and services tax.

For granting exemption to services from integrated goods and services tax (tax leviable on inter-State supply of goods or services or both under the IGST Act), Government of India has, on recommendation of the GST Council, issued Notification No. 9/2017-Integrated Tax (Rate), Dated: 28th June, 2017. Paragraph 1 of the said notification runs as follows:-

” G.S.R…..(E).- In exercise of the powers conferred by sub-section (1) of section 6 of the Integrated Good and Services Tax Act, 2017 (13 of 2017), the Central Government, on being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, hereby exempts the inter-State supply of services of description as specified in column (3) of the Table below from so much of the Integrated Tax leviable thereon under sub-section (1) of section 5 of the said Act, as is in excess of the said tax calculated at the rate as specified in the corresponding entry in column (4) of the said Table, unless specified otherwise, subject to the relevant conditions as specified in the corresponding entry in column (5) of the said Table, namely:-.”

Similarly, for granting exemption to services from central goods and services tax (tax leviable on intra-State supply of goods or services or both under the CGST Act), Government of India has, on recommendation of the GST Council, issued Notification No. 12/2017-Central Tax (Rate), Dated: 28th June, 2017. Paragraph 1 of the said notification runs as follows:-

“G.S.R……(E).- In exercise of the powers conferred by sub-section (1) of section 11 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on being satisfied that it is necessary in the public interest so to do, on the recommendations of the Council, hereby exempts the intra-State supply of services of description as specified in column (3) of the Table below from so much of the central tax leviable thereon under sub-section (1) of section 9 of the said Act, as is in excess of the said tax calculated at the rate as specified in the corresponding entry in column (4) of the said Table, unless specified otherwise, subject to the relevant conditions as specified in the corresponding entry in column (5) of the said Table, namely:-“

States have also issued notification for granting exemption from tax on intra-State supply of services.

In my personal opinion, although tables of notifications provide exemption from so much of tax as is in excess of tax computed applying NIL rate of tax, language used in the notifications is not proper, Normally, such language is used to provide partial exemption from tax. It is important to be noted that fiscal statutes are literally interpreted.

Another provision of Article 279A of the Constitution, which relates to exemption of goods and services from goods and services tax, is sub-clause (d) of clause (4) of Article 279A of the Constitution. The said sub-clause runs as follows:-

“(4) The Goods and Services Tax Council shall make recommendations to the Union and the States on—

(a) —

(b) —

(c) —

(d) the threshold limit of turnover below which goods and services may be exempted from goods and services tax;”

Above quoted provision reveals that it is of mandatory nature for the GST Council to make its recommendation on the threshold limit of turnover. Such threshold limit of turnover is required for providing exemption to goods and services from goods and services tax (GST) to those persons whose aggregate turnover is below such threshold limit of turnover, as may be recommended by the Council.

Initially, the GST Council has, for the States of Arunachal Pradesh, Assam, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Himachal Pradesh and Uttarakhand, decided threshold limit of turnover of ten lakh rupees, and for all remaining States, it has decided threshold limit of turnover of twenty lakh rupees. Subsequently, such thresholds limits were revised in 2018. Limit of 10 lakh rupees was made applicable to States of Manipur, Mizoram, Nagaland and Tripura, and limit of 20 lakh rupees was made applicable to all other States.

Sub-clause (c) of clause (4) of Article 279A of the Constitution also requires the GST Council to make its recommendations to the Union and the States on model Goods and Services Tax Laws. On the basis of recommendations of the GST Council, Parliament has enacted GST Laws for the Union, and Legislatures of the States have enacted State Goods and Services Tax Laws for their respective States. In none of these laws, provision has been made to grant exemption to goods and services from goods and services tax, in cases of those small businesses whose aggregate turnover is below the threshold limit of turnover. Conversely, by enacting section 24 of the CGST Act and Section 24 in the State Goods and Services Tax Laws made by the Legislatures, following categories of persons have, irrespective of their turnover, been made liable to registration, and thereby, for payment of tax under all Goods and Services Tax Laws, namely:-

(i) persons making any inter-State taxable supply;

(ii) casual taxable persons making taxable supply;

(iii) persons who are required to pay tax under reverse charge;

(iv) person who are required to pay tax under sub-section (5) of section 9;

(v) non-resident taxable persons making taxable supply;

(vi) persons who are required to deduct tax under section 51, whether or not separately registered under this Act;

(vii) persons who make taxable supply of goods or services or both on behalf of other taxable persons whether as an agent or otherwise;

(viii) Input Service Distributor, whether or not separately registered under this Act;

(ix) persons who supply goods or services or both, other than supplies specified under sub-section (5) of section 9, through such electronic commerce operator who is required to collect tax at source under section 52;

(x) every electronic commerce operator who is required to collect tax at source under section 52;

(xi) every person supplying online information and database access or retrieval services from a place outside India to a person in India, other than a registered person; and

(xii) such other person or class of persons as may be notified by the Government on the recommendations of the Council.

Provisions of section 24 of the CGST Act have been adopted in all Goods and Services Tax Laws made by the Parliament. Said provisions of section 24 of the CGST Act, and State GST Acts deny benefit of threshold limit of turnover as provided in sub-clause (d) of clause (4) of Article 279A of the Constitution.
In my personal opinion, no provision of law has been made to provide exemption to goods and services from goods and services tax where aggregate turnover of a person is below the threshold limit of turnover. Had such law been made, provisions of section 24 of the CGST Act, and similar provisions under the State Laws, could not have been enacted.

Clause (6) of Article 279A of the Constitution runs as follows:-

“(6) While discharging the functions conferred by this article, the Goods and Services Tax Council shall be guided by the need for a harmonised structure of goods and services tax and for the development of a harmonised national market for goods and services.”

In my personal opinion, above quoted provision of the Constitution gives national character to goods and services tax and is a step towards achieving economic unity of the nation. Harmonious structure of goods and services tax requires that total burden of tax, levied by the Union and the States, on all supplies of same goods or services should, irrespective of the nature of the supply and the manner in which supply is made, be same. Harmonized national market requires that traders and entrepreneurs should be able to supply their goods and services without additional burden of tax, irrespective of the location from where they make supply, so that goods and services may move freely throughout the nation without intervention of goods and services tax.

*****

Disclaimer: Except the quoted versions, interpretations made and all other views expressed here are my personal views and are meant only for academic discussion. Readers are advised to follow the provisions of 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.