Article Explore the concept of exempt supply under GST (Goods and Services Tax) law, including its broad definition, types of exempt supplies, and their implications. Article help readers Learn about NIL rated supplies, supplies exempted from GST, and non-taxable supplies, along with the requirements for GST registration for individuals engaged exclusively in exempt supplies. It further explains interplay between Section 23 and Section 24 of the CGST Act, 2017 in determining the registration obligations for suppliers involved in exempt supplies subject to reverse charge mechanism.
The expression ‘exempt supply’ under GST law is of critical importance, as if a supply of goods or services or both is exempt, no GST is payable on such supplies by the supplier under forward charge mechanism. Further in case any goods / service which are notified by the government for payment under reverse charge mechanism, it is exempt, the recipient also is not required to pay GST thereon. Therefore, a supplier as well as recipient has to identify exempt supplies for discharging their liability of GST wherever required. As per Section 22(1) of the CGST Act, 2017 every person has to obtain registration whose aggregate turnover exceeds the prescribed limit. The aggregate turnover inter-alia includes exempt supplies as per Section 2(6) of the CGST Act, 2017 and therefore quantification of exempt supply is also required to identify whether registration is required or not. Though as per Section 23(1) of the CGST Act, 2017 any person engaged exclusively in exempt supplies of goods or services or both is not required to obtain GST registration.
The term exempt supply has been defined in a very broad manner in Section 2(47) of the CGST Act,2017 as under: –
(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;
From the above definition exempt supply includes:
Nil-rated supply is a type of GST supply where the GST rate is also 0%, but the supplier cannot claim the input tax credit. Non-GST supply or non-taxable supply is a type of GST supply which does not attract any GST, and exempt supply is a type of GST supply which is exempt from GST.
Goods: As per Notification No. 1/2017-CT(R) dated 28.06.2017 which lays down the rate of tax on supply of goods, none of the goods are subject to NIL rate. Thus, we can say that as on date, there are no NIL rated supply of goods.
Services: As per Sl. No 24 of the Notification No.11/2017-CT(R) dated 28.06.2017, the support services to agriculture, forestry, fishing, animal husbandry, are subjected to NIL rate of tax. It is important to note here that as per Explanation provided in said Notification, support services to agriculture, forestry, fishing, animal husbandry mean –
(i) Services relating to cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products or agricultural produce by way of—
(a) agricultural operations directly related to production of any agricultural produce including cultivation, harvesting, threshing, plant protection or testing;
(b) supply of farm labour;
(c) processes carried out at an agricultural farm including tending, pruning, cutting, harvesting, drying, cleaning, trimming, sun drying, fumigating, curing, sorting, grading, cooling or bulk packaging and such like operations which do not alter the essential characteristics of agricultural produce but make it only marketable for the primary market;
(d) renting or leasing
(e) loading, unloading, packing, storage or warehousing of agricultural produce;
(f) agricultural extension services;
(g) services by any Agricultural Produce Marketing Committee or Board or services provided by a commission agent for sale or purchase of agricultural produce.
(h) services by way of fumigation in a warehouse of agricultural produce.
(ii) Services by way of pre-conditioning, pre-cooling, ripening, waxing, retail packing, labelling of fruits and vegetables which do not change or alter the essential characteristics of the said fruits or vegetables.
(iii) Carrying out an intermediate production process as job work in relation to cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products or agricultural produce
The Central Government has power to grant exemption from tax by issue of notification under Section 11(1) of the CGST Act, 2017 / Section 6(1) of the IGST Act / Section 8(1) of the UTGST Act,2017. Similar powers have been conferred with State Government under Section 11(1) of respective SGST Acts. Such exemption can be granted from whole of the tax or part of tax and can be given absolutely or subject to some conditions.
Goods: As per the powers conferred under Section 11(1) of the CGST Act, 2017, the Central Government has issued Notification No. 02/2017-CT(R) dated 28.06.2017 (as amended) whereby it has exempted certain supply of goods from whole of the CGST. Similar Notifications have been issued under other GST Act(s) also. Some of the exempted goods are live animals(except horses) , meat, fish meat and fillets, eggs, honey and milk products, live trees and plants, vegetables, fruits and dry fruits, coffee beans not roasted, printed books, newspaper, raw silk etc.
Services: As per the powers conferred under Section 11(1) of the CGST Act, 2017, the Central Government has issued Notification No. 12/2017-CT(R) dated 28.06.2017 (as amended) whereby it has exempted certain supply of services from whole of the CGST. Similar Notifications have been issued under other GST Act(s) also. Some of the exempted services are interest or discount on deposits, loans or advances, renting of residential dwelling for residential use, transfer of a going concern, services of charitable entity, health care services, certain agricultural services etc
Non-GST Supply: Goods or services on which GST is not leviable are called Non-GST supply. Input tax credit of inputs and / or input services used in providing non-GST supply is not available i.e. no input tax credit on non-GST supplies. Examples of Non-GST supplies are alcohol for human consumption, petroleum products, electricity etc.
Section 2(78) of the Act has defined the term Non-Taxable Supply as hereunder- “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 & Services Tax. So, there should be a supply first for an activity or transaction. If an activity or transaction falls outside the scope of supply then it cannot be said as a non-taxable supply. The definition of supply has been given in section 7 of the Act and it is an inclusive definition which covers almost every transaction of goods and services unless specially excluded under schedule III. So, the activities and transactions specified in Schedule III are not supply. As it is not supply so it cannot be said as non-taxable supply but can be said as Non-GST Supply. Non-Taxable Supply is supply under section 7 of the act which is not chargeable to tax due to excluded by charging section i.e by section 9 of the Act. Hence supply of alcoholic liquor for human consumption, petroleum crude, high speed diesel, motor spirit, natural gases and aviation turbine fuel is a non-taxable supply
As per Section 7(2)(a) read with Schedule III of the CGST Act, 2017, eight activities / transactions are treated neither as a supply of goods nor a supply of services. Accordingly, these are also not subject to GST. The question before us is whether such activities / transactions be regarded as non-taxable supplies. such activities cannot be regarded as non-taxable supply as in order to become non-taxable supply, it should firstly be a supply and as such activities/ transactions are not treated as supply they cannot be regarded as non-taxable supply. Accordingly, Schedule III activities like employee services will remain outside GST net and also will not form part of exempt supply. Exempt supply has a different connotation when it comes for purpose of reversal of input tax credit as per Section 17(2) of the CGST Act, 2017 read with Rule 42 and 43 of the CGST Rules, 2017.
We all know that as per Section 22(1) of the CGST Act, 2017, if aggregate turnover of a supplier in a financial year exceeds Rs 40 lakh / Rs 20 lakh / Rs 10 lakh as may be applicable, such a supplier is liable to take registration in the State / Union territory from where he makes a taxable supply of goods or services or both.
The expression “Aggregate Turnover” has been defined under Section 2(6) of the CGST Act,2017 as under:
“Aggregate turnover” 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;
The provisions of Section 22(1) are in a way contradicting the definition of the aggregate turnover in view of fact that it mandates that a supplier is liable to take registration from where he makes taxable supply of goods or service or both, thus the thrust is on taxable supplies. On the other the threshold limit of exemption in said Section is linked to the ‘aggregate turnover’ whose definition as stated above includes exempt supplies.
In view of discussion made supra, a direct question arises as to whether a person exclusively engaged in exempt supplies and whose aggregate turnover is in excess of the limit prescribed under Section 22(1) is required to obtain GST registration or not.
In this regard Section 23(1) of the CGST Act, 2017 comes to rescue of the persons exclusively engaged in exempt supplies. The said section is reproduced below for ready reference:
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;
(b) an agriculturist, to the extent of supply of produce out of cultivation of land.
In view of clause (a) of Section 23(1) of the CGST Act,2017, the persons exclusively engaged in exempt supplies of goods or services or both is not required to obtain GST registration even if its aggregate turnover exceeds the limit prescribed under Section 22(1).
However, it is amusing to note that specific mention that Section 23 overrides Section 22 has not been made by the legislature in Section 23. Anyways in view of specific Section 23 it would definitely override Section 22 and there is no cause of any worry for persons exclusively engaged in exempt supplies and they have been absolved from taking GST registration. The raison d’être for this is that when all the outward supplies of a person are exempt and no tax is payable by him nor he can avail any input tax credit, there is no logic for his obtaining GST registration.
In preceding para, we have deliberated that a supplier exclusively dealing in exempt goods / services is not required to obtain GST registration in view of specific relaxation provided to them under Section 23(1)(a) of the CGST Act, 2017. Now let’s take this discussion ahead and discuss whether such supplier would be required to obtain GST registration in case it receives any good or services which is subject to payment under reverse charge mechanism wherein the tax is to be paid by recipient of supply.
In this regard provisions of Section 24 of the CGST Act, 2017 are relevant. For ready reference said Section is reproduced below:
Notwithstanding anything contained in sub-section (1) of section 22, the following categories of persons shall be required to be registered under this Act, ––
(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;
(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.
From above Section, two important legal points emerges as under:
Section 24 overrides Section 22, which means that the persons specified in Sec 24 are required to obtain registration, irrespective of their aggregate turnover.
Persons who are required to pay tax under reverse charge are required to be obtain GST registration as per Sec 24(iii).
Now coming to our main question whether a supplier exclusively engaged in exempt supplies would be required to obtain GST registration, in case it receives any supply of goods or services which are subject to payment under reverse charge mechanism.
This question seems to be clash of Section 23 and Section 24 of the CGST Act, 2017, in a way that Section 23 mandates no registration for 100% exempt suppliers whereas Section 24 prescribes mandatory registration for person liable to pay tax under reverse charge.
The issue becomes more interesting when we note that Section 24 only overrides Section 22, which may mean that benefit of not taking registration granted to 100% exempt suppliers cannot be taken away by Section 24 if such supplier receives supplies subject to payment of tax under reverse charge.
On the other hand, another view on the issue can be that Section 23 and 24 are independent Sections and operate in different aspects, thus 100% exempt suppliers would be required to obtain registration, if they receive any supplies subject to reverse charge. Thus there can be two views on the issue before us.
It is a well settled principle of law that the law should not be interpreted in such a way to make any part of the statute redundant. By application of rule of harmonious construction and the rule against redundancy, the applicant would go out of the scope of section 23 because he is making certain quantity of taxable supply of GTA service by way of reverse charge mechanism and would fall within the scope of section 24 for purpose of registration and hence he would be required to obtain registration in order to discharge his liability under reverse charge.
As per Section 17(2) of the CGST Act, 2017 where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, the amount of credit shall be restricted to so much amount of the Input tax as is attributable to the said taxable supplies including zero rated supplies.
In other words, the registered person is required to reverse the pro rata input tax credit which is related to exempt supplies. The manner of determination of quantum and reversal of input tax credit is laid down in Rule 42 (for input and input services) and Rule 43 (for capital goods), of the CGST Rules, 2017.
The expression exempt supply has been defined under Section 2(47) of the CGST Act, 2017. As per this definition the exempt supply includes NIL rated supply, supplies exempted under Section 11 of CGST Act / Section 6 of IGST Act and non-taxable supplies. Readers for learning the definition of exempt supply can refer to our article titled “Understanding exempt supply under GST law” published yesterday.
It is important to note here that the exempt supplies which are used for determining of quantum of reversal of input tax credit related to such supplies is not purely the exempt supply as per Section 2(47), rather it is subject to certain adjustments. In this article we shall be discussing such adjustments.
The value of exempt supplies will first be determined as per definition of Section 2(47) which will include NIL rated supply, supplies exempted under Section 11 of CGST Act / Section 6 of IGST Act and non-taxable supplies. After this, following adjustments will be made in same:
The Government has notified certain goods / services / situations, using its powers conferred under Section 9(3) and 9(4) of the CGST Act, 2017 / Section 5(3) and 5(4) of the IGST Act, 2017, wherein the tax thereon is required to be paid by the recipient of supply.
Thus, in such cases the supplies is absolved from payment of tax and such liability is shifted onto recipient. It is important to note here that tax under reverse charge is to be paid only in respect of taxable supplies. Thus, it can be said that outward supplies subject to reverse charge will not form part of exempt supply and rather would be taxable supplies. However, the legislature considering that tax on such outward supplies is not being paid by supplier and thus input tax credit attributable to such supplies should not be given. Accordingly vide Section 17(3) of the CGST Act, 2017, they have mandated that the value of exempt supply under Section 17(2) shall include supplies on which recipient is liable to pay tax on reverse charge basis.
Securities have been kept out of the definition of goods and well as services. Thus, any sale of securities made will not be regarded as supply under GST Law and consequentially cannot also be treated as exempt supply.
However as per Section 17(3) of the CGST Act, 2017, it has been mandated that the value of exempt supply under Section 17(2) shall include transactions in securities. Now the question arises whether entire value of sale would be included.
In this regard it has been provided under Explanation (2)(b) after Rule 45 of the CGST Rules, 2017 that for determining the value of an exempt supply as referred to in Section 17(3) the value of security shall be taken as 1% of the sale value of such security.
Sale of land and completed building is not treated as supply as per Section 7(2)(a) of the CGST Act, 2017 read with para 5 of Schedule III of the CGST Act,2017. As these are not treated as supply, they will also not form part of exempt supply as per Sec 2(47) of the CGST Act, 2017.
However as per Section 17(3) of the CGST Act, 2017, it has been mandated that the value of exempt supply under Section 17(2) shall include sale of land and completed building. The reason for such inclusion may be that legislature wanted to curb availing of input tax credit attributable to such supplies.
It has been provided under Explanation (2)(a) after Rule 45 of the CGST Rules, 2017 that for determining the value of an exempt supply as referred to in Section 17(3) the value of land and building shall be taken as the same as adopted for the purpose of paying stamp duty.
It is important to note here that as per Explanation to Section 17(3) the value of exempt supply shall not include value of activities / transactions specified in Schedule III, except para 5 viz sale of land and completed building. Thus, value of other activities covered under Schedule III like employee services, actionable claims (other than lottery, betting and gambling), high seas sale etc will not be included in value of exempt supplies to be used for computing reversal of input tax credit.
As per Explanation 1(b) after Rule 43, the value of services by way of accepting deposits, extending loans or advances in so far as the consideration is represented by way of interest or discount is to be excluded from the aggregate value of exempt supplies.
However, such exclusion will not be made in case the supplier is a banking company, FI, NBFC engaged in supplying services by way of accepting deposits, extending loans or advances. These entities have been kept out of as income from interest or discount is their main business income.
X Ltd is engaged exclusively is supply of taxable supplies. However, it has sparked some surplus funds in FDR with Banks, on which it has received interest. Now such interest is an exempt supply and thus X Ltd would have to reverse pro rata credit attributable to such exempt supply. However, in view of specific exclusion stated above, such interest income will not form part of exempt supply. This will mean that no credit reversal will be required to be made by X Ltd.
As per Explanation 1(c) after Rule 43, the value of supply of services by way of transportation of goods by a vessel from the custom station of clearance in India to a place outside India is to be excluded from the aggregate value of exempt supplies.
It may be noted here that as per Sl. No 19B of the Notification No. 12/2017- Central Tax (Rate) dated 28.06.2017 (as amended), the services by way of transportation of goods by a vessel from customs station of clearance in India to a place outside India are exempted till 30.09.2020. Thus, the value of such supplies will be included in exempt supplies as per Section 2(47) of the CGST Act,2017.
However, benefit has been granted vide Explanation 1(c) after Rule 43, according to which value of above supply will be excluded from the aggregate value of exempt supplies and thus no reversal of credit will have to be made in this regard.
The non-taxable supplies / non-GST Supplies would include alcoholic liquor and the five petroleum products as they are not leviable to GST and rather subject to other Central / State taxes. As per Sec 2(47) exempt supplies include non-taxable supplies and thus such supplies would form part of exempt supplies.
Further as per Section 15(2)(a) of the CGST Act, 2017, the value of supply will include taxes other than GST. Accordingly, the taxes on above non-taxable supplies would also be included in value of such supplies. However in order to provide relaxation in this regard, it has been provided in Explanation to Rule 43(1)(g) that the aggregate value of exempt supplies and total turnover shall exclude the amount of duty or tax paid under entry 84 (Excise duty on petroleum products) and entry 92A ( Tax on inter-State sale or purchase of goods) or List I of Seventh Schedule to the Constitution and entries 51 (State Excise duty on alcoholic liquor) and 54 ( taxes on petroleum products) of List II of the said Schedule.
Conclusion– Concept of exempt supply under GST law is a fundamental aspect that significantly impacts the tax liability of suppliers and recipients. It encompasses goods or services attracting a nil rate of tax, wholly exempt supplies, and non-taxable supplies. Proper identification and quantification of exempt supplies are essential for determining GST registration requirements and aggregate turnover. While Section 23 of the CGST Act provides relief to those exclusively engaged in exempt supplies, exempting them from registration, the interaction with Section 24 regarding reverse charge obligations requires further clarification. Understanding and adhering to the regulations surrounding exempt supplies are crucial for businesses to ensure compliance with GST laws and effectively manage their tax obligations.