The Central Government has the power to exempt goods or services or both from the levy of GST, by notification or special order. Even if, any goods or services are covered by an exemption notification, that does not mean that such goods or services are outside the scope of taxability under the GST law although no tax is required to be paid on the supply of such goods or services. GST will have to be paid on the supply of such goods or services once the Government withdraws the exemption.
What is Exempt Supply
“Exempt supply” has been defined under section 2(47) of the CGST Act, 2017, to mean 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.
Provisions for Exempt Supply Under the GST Law
As per section 11 of the CGST Act, 2017 as well as section 6 of the IGST Act, 2017, the Central Government on the recommendation of the GST Council may grant exemption to goods or services or both of any specified description from the tax leviable thereon via notification or special order. Section 11 of the CGST Act, 2017 reads as below-
“11(1) Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by notification, exempt generally, either absolutely or subject to such conditions as may be specified therein, goods or services or both of any specified description from the whole or any part of the tax leviable thereon with effect from such date as may be specified in such notification.
(2) Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by special order in each case, under circumstances of an exceptional nature to be stated in such order, exempt from payment of tax any goods or services or both on which tax is leviable.
(3) The Government may, if it considers necessary or expedient so to do for the purpose of clarifying the scope or applicability of any notification issued under sub-section (1) or order issued under sub-section (2), insert an explanation in such notification or order, as the case may be, by notification at any time within one year of issue of the notification under sub-section (1) or order under sub-section (2), and every such explanation shall have effect as if it had always been the part of the first such notification or order, as the case may be.
Explanation.––For the purposes of this section, where an exemption in respect of any goods or services or both from the whole or part of the tax leviable thereon has been granted absolutely, the registered person supplying such goods or services or both shall not collect the tax, in excess of the effective rate, on such supply of goods or services or both.”
Section 6 of the IGST Act, 2017 reads as below: –
“6. (1) Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by notification, exempt generally, either absolutely or subject to such conditions as may be specified therein, goods or services or both of any specified description from the whole or any part of the tax leviable thereon with effect from such date as may be specified in such notification.
(2) Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by special order in each case, under circumstances of an exceptional nature to be stated in such order, exempt from payment of tax any goods or services or both on which tax is leviable.
(3) The Government may, if it considers necessary or expedient so to do for the purpose of clarifying the scope or applicability of any notification issued under sub-section (1) or order issued under sub-section (2), insert an Explanation in such notification or order, as the case may be, by notification at any time within one year of issue of the notification under sub-section (1) or order under subsection (2), and every such Explanation shall have effect as if it had always been the part of the first such notification or order, as the case may be.
Explanation.— For the purposes of this section, where an exemption in respect of any goods or services or both from the whole or part of the tax leviable thereon has been granted absolutely, the registered person supplying such goods or services or both shall not collect the tax, in excess of the effective rate, on such supply of goods or services or both.”
Further, sub-section (108) of section 2 of the CGST Act, 2017 defines a taxable supply as below: –
‘(108) “taxable supply” means a supply of goods or services or both which is leviable to tax under this Act;’
On reading of the aforesaid definition of taxable supply, it emerges that the definition of taxable supply includes those supplies of goods or services which are leviable to tax and chosen to be exempted under section 11 of the CGST Act, 2017 or under section 6 of the IGST Act, 2017. Accordingly, exempt supplies also fall under the category of taxable supplies. Therefore, even if goods or services are exempted under exemption notifications, they are still within the scope of chargeability under the GST laws, although no tax is required to be paid on the supply of exempted goods or services.
Exemption Notifications
In terms of section 11 of the CGST Act, 2017/section 6 of the IGST Act, 2017, the Central Government, on recommendation of the Goods and Services Tax Council issued the following notifications:
For goods
- Notification No. 2/2017 Central Tax (Rate) dated 28.06.2017
- Notification No. 2/2017 Integrated Tax (Rate) dated 28.06.2017
For Services
- Notification No. 12/2017 Central Tax (Rate) dated 28.06.2017
- Notification No. 9/2017 Integrated Tax (Rate) dated 28.06.2017
Registration and the Supplier of Exempted Goods or Services
Section 23(1)(a) of the CGST Act, 2017, stipulates that any person engaged exclusively in the business of supplying goods or services or both that are wholly exempt from tax are not liable for registration. However, if a person is engaged in supply of both exempted and taxable goods or services or both, then his exempt turnover will be included in calculation of threshold limits for registration as per section 2(112) of the CGST Act, 2017.
Other Provisions
- A registered person can not avail ITC on the goods or services used in making or providing exempt supply. As per section 17(2) of the CGST Act, 2017, where the goods or services or both are used by a 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 of the input tax as is attributable to the said taxable supplies including zero-rated supplies.
- As per section 18(1) of the CGST Act, 2017, where an exempt supply of goods or services or both by a registered person becomes a taxable supply, such person shall be entitled to take credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock relatable to such exempt supply and on capital goods exclusively used for such exempt supply on the day immediately preceding the date from which such supply becomes taxable. The credit on capital goods shall be reduced by such percentage points as may be prescribed (Currently 5% per quarter or part thereof). A registered person shall not be entitled to take input tax credit in respect of any supply of goods or services or both to him after the expiry of one year from the date of issue of tax invoice relating to such supply.
- As per section 18(4) of the CGST Act, 2017, where any registered person who has availed of input tax credit and the goods or services or both supplied by him become wholly exempt, he shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, reduced by such percentage points as may be prescribed (currently 5% per quarter or part thereof), on the day immediately preceding the date of such exemption. After payment of such amount, the balance of input tax credit, if any, lying in his electronic credit ledger shall lapse.
- In terms of section 54 of the CGST Act, 2017, the refund of input tax credit is not available in case of goods or services used for providing exempt supply.