1. Introduction: The power of Government to levy and collect taxes is inherent sovereign power well recognised from time immemorial. Under the Indian constitution, the power of the Government to levy and collect taxes is mainly regulated by article 265 of the constitution. The power to levy tax grants the power to provide for exemptions. The exemptions are largely for welfare of the people or for development of trade and industry. Under GST, the mechanism to levy and collect taxes is enshrined in various provisions of the central and state/UT legislations. This article is to discuss the exemptions granted under GST. Taxation is statutory filed. No tax can be levied and collected except according to the authority of law. The principle of strict interpretation of taxing statutes was best enunciated by Rowlatt J. in his classic statement in Cape Brandy Syndicate v I.R.C. (1 KB 64, 71): “In a taxing statute one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can look fairly at the language used”.
2. Exemptions: Word exemption is understood as freedom from tax. Under GST the meaning is putting a person beyond levy of tax. It also means immunity from a liability or obligation. Exemption and non-liability are different under GST. Exempted turnover is included in gross turnover and deducted while computing tax liability whereas non liable turnover (transactions as neither supply of goods nor supply of services) is totally outside the perview of computation. “Aggregate turnover” u/s 2(6) means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess; Let’s understand the legal terminology under GST:
a. S. 2(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;
b. S. 2(78) “non-taxable supply” 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;
c. 11. 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 on the recommendations of the Council, by special order in each case, under circumstances of an exceptional nature to be stated in such order, exempt from payment of tax any goods or services or both on which tax is leviable.
d. IGST Act Section 6. Power to grant exemption from tax is similar under CGST.
2. Non levy on alcoholic liquor for human consumption and certain petroleum products– section 9. (1) Subject to the provisions of sub-section (2), there shall be levied a tax called the central goods and services tax on all intra-State supplies of goods or services or both, except on the supply of alcoholic liquor for human consumption, on the value determined under section 15 and at such rates, not exceeding twenty per cent., as may be notified by the Government on the recommendations of the Council and collected in such manner as may be prescribed and shall be paid by the taxable person.
(2) The central tax on the supply of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel shall be levied with effect from such date as may be notified by the Government on the recommendations of the Council.
Doubt arises as to the classification of above two category of goods, are they classified as non-supply or as exempted supply? Supply of alcoholic liquor for human consumption are definitely intended to be kept out of GST. However these goods are not covered under schedule III and fall under classification as non-taxable supply under GST. In article 366 of the Constitution- clause (12A) “goods and services tax” means any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption;’
Supply of petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel are kept outside GST for time being and intension to levy GST at future date is clearly intended. Hence these categories are non-taxable supplies (GST rate not notified).
3. Transactions as neither supply of goods nor supply of services: Apart from the exempted supply and non-taxable supply this is another category of transactions to be understood under GST. Schedule III to CGST Act specify transactions of these nature which are neither supply of goods nor supply of services. Recent notification is another instance of such transactions.
|25/2019-Central Tax (Rate), dt. 30-09-2019||Seeks to notify the grant of alcoholic liquor licence neither a supply of goods nor a supply of service as per Section 7(2) of CGST Act, 2017|
These type of transactions is totally outside the perview of computation.
4. Nature of exemptions: Normally, it is the State or the Central Government (or UT) which grant exemptions. Such, exemption may be granted –
(iii) through Government orders
(iv) under special circumstances
(v) through notifications
(vi) by way of circulars
(vii) by way of tax holidays
(viii) to specific class (or kind) of goods and / or services
(ix) to specific class of persons
(x) for a specific time frame or with a cap on value
(xi) to specified transactions etc.
(xii) It can also be granted in any combination of the above since it is the prerogative of the Government
5. Impact of exemptions: Exemptions from GST impact on prices of outward supplies. The positive side are the supplies become cheaper and supplier is free from hassles of compliance. The negative side are the ITC cannot be absorbed and indirectly join the cost stream and the ITC chain is broken. In case of suppliers who deal in both taxable and exempted supplies ITC is restricted related to exempted supplies as per regulations.
6. Notifications: In exercise of powers conferred by section 11(1) of CGST Act and section 6(1) of IGST Act, the Central government has issued the various notifications to exempt supply of goods or services from time to time. As per section 11(4) of SGST Act and section 8(4) of UTGST Act, any notification issued by the Central Government, on the recommendations of the Council, under section 11(1) or order issued section 11(2) of the CGST Act shall be deemed to be a notification or, as the case may be, an order issued under SGST/ UTGST Act.
7. Supply without consideration such as Free Samples and Free Goods / Promotional items, Samples of Medicines etc.- Input tax credit is required to be reversed in respect of goods which have been disposed of by way of free samples. Input Tax Credit shall not be allowed for goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.. If free promotional items are provided with the taxable product, then the consideration for the same will be the value charged from the consumer.
8. Supply of free materials by Contractee: If the contract is structured in such a way that the total contract value is arrived at without including the value of free supply of materials and the contractor is under no obligation to supply such free supplies then the valuation will not include value of free supplies. The terms of contract must be drafted carefully on this aspect. In case of ambiguity the valuation mechanism may kick in and the tax liability may be additional burden thereon. Several legal decisions in earlier tax regime made the concept clear. It is a settled position under the Sales Tax / VAT Laws that free supply would be construed as sale liable to Sales Tax / VAT when the value of the contractee supplied goods was deducted from the contract price payable which was inclusive of the value of the material. The same analogy will apply under GST. Section 15(2) of the CGST Act reads “the value of supply shall include any amount that the Supplier is liable to pay in relation to such supply but which has been incurred by the recipient of supply and not included in the price actually paid or payable for the goods or services or both”.
9. Supply of exempted goods and services under composite supply or mixed supply: The principal supply shall decide the nature of the entire package and if such supply is taxable, the entire package shall be taxed at such rate but if the principal supply is exempt, then, the entire supply shall be exempted. In case of a mixed supply, the highest rate on supply determines the rate for the entire package.
10. Zero-rated supplies and exemptions: Zero-rated supplies are eligible for refund of input tax paid by such supplier. Even if the output is exempt, the law allows the benefit of refund of input taxes to such supplier also. Export of exempted goods or services will also be treated as zero rated supplies.
11. Whether an exemption is mandatory or optional: This is a question always bothering the trade and industry. Merely because a customer is willing to pay taxes, supplier cannot collect taxes. Such collection will amount to unauthorised collection of taxes ( S.32 ) and liable for penalty. When the output tax is exempt the input tax stands restricted.
12. Registration in cases of supply of exempt goods and/or services:
a. Section 23 of the CGST Act provides that 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 shall not be liable for registration;
b. an agriculturist, to the extent of supply of produce out of cultivation of land shall not be liable for registration.
c. The Government may, on the recommendations of the Council, by notification, specify the category of persons who may be exempted from obtaining registration under this Act. The Central Government vide Notification No. 05/2017-CT, dt. 28-06-2017 has, w.e.f 22nd June 2017 amended section 23 of CGST Act, 2017 to include the persons who are only engaged in making supplies of taxable goods or services or both, the total tax on which is liable to be paid on reverse charge basis by the recipient of such goods or services or both under section 9(3) of the CGST Act, 2017 in the category of persons exempt from obtaining registration under the aforesaid Act.
d. The supplier who is engaged in the supply of any taxable goods or services, shall be liable to take registration. Rs 20 Lakhs limit as specified in Section 22 shall be arrived at after adding both taxable as well as exempt supplies. Non-taxable supplies are part of aggregate supplies and to be included for determination of registration limit. Non supplies i.e. schedule III and the like notified transactions u/s 7 are outside the scope and not to be included to determine the limit.
13. Documents required to be issued in case of Exempt Supply: Section 31(3)(c) of the CGST Act provides that a registered person supplying exempt goods or services or both or paying tax under the provisions of section 10 shall issue, instead of a tax invoice, a bill of supply containing such particulars and in such manner as may be prescribed. Rule 46A of CGST Rules, 2017 overrides rule 46, rule 49 and rule 54, to provide that a registered person supplying taxable goods as well as exempted goods or services or both to an unregistered person may issue a single “invoice-cum-bill of supply” for all such supplies. Provisions relating to issue of documents by registered person can be summarized as follows-
|Cases||Document to be issued||Section||Rule|
|Supply of taxable goods or services||Tax Invoice||31(1)||46|
|Supply of exempted goods or services||Bill of supply||31(3)(c)||49|
|Supply of taxable as well as exempted goods or services to un-registered person||Invoice-cum-bill of supply||31||46A|
|Supply of taxable as well as exempted goods or services to registered person||Tax Invoice, in respect of taxable supplies.
Bill of supply in respect of exempted supplies.
14. E-way Bill in case of exempt supplies: Section 68 of CGST Act, 2017 read with rule 138 of CGST Rules, 2017 specify requirements of issue of e way bill. Explanation 2 to rule 138(1) provides that the value for the requirements of the section “shall exclude the value of exempt supply of goods where the invoice is issued in respect of both exempt and taxable supply of goods.” Rule 55A of CGST Rules, 2017 requires the person-in-charge of the conveyance to carry a copy of the tax invoice or the bill of supply issued in accordance with the provisions of rules 46, 46A or 49 in a case where such person is not required to carry an e-way bill. Therefore, in case of pure supply of exempted goods, other than de-oiled cake as specified in rule 138(14) of CGST Act, 2017, no e-way bill is required.
15. Records required to be maintained by supplier of taxable/ exempt supplies: Every supplier of exempted goods also needs to maintain proper sale purchase register, stock register and manufacturing records. In addition to the above, rule 56 requires every registered person to keep and maintain the certain records. Section 36 of CGST Act, 2017 requires a registered person to keep and maintain books of accounts or other records. A registered person supplying exclusively exempted goods or services or both shall have to pay a penalty of Rs. 10,000/- if he fails to keep, maintain or retain books of account and other documents in accordance with the provisions of this Act or the rules made thereunder.
16. Broad grouping and analysis of exemptions:
|Government related transactions:|
|I||Exemptions in case of supplies effected to Government/ Municipal Bodies/ Government bodies and organisations, and entities under Article 243G or 243W|
|II||Exemptions in case of supplies effected by Government / Municipal Bodies / Government bodies and organisations|
|III||All activities of Central Government, State Government and Union territory|
|IV||Services by governmental authority in relation to functions under Articles 243W and 243G|
|V||Certain Services by government or local authority to business entities|
|VI||Services by one Government to another|
|1||Exemptions in case of supplies effected by Charitable Trusts, religious institutions/organisations and Not for profit entities|
|2||Exemptions in case of associations and clubs|
|3||Exemptions in case of Education and allied Services|
|4||Health related services|
|5||Exemptions in case of Transportation Services of goods and Passengers|
|6||Exemptions in case of services received for personal consumption, recreation including import of services by individuals|
|7||Exemptions in case of finance and insurance and employee funds|
|Exemptions in case of activities related to arts, sports and culture|
|9||Exemptions in case of activities relating to Agriculture|
|10||Exemption to other construction / installation etc. related activities|
|Exemption to business support Services|
17. Explanations to exemption entries of the Exemption Notification: Various terms used in exemption notifications are explained under foot note of exemption notifications. These explanatory foot notes provide clarity on the terminology for better understanding of the exemptions.
18. Exemption by Notification -In exercise of powers conferred by section 11(1) of CGST Act and section 6(1) of IGST Act, the Central government has issued the several notifications to exempt supply of goods or services. Such notifications are listed here below:
|CGST||IGST||Contents in brief|
|02/ 2017–CT (Rate), dated 28-Jun-2017||02/ 2017–IT (Rate), dated 28-Jun-2017||Exemption to supplies of goods|
|03/ 2017–CT (Rate), dated 28-Jun-2017||03/ 2017–IT (Rate), dated 28-Jun-2017||Exemption to goods specified in the list annexed|
|07/ 2017–CT (Rate), dated 28-Jun-2017||07/ 2017–IT (Rate), dated 28-Jun-2017||Exemption to supplies of goods by CSD or unit run canteens to specified recipients|
|08/ 2017–CT (Rate), dated 28-Jun-2017||NIL||Exemption granted from levy of CGST under RCM on supplies received from unregistered persons|
|09/ 2017–CT (Rate), dated 28-Jun-2017||NIL||Exemption granted to supplies under RCM to a tax deductor by an unregistered supplier|
|10/ 2017–CT (Rate), dated 28-Jun-2017||NIL||Exemption to supplies of second hand goods|
|12/ 2017–CT (Rate), dated 28-Jun-2017||9/2017–IT (Rate), dated 28-Jun-2017||Exemption to supply of services|
|26/ 2017–CT (Rate), dated 21-Sept-2017||26/ 2017–IT (Rate), dated 21-Sept-2017||Exemption to heavy water and nuclear fuels|
|NIL||30/ 2017–IT (Rate), dated 22-Sept-2017||Exemption to inter-State supply of skimmed milk powder or concentrated milk|
|38/ 2017–CT (Rate), dated 13-Oct-2017||32/ 2017–IT (Rate), dated 13-Oct-2017||Exemption relating to supplies under RCM|
|40/ 2017–CT (Rate), dated 23-Oct-2017||41/ 2017–IT(Rate), dated 23-Oct-2017||Exemption to supplies by registered suppliers to registered recipients for exports in excess of 0.05% CGST or 0.01% IGST|
|45/ 2017–CT (Rate), dated 14-Nov-2017||47/ 2017–IT(Rate), dated 14-Nov-2017||Exemption to scientific and technical equipment|
|05/ 2018–CT (Rate), dated 25-Jan-2018||05/ 2018–IT (Rate), dated 25-Jan-2018||Exemption to Central Government’s share of profit out of services by way of grant of license to explore petroleum crude etc.|
|NIL||06/ 2018–IT (Rate), dated 25-Jan-2018||Exemption from levy of IGST on royalty and license fee in case of import|
|13/ 2019–CT (Rate), dated 31-July-2019||13/ 2019–IT (Rate), dated 31-July-2019||Exemption from hiring of Electric buses by local authorities from GST.|
|19/ 2019–CT (Rate), dated 30-Sep-2019||19/ 2019–IT (Rate), dated 30-Sep-2019||Exemption of supply of goods for specified projects under FAO|
(*there are amendments to some of the notifications )