In clause (47) and clause (108) of section 2 of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as the CGST Act), expressions ‘exempt supply’ and ‘taxable supply’ have been defined 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;
(108) “taxable supply” means a supply of goods or services or both which is leviable to tax under this Act;
Clause (6) of section 2 of the CGST Act defines expression “aggregate turnover” as follows:
(6) “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 cuss;
We all know that aggregate turnover cannot include value of same supply more than once. Inclusion of value of any supply more than once in the definition of ‘aggregate turnover’ will vitiate the definition and will render the expression impractical. Now let us suppose that those supplies which attract nil rate of tax or which are wholly exempt from tax are also included in the expression ‘taxable supply’. But expression ‘taxable supply’ has been defined as a supply of goods or services or both which is leviable to tax’. In such circumstances, ─
(a) definition of expression ‘taxable supply’ will also include within it all supplies which attract nil rate of tax or which are wholly exempt from tax;
(b) definition of expression ‘exempt supply’ already includes supplies which attract nil rate of tax or which are wholly exempt from tax.
We see that definition of expression ‘aggregate turnover’ includes value of all taxable supplies as well as value of all exempt supplies. If our assumption is true then definition of expression ‘aggregate turnover’ will result in two times inclusion of the value of supplies which attract nil rate of tax or which are wholly exempt from tax. This will make the definition of ‘aggregate turnover’ unworkable or impractical. Therefore, our assumption that the expression ‘taxable supply’ includes supplies which attract nil rate of tax or which are wholly exempt from tax is false.
We know that the State does not receive any amount of tax from the supplies which attract nil rate of tax or which are wholly exempt from tax. Word “tax” is defined as compulsory exaction of money by public authority from the public for public purpose. Where ‘compulsory exaction of money is not involved’ we cannot say that any tax is leviable or any event is leviable to tax. Therefore, in respect of supplies which attract nil rate of tax or which are wholly exempt from tax or in respect of any other supply on which any amount of tax is not leviable, it cannot be said that such supplies are leviable to tax. Here it is to be noted that supplies wholly exempt from tax do not include supplies of goods or services or both in respect of which exemption from tax has been granted subject to fulfillment of certain specified conditions because where a person fails to fulfill the condition(s), the tax becomes leviable on the supply. Similarly where exemption from tax has been granted in respect of a supply of any goods or services or both if it is made in specified circumstances, supply of such goods or services or both cannot be treated a supply wholly exempt from tax because where such supply is not made in the specified circumstances, tax becomes leviable on the supply.
In clause (82) of section 2 of the CGST Act, term ‘output tax’ has been defined as follows:
‘(82) “output tax” in relation to a taxable person, means the tax chargeable under this Act on taxable supply of goods or services or both made by him or by his agent but excludes tax payable by him on reverse charge basis;’
Output tax is computed for the purpose of ascertaining the amount of tax payable on supplies of goods or services or both made by the taxpayer. It is computed in respect of taxable supplies. It is not computed in respect of supplies which attract nil rate of tax or which are wholly exempt from tax.
In view of the above, we can conclude that ‘taxable supplies’ and ‘exempt supplies’ are mutually exclusive. Any supply, which is an exempt supply, is not a taxable supply and conversely any supply, which is a taxable supply, is not an exempt supply. Also an exempt supply cannot be said to be a supply of goods and services or both leviable to tax.
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Section 2(30) defines “composite supply” as supply made by a taxable person to a recipient consisting of two or more ‘taxable supplies’ of goods or services or both or any combination therof which are naturally bundled and supplied in conjunction with each other in ordinary course of business one of which is a principal supply.
In re M/s Ernakulam Medical Centre Private Ltd (GST AAAR Kerala) it is held that medicine or allied goods supplied to inpatient are indispensable items during the course of treatment along with exempted health care services and it is a ‘composite supply’ to facilitate health care services and is not taxable.
Now referring to your opinion if we consider that taxable supply does not include exempt supply then supply of medicine (taxable supply) along with health care services (exempt supply) to inpatient will never get covered under the scope of composite supply because it will only include taxable supply.
Therefore, if we strictly apply this principle then the supplies of medicine to inpatient during medical treatment will get covered under mixed supplies and because it get covered under mixed supplies then as per definition of mixed supplies, the health care services also becomes taxable if we supply any medicines to the patient and the rate of tax on mixed supply will be of supply (medicines) which attracts the highest rate of tax.
Therefore, in my opinion taxable supply includes exempt supply otherwise the ruling of AAAR will have no effect.