In my opinion, definitions of expressions ‘exempt supply’, ‘non-taxable supply’, ‘taxable supply’ and ‘Zero rated supply’, as provided in the Central Goods and Services Tax Act, 2017 (GST Act) and the Integrated Goods and Services Tax Act, 2017 (IGST Act), for certain provisions of the said Acts, are inconsistent or irrelevant. In my opinion, these definitions require amendments.
The following table points out the difference among various types of supplies of goods or services or both in view of their taxability and admissibility of input tax credit.
TABLE
| Sl. No. | Name of Supply & Provision | Details of Supply | Tax Leviability | ITC Availability | Taxability & ITC |
| 1. | Taxable Supply [Section 2(108) of CGST Act] | Any supply which is leviable to tax | Tax is leviable | ITC is admissible in respect of inputs and input services utilized in making the supply | Tax is leviable but ITC is admissible |
| 2. | Exempt Supply [Section 2(47) of CGST Act] | Supply which attracts nil rate of tax, or is wholly exempt from tax, under section 11 of CGST Act, or section 6 of the IGST Act, or is a non-taxable supply | Tax is not leviable | ITC is not admissible in respect of inputs and input services utilized in making the supply | Tax is not leviable and ITC is also not admissible |
| 3. | Non-taxable Supply [Section 2(78) of CGST Act] | Supply of goods or services or both which is not leviable to tax | Tax is not leviable | ITC is not admissible in respect of inputs and input services utilized in making the supply | Tax is not leviable and ITC is also not admissible |
| 4. | Zero rated supply [Section 16(1) of IGST Act] | Export supply of all goods and all services; and supply of all goods and all services to SEZ unit or SEZ developer. Had such supplies not been declared zero rated supply, the supplies would have been either a taxable supply or an exempt supply (which includes non-taxable supply)* | Tax is not leviable | ITC is admissible in respect of inputs and input services utilized in making the supply | Tax is not leviable but ITC is admissible |
* Even after declaration of certain taxable supplies as zero rated supply, the definition of expression “taxable supply” continues to include such supplies within it. I mean to say that after inclusion of a taxable supply in zero rated supply, supply should have been excluded from the definition of expression “taxable supply”. Similarly, exempt supplies and non-taxable supplies, which are included in zero rated supply, should also have been excluded from definitions of those expressions.
The table above explains that a zero rated supply is different from an exempt supply because in relation to an exempt supply, benefit of input tax credit is not available whereas in respect of zero rated supply benefit of input tax credit is available. A zero rated supply is also different from a taxable supply because on a taxable supply, tax is leviable whereas on a zero rated supply tax is not leviable.
Sub-section (2) of section 17 of the CGST Act, which also applies to the IGST Act, deals with apportionment of input tax credit and blocked credits. The said section 17(2) of the CGST Act runs as follows:–
“(2) Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.”
In view of the existing provisions of the IGST Act, a taxable supply may also be a zero rated supply. In such circumstances, expression “taxable supplies including zero rated supplies” will include such taxable supply twice, once as taxable supply and once as zero rated supply. Unless a taxable supply, which is also a zero rated supply, is excluded either from taxable supply or from zero rated supply, the taxable supply shall get included twice in the expression “taxable supplies including zero rated supply”. Similarly, where an exempt supply is also a zero rated supply, unless an exempt supply which is also a zero rated supply is excluded from the definition of “exempt supply”, the supply shall continue be included in the expressions “exempt supplies” also. Since, tax on taxable supplies is leviable and tax on zero rated supply is not leviable, it is desirable that a taxable supply, which is included in zero rated supply, should be excluded from the expression taxable supply. Similarly, an exempt supply, which is also included in zero rated supply, should also be excluded from definition of the expression “exempt supply”. Otherwise, input tax credit cannot be allowed in respect of such supply.
In my opinion, nomenclature of supplies is also not proper. In a law which deals with levy of tax on supplies of goods or services or both, due to Constitutional limitations, tax on certain supplies cannot be levied. In such circumstances, all supplies can be divided in two categories, viz. supplies, to which law does not apply, and supplies to which law applies. In view of this, supplies falling in first category can be addressed as supplies of goods or services or both not liable to tax (supply not liable to tax) and supplies falling in second category can be addressed as supplies of goods or services or both liable to tax (supply liable to tax). Thereafter, supplies liable to tax can further be divided in two categories viz. supplies on which tax is not leviable (supply not leviable to tax) and supplies on which tax is leviable (supply leviable to tax, or taxable supply ). Expression “exempt supply” can be defined to include the supplies which are either not liable to tax or not leviable to tax. Difference in between these two types of sales or supplies has been explained by the Honorable Supreme Court in its judgment in A. V. Fernandez vs. State of Kerala, judgment dated 02/04/1957. In this regards, the Honorable Apex Court has made following observations, namely:-
“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.”
It is noteworthy that in clause (a) of section 23(1) of the CGST Act, expression “not liable to tax” has been used to refer to the supplies which have been defined as “non-taxable supply” in section 2(78) of the CGST Act.
Now the question is that what can be done to continue with the existing system of nomenclature of supplies. In my opinion, –
(i) in place of expression “non-taxable supply”, expression “supply not liable to tax” may be defined to mean a supply of goods or services or both on which tax is leviable neither under any provision of the Central Goods and Services Tax Act, 2017 nor under any provision of the Integrated Goods and Services Tax Act, 2017;
(ii) in the definition of expression “exempt supply”, in place of the expression “non-taxable supply”, expression “supply not liable to tax” should be substituted.
(iii) except “exempt supply” and zero rated supply, all other supplies should be included in the definition of the expression “taxable supply”. The expression “taxable supply” supply may be defined to mean a supply of goods or services or both except an exempt supply and a zero rated supply.
It is important to note that in the IGST Act, there are four types of supplies of goods or services or both. These supplies are as follows:–
(i) taxable supply;
(ii) exempt supply;
(iii) non-taxable supply; and
(iv) zero rated supply.
Looking into taxability and admissibility of input tax credit, zero rated supply is different from a taxable supply as well as from an exempt supply. A zero rated supply is to be given overriding effect over all other supplies. For this purpose, in the definitions of expressions “taxable supply”, “exempt supply” and “supply not liable to tax” (as proposed), a clause “except a supply which is covered under zero rated supply” may be added.
In view of the discussion above, expressions “exempt supply”, “supply not liable to tax” and “taxable supply” may be defined as follows:–
(i) “exempt supply” means a supply of goods or services or both which generally and unconditionally attracts nil rate of tax either under this Act or under the Integrated Goods and Services Tax Act, 2017, or which is wholly exempt from tax either under section 11 of this Act or under section 6 of the Integrated Goods and Services Tax Act, 2017, or which is a supply not liable to tax, except a supply of goods or services or both which is included in any zero rated supply.
(ii) “supply not liable to tax” means a supply of goods or services or both, which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act, excluding a supply of goods or services or both which is included in any zero rated supply.
(iii) “taxable supply” means any supply of goods or services or both except an exempt supply and a supply of goods or services or both which is included in any zero rated supply.
I will like to point out that definitions proposed above will not make any difference except giving overriding effect to zero rated supply. Such amendments are also necessary to make section 17(2) of the CGST Act consistent with the definitions. Presently “supply of goods or services or both not liable to tax” used in section 23(1) (a) of the CGST Act, is not defined. Existing expression “non-taxable supply” has been used in the CGST Act at two places. At one place it has been used in definition of expression “exempt supply” and the other place where it has been used is definition of expression “non-taxable supply” itself. Since both these provisions require amendments, therefore, there will be no difficulty in amending name of non-taxable supply. Proposed change in the definition of expression “taxable supply” will also clarify the taxability of supplies which are conditionally exempt. Tax on such supplies may or may not be leviable. The definition will also clarify the taxability of supplies which are not generally exempt from tax. I will like to point out that in respect of both these supplies; currently benefit of input tax credit is admissible. Facility of input tax credit has not been blocked in respect of inputs and input services utilized in making such supplies.
I am also of the opinion that zero rated supply also includes non-taxable supply or supply not liable to tax (as proposed). In common parlance, a zero rated supply is understood as a supply in respect of tax is computed at zero rate of tax and in relation to which facility of input tax credit is admissible. But in respect of such supplies, GST law making powers are not available. Therefore, they cannot be treated supplies attracting zero or nil rate of tax. They can be said only non-taxable supply, or supply not liable to tax (as proposed). One more thing about export supply is that in view of the definition of “export of goods” provided in section 2() of the IGST Act, in the expression “export of goods”, activity of supply of goods is missing. Secondly, in sub-section (2) of section 16 of the said IGST Act, use of clause “notwithstanding that such supply may be an exempt supply” is vague because after inclusion of exempt supply in zero rated supply, exempt supply has lost its identity of being an exempt supply. In view of this, sub-sections (1) & (2) of section 16 of the IGST Act will require amendments. The said provision may be redrafted as follows:–
(1) Notwithstanding anything contained contrary to in any other provision of this Act, following supplies of goods or services or both shall be treated as zero rated supply, namely:–
(i) supply of goods or services or both in the course of export of the goods or services or both out of the territory of India (or out of India);
(ii) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit.
(2) No tax shall be levied on a zero rated supply and a registered person, in respect of a zero rated supply made by him, shall, subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, be entitled for claiming credit of input tax in respect of inputs and input services utilized in making the zero-rated supply.
In my opinion, provisions of sub-section (3) of section 16 of the IGST Act have also not been drafted properly. Existing provision is presenting many difficulties before traders and entrepreneurs. Both clauses of the said sub-section have been drafted with reference to payment of tax, without taking into account that tax is not payable in respect of a zero rated supply. I will like to express my views separately.
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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.
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