This article aims to analyse the concepts of exempt supply and non-taxable supply by understanding the application in relevant sections and the primary differences between non taxable supply vis a vis activities not taxable as supply.
The concepts of Exempt Supply and Non-Taxable Supply are of predominant significance as there is a likelihood of different forms of litigation in these arenas in the future. These two concepts are essentially relevant in the context of sec.17(2) of the CGST Act for availment of Input Tax credit. An interplay between these concepts gives an interesting area of research along with a likelihood of different forms of litigation in the future.
TAXABLE EVENT AND APPLICABILITY
The taxable event in GST is the ‘Supply’ of goods or services or both. Section 7 of the CGST Act defines the scope of Supply and the crux of the definition can be understood as follows:
(i) Supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal.
(ii) Made or agreed to be made for a consideration by a person in the course or furtherance of business.
The use of expression ‘agreed to be made’ in the definition of supply is significant as it would justify payment of GST even on advances received before the supply is effected.
This is so since advances received are for a consideration for a supply which is ‘agreed to be made.’
Exempt Supply &Non Taxable Supply
Having understood the Scope of supply as per s. 7, the two major concepts which need to be understood considering the above definition, are, as stated above, exempt supply and nontaxable supply.
Exempt supply is defined under sec.2(47) as follows:
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.
On the other hand non taxable supply is defined under section 2(78) as follows:
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.
In the case of Exempt supply, supply is as per the definition indicated above, and it is taxable but government by virtue of powers vested with them, is satisfied that it is necessary in public interest to exempt such supplies either absolutely or partially on the recommendations of the GST Council with effect from a particular date (sec.11). In simple words, Goods and services are tax free, however Input tax credit cannot be claimed on GST paid on assets, purchases or expenses for their businesses. Exempt supply will also include ‘nil’ rated supply meaning supplies which are subject to ‘nil’ rate as per the tariff itself.
Whereas, in the case of nontaxable supply while the supply should be as per the provisions of the Act but it is not taxable at all for certain reasons. E.g. supply of alcoholic liquor for human consumption, certain products of petroleum etc. A transaction must be a ‘supply’ as defined under the GST law to qualify as a non-taxable supply under the GST.
Activities which are neither as supply of goods nor supply of services
The transactions mentioned in Schedule III to the CGST Act are specifically designated as “Activities of transactions which shall be treated neither as supply of goods nor supply of services”. From the description of Schedule III, it is clear that the legislature in their wisdom thought that the specified transactions mentioned in Schedule III could not be treated as supply at all of either of goods or services In my view such transactions cannot be brought under the term ‘non taxable supply’.
Charging Section & Supply
s. 9 which is the charging section of the CGST Act and s.5 of the IGST act clearly envisage a ‘levy of tax on supplies. The transactions which fall under Schedule III are listed therein to be neither supply of goods nor supply of services. Thus, the transactions mentioned therein do not get entry into the scope of CGST Act or IGST Act and hence they are not taxable under the said Act as ‘supplies’ under the Act.
However there is a tendency on the part of certain authors to include transactions under Schedule III under the scope of nontaxable supply, which with due respect I would submit may not be legally tenable as such transactions are not construed as ‘supplies’ at all as per Schedule III to the CGST Act.
Non Taxable Supply vis a vis Activities not taxable as Supply
Now the question arises, whether a transaction which is not recognized as supply under the Act could be construed as nontaxable supply? In my view, it is difficult to justify that a supply/ transaction which is firstly not recognized as supply under the Act (i.e. s. 7) could be construed as ‘nontaxable supply.’ The rationale being, a supply can be either taxable or not taxable, but when the transaction itself is not treated as ‘supply’ the question of it being a ‘nontaxable supply’ does not arise in the first place.
Therefore, it is my view, that the expression nontaxable supply cannot cover such of those activities of transactions as mentioned in Schedule III to the CGST Act as nontaxable supplies as they are not supplies at all. This question is significantly relevant in the context of reversal of input tax credit under sec.17(2) of the CGST Act as it gives rise to a major concern.
The relevance of this understanding is important in light of the recent decision of Hon’ble High Court of Gujarat in the case of Mohit Minerals vs. Union of India where the Court quashed notification no.8/2017 – Integrated Taxes (Rate) dated 28.06.2017 and notification no.10/2017 Integrated Taxes (Rate) dated 28.06.2017 as unconstitutional. The first notification dealt with fixation of rates on transport of service provided by nonresident outside India to a nonresident outside India among other services. The second notification dealt with payment of IGST under Reverse Charge Mechanism, where the liability is placed on importer for paying GST. As held by the Hon’ble Gujarat High Court in the above decision, the transaction that takes place between two non-residents outside India cannot be brought under the scope of IGST and such transaction cannot be covered under the expression ‘non taxable supply’.
In my view, when the two notifications as above have been rendered as unconstitutional, such transactions/supplies cannot be treated as supplies at all under provision of CGST Act or IGST Act and the same cannot be construed as nontaxable supplies under the Act.
 The Meaning and Scope of Supply, available at http://www.cbic.gov.in/resources//htdocs-cbec/gst/51_GST_Flyer_Chapter3.pdf.