EXEMPTIONS UNDER GOODS AND SERVICES TAX ACT

1.  Meaning of Supply :-

The Taxable event under The CGST Act 2017 (referred as Act for brevity) is “Supply”. Section 7 states that the expression “supply” includes all forms of supply. By stating that the word supply is as an ‘expression’ the intentions and thoughts of the Government to enlarge the scope of tax are made very clear so that no supply in any form is left out from being taxed, be it goods or service or both.

Further it is to be noted that the expression supply is inclusive of all forms. When the word “such as” prefixes examples like ‘sale’ ‘barter’ ‘exchange’ as used in sub clause (a) of Sub section (1) of Section 7, it is legally held that the examples are given only to further enhance the scope and meaning of the word “supply” and not to restrict the meaning to the given words.

Thus, every form of supply of goods or service or combination of both, when “supplied” in the course of business and for consideration, will be taxed.

Without limiting the scope to a business transaction or for consideration, Government has also carved out certain specific exceptions to tax supplies, even when specific supplies are not made in the course of business (ref sec 7 1 (b) or are made without consideration. (ref Schedule I)

• Creation of charge to Tax Supply:-

Section 9 is the charging section through which tax is levied (imposed) called CGST (referred as “Tax” for brevity) on all intra state supplies, excluding Alchohol for human consumption.

Whenever tax is levied 3 aspects assume importance to work out the tax payable. 1^st is the quantity supplied, 2^nd is the Rate of Tax and 3^rd is the “value” on which tax is to be levied.

Section 9 empowers the Government to notify the Rate of Tax applicable to the described Goods and Services supplied. Such Notifications are called as “Rate” notifications. Further as the tax payable can be tweaked by manipulating value, the Act requires that the Value of each supply is determined as per provisions of Section 15.

Though enormous powers are taken by Government to tax all forms of supply, and also lay down the manner in which the Value of supply is to be determined, such unlimited power to tax everything if exercised in unrestricted manner, may result in inflicting social injury (and cost political popularity). For achieving, social justice a provision has been made to exempt from GST certain supplies of goods and services as well as certain category of persons when Government considers it is in public interest to do so. Such exemption is granted by reducing the notified Tax Rate or by capping the values on which tax is to be calculated or when the recipient is a special category recipient or when such supply is made from a particular area or when the supplier or recipient satisfy certain conditions.

Therefore, for any business it is extremely necessary to determine the effective Tax payable after carefully considering all the available exemptions.  Many a times it can give a competitive advantage if the exemptions are properly claimed. However if the exemptions are improperly claimed , it can cause damage to profit of business due to penalty and interest which can be attracted for wrong claiming of exemption.

• Definition of Exempt supply: –

As per Sec 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 nontaxable supply.

Therefore, Exempt supply means supply of those Goods or Service or both which either: –

1. attract Nil Rate of Tax as per notifications/ order issued under Section 9,(e.g. Services by the Central Government, State Government, Union territory or local authority to governmental authority or government entity, by way of lease of land as per Serial No 16 of the Table attached to Not No 11/2017 – CT )

 or

• have a notified Rate of Tax under Section 9, but are separately exempted by way of exemption notification or order, (e.g. Grapes, dried, raisins attract 2.5 % CGST as per serial No 31 of Schedule I of Notification 1/2017 (R ) under Ch 0806  but “Grape Fresh” are exempted from whole of tax i.e. 2.5% as per Serial No 53 of Not 2/2017 -CT ( R );

 or

• Are non-taxable supplies. (Refer Schedule III or say money and securities).

• Power to grant exemption from tax: –

Section 11, confers powers on the Government to exempt either absolutely or conditionally goods or services or both of any specific description from the whole or part of the Central Tax.  Such an exemption is granted by issue of a notification under sub section (1), or by issue of special order under sub section (2) when circumstances of special nature such as floods, Earthquake etc arise.

However, no exemption whether under sub section (1) or (2) can be granted, unless it is recommended by the GST council. The GST council is the final recommending authority and once recommended by the council the Government must grant such exemption.

• Meaning of absolute exemption and conditional exemption.

Absolute exemption means an exemption which is given without any condition, qualification or restriction. As per the explanation given under Section 11, once exemption is granted absolutely,the registered person who makes the supply shall not collect tax. Unconditional exemption is compulsory for all those who are the Registered person liable to pay tax on such supply.

In respect of conditional exemption, the supply will be exempted only if all the conditions as stipulated in the notification are met 100% in all respect. However, in contrast to absolute exemption the registered person can opt to not claim such exemption and pay tax.

The onus to prove eligibility to absolute or conditional exemption is on the registered person who is liable to pay the tax on such supply. One has to be extremely careful and has to ensure that all the conditions are met including the procedural compliance if any .

• Specific description of goods or service or both are only exempted.

The Goods or services or both which are exempted are clearly specified and described in the notification or order issued under which exemption is granted. Nothing more or less other than what is specifically described can be exempted. For e.g. if laptops are described as goods exempted in the notification, desktops cannot be exempted though they may perform same functions and are cheaper.

• Wholly exempted or Partly exempted

If notification exempting the Goods or service or both attracting say 9% Notified Tax Rate is so worded that “tax in excess of 6% is exempted” it means that the supply is exempted for 3% of Total Tax and the effective Tax Rate will be 6%. This is known as partial exemption.

If the notification exempting Goods or service or both attracting 9% Notified Tax Rate is so worded that “ tax in excess of Nil is exempted” it means that the Rate in excess of zero i.e.9% is exempted and is known as wholly exempted.

• Impact of Exemption on Input Tax Credit:

Once the Goods or service or both are exempted wholly or absolutely or are declared as non-taxable supplies, they are defined as exempted goods as per Section 2 (47) of the Act. Once the supply is exempted, no input tax credit is available for such goods or service or both.

Assuming the Goods were taxable upto 3^rd may 2021 attracting 9% CGST and on 4^th the said goods were exempted wholly, the Input Tax credit availed on inputs in the inventory lying in stock with the Registered person on becomes ineligible and is to be paid back. If the balance in electronic credit ledger is not available it is to be paid in cash.

In contrast to the above situation, if the goods which were wholly exempt or are non-taxable on 3^rd May 2021 but were notified to be taxable @ say 9% CGST on 4^th May 2021, the Input Tax Credit on inputs of such goods in the inventory lying on 4^th May 2021 will be allowed to be taken in Electronic Credit Ledger, subject to satisfaction of other credit eligibility requirement as per Section 16.

It is thus advisable to retain the Tax paid Invoices for inputs which will be the basis to claim the ITC in such situation even when supplying exempted goods.

• Input Tax Credit is available on exempted goods only if they are exported

Sec 16 (2) of the IGST Act carves out an exception to the General Rule that credit will not be allowed if the supply is exempted.

Where the exempted Goods or services or both are exported, subject to compliance of section 17 (5), ITC would be allowed on such Goods.

1. Apportionment of Credit on common Inputs and input services:-

Where any inputs or input services or both are partly used for making a taxable supply including the zero Rated supply (exports or supplies to SEZ)  and partly for making exempted supply, the ITC is apportioned by restricting it in proportion to that which is attributable to the Taxable supplies including zero Rated supplies. In other words the credit apportioned to exempted or non taxable supplies is not available.

1. Supplies made by very small Suppliers are exempt from Tax. (Sec 22)

Actually, in this case the Goods or services are not exempted. However, those suppliers who do very small annual turnover are exempted from Registration and hence such supplies though taxable do not attract Tax.