Almost its three years now since GST laws were brought into force, yet there are some confusions in the very basic terminology around which the whole GST revolves. One such web of confusion is the meaning of taxable supply, non taxable supply and exempt supply. What does it actually mean, strictly going by the definitions as per section 2 and whether the same meaning holds good while interpreting it in other section? Let us begin with the definitions u/s 2
Section 2(108) – taxable supply means a supply of goods or services or both which is leviable to tax under this Act
Section 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
It is clear that both the terms are mutually exclusive and if a supply falls under the category of taxable supply, it cant be a non taxable supply and vice versa. Now lets turn our attention towards section 9 of CGST Act which is the charging section of GST.
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
Section 9(1) states that a tax called CGST shall be leviable on all intra-state supplies [except alcohol and supplies stated in sub-sec (2)], and by virtue of section 2(108), every supply on which tax is leviable under this Act is called taxable supply. As such, in my opinion, every supply on which CGST Act applies is a taxable supply as leviability is the only condition, whereas supplies on which CGST Act is not leviable is a non-taxable supply, for example – alcohol for human consumption, petrol, diesel etc.
Now, lets turn our attention towards another important term ‘exempt supply’.
Section 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
The definition of exempt supplies consists of three limbs:
i) Nil rate of tax
ii) Wholly exempt u/s 11 of CGST or u/s 6 of IGST
iii) Non taxable supply
The first two limbs are supplies which are leviable to tax (as included within the scope of section 9) but not liable to tax, whereas the third limb is supply which is neither leviable nor liable to tax.
As such, the term ‘taxable supply’ defined u/s 2(108) includes the first two limbs of exempt supplies and is not to be construed only for those supplies which are both leviable and liable to tax.
Summarily, there can be three types of supplies based on the condition of leviability and liability of tax:
a) Supply is not leviable to tax [Non taxable supply by virtue of non leviability and Exempt supply since non taxable supply is also a part of Exempt supply]
b) Supply is leviable to tax as well as liable to tax [Taxable supply]
c) Supply is leviable to tax but not liable to tax [Taxable supply by virtue of leviability but Exempt supply by virtue of no liability]
However, many experts reject this conclusion and are of the view that taxable supply means supply which attracts tax and therefore exempt supply does not form part of taxable supply. If this proposition is considered true, then what are the subsequent results? If taxable supply is something which attracts tax, then the necessary corollary would be that non-taxable supply is something which does not attract tax; both the definitions being diagonally opposite to each other. If that being true, then the definition of exempt supply is otiose, whereas we have already seen that the definition of exempt supply is of wider connotation that non-taxable supply.
The meaning of these definitions also give the same sense when used in various provisions. For instance, when section 10(2)(b) reg composition scheme states that ‘he is not engaged in making any supply of goods or services which are not leviable to tax under this Act’, the words ‘not leviable’ does not refer to entire exempt supplies but only to non taxable supplies.
Similarly, Section 2(30) defines composite supply to mean a 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 thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply. Here, if taxable supply did not cover the first two limbs of exempt supply, then the concept of composite supply could not be applied to healthcare services where medicines to Indoor patients and rent etc are treated as exempt since healthcare is the principal supply which is exempt in itself, since composite supply deals only with taxable supplies.
However, the conclusions of the definition part does not aptly fit into all places where these words ‘taxable supply’/ ‘exempt supply’/ ‘non taxable supply’ are used in various Sections and Rules. For instance, in Rule 7, the words ‘half percent’ were substituted by ‘half per cent of the turnover of taxable supplies of goods in the State or Union territory’.Definitely, the intention was not to tax the exempt portion of supply. There are many other such instances in the Act and Rules as well.
The only logic one can give for these divergent interpretation is that section 2 itself starts with the word ‘unless the context otherwise requires’. As such, it can be concluded that the taxable supply includes nil rated supplies as well as wholly exempted supplies, the two out of three limbs of exempt supplies, unless the context otherwise requires.
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