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Exemptions Under GST - Goods

Updated on: July 19th, 2022

Exempt Supplies under GST

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13 min read

• What is Exempt Supply
• Classification of Exemptions
• Types of Exemptions
• Exemption under one GST Law and the effect on another GST Law
• Important Notifications issued for exemption from payment of GST
• What goods are exempted from GST? (List of exempted goods)
• Treatment of ITC if supply is exempt. How to determine the credit attributable to exempt supplies?
• What is a non-taxable supply?
• The negative list under GST
• Difference between Exempt, Nil Rated, Zero Rated, and Non-GST supplies
• Frequently Asked Questions

What are Exempt Supplies?

• Exempt supplies refer to goods or services that are not taxable under the GST regime.
• These supplies do not attract any tax liability, providing relief to specific sectors or goods.
• For example, healthcare services and educational services are often categorized as exempt supplies.

Classification of Exemptions

• Exemptions under GST are categorized based on the nature of goods or services provided.
• They can include specific categories such as essential goods, healthcare, and educational services.
• Each category may have different conditions and implications for businesses.

Effect of Exemptions on ITC

• When a supply is exempt, Input Tax Credit (ITC) associated with that supply cannot be claimed.
• Businesses need to carefully track and segregate ITC related to exempt supplies to comply with regulations.
• For instance, if a company provides only exempt supplies, it may face challenges in claiming ITC.

Important Notifications on Exemptions

• The government issues notifications to clarify and update the list of exempt goods and services.
• These notifications provide guidance to businesses on compliance and tax implications.
• Staying informed about these notifications is crucial for businesses to avoid penalties.

What is Exempt Supply

Exempt supplies encompass the following three categories of supplies:

• Supplies that are taxed at a 'NIL' rate of tax (0% tax)
• Supplies that are fully or partially exempted from CGST or IGST through official notifications altering relevant sections of the CGST Act or IGST Act
• Non-taxable supplies as specified under Section 2(78) - these are supplies not subject to taxation under the Act, for instance, Alcoholic liquor for human consumption.

No taxes are levied on these supplies. Input tax credit linked to exempt supplies cannot be utilized or offset.

'Zero-rated' supplies, like exports, are not considered supplies taxed at a 'NIL' rate of tax.

• Conditions for Granting GST Exemptions:
  • The exemption must serve the public interest.
  • It should be announced through an official notification.
  • Approval from the GST Council is necessary.
  • Exemptions can be absolute or conditional, applying to specific goods or services.
  • In exceptional cases, exemptions can be granted through a special order.
  • Under absolute exemption, the supplier cannot charge a tax higher than the effective rate.
• Classification of Exemptions:
  • Exemption may apply to the supplier, irrespective of the type of supplies made.
  • For instance, services provided by charitable organizations fall under this category.

• Supplier may be exempt
  • Certain supplies may be exempt – Some supplies are excluded from GST based on their nature and type. Any supplies that are officially notified are eligible for exemption, regardless of the supplier. Examples include services related to sponsoring sporting events and providing public conveniences.
• Certain Supplies may be exempt
  • Types of Exemptions
    • Absolute exemption: This type of exemption is granted without any conditions attached. For instance, the transmission or distribution of electricity by an electricity utility is absolutely exempt from GST.
    • Conditional Exemption: This exemption is granted subject to specific conditions. An example is healthcare services provided by a clinical establishment, excluding specialized care units, with room charges exceeding Rs. 5000 per day.
    • Conditional or partial exemption: Intra-State supplies of goods and/or services received from an unregistered person by a registered individual are exempt from tax under reverse charge, provided the total value of such supplies in a day does not exceed Rs. 5000.

Exemption under one GST Law and the impact on another GST Law

• Exemption under the CGST Act is automatically considered exempt under the SGST / UTGST Act.
• There is no automatic application of exemption under the IGST Act.
• Exemption under the IGST Act does not automatically apply under the CGST Act.

Important Notifications for GST Payment Exemption

• What items are not subject to GST? (List of items exempt from GST)

  Explore the full catalogue of goods that are exempt from GST here.

• Treatment of Input Tax Credit (ITC) in case of exempt supply

  • Calculating credit linked to exempt supplies

    To determine the credit associated with exempt supplies, use the formula: Credit related to exempt supplies = (A/T) x C

    Here, A represents the total value of exempt supplies, T denotes the overall turnover of the individual during the tax period, and C stands for Common Credit.

    For example, if a business has made exempt supplies worth $10,000, its total turnover is $100,000, and the common credit available is $5,000, the credit linked to exempt supplies would be ($10,000/$100,000) x $5,000 = $500.

  • Components considered in Common Credit

    • Total input tax in a given period
    • Tax specifically allocated for non-business purposes
    • Tax exclusively related to exempt supplies
    • Ineligible credits as per Section 17(5) for activities like Works contract, Rent a cab, etc.
    • Tax exclusively linked to taxable supplies (including zero-rated supplies)

What is a non-taxable supply?

A non-taxable supply refers to the provision of goods or services that are not subject to taxation under the CGST Act or the IGST Act. For an item to be considered a 'supply' under GST regulations, it must meet the definition outlined in the GST law. It's important to note that only supplies explicitly excluded from GST fall under this category. These exclusions typically include alcoholic beverages meant for human consumption and items specified in section 9(2) or schedule III.

It's crucial to understand that certain items are not entirely outside the scope of GST. Although they are not currently assigned a specific GST rate, they are not considered non-taxable supplies. These items include:

• petroleum crude
• high-speed diesel
• motor spirit (commonly known as petrol)
• natural gas
• aviation turbine fuel

Examples of Non-taxable Supplies

• Goods or services meant for export purposes
• Healthcare services provided by charitable organizations
• Education services offered by recognized institutions

Exceptions to Non-taxable Supplies

There are certain situations where seemingly non-taxable supplies may still attract GST. For instance, if a good or service initially falls under the non-taxable category but is later used for a taxable purpose, it could become subject to GST.

Impact of Non-taxable Supplies on Businesses

Understanding non-taxable supplies is crucial for businesses to ensure compliance with GST regulations. Failing to correctly identify non-taxable supplies can lead to inadvertent tax liabilities and penalties.

The negative list under GST

Items not included in GST form what is known as the negative list. These items are specifically listed in Schedule III of the CGST Act. Let's explore the various entries in the negative list under GST:

• Services provided by an employee to their employer in the context of employment
• Services related to funeral, burial, crematorium, or mortuary
• Sale of land
• Sale of fully constructed buildings
• Actionable claims, excluding those related to lottery, betting, or gambling
• Services provided by any court or Tribunal
• Functions carried out by Members of Parliament (MPs), Members of Legislative Assembly (MLAs), etc.
• Duties performed by individuals holding positions as specified by the Constitution

Difference between Exempt, Nil Rated, Zero Rated, and Non-GST Supplies

• Exempt Supplies: These are taxable items that do not attract GST and do not allow for Input Tax Credit (ITC). Examples include fresh milk, fresh fruits, curd, and bread.
• Zero-Rated Exports: Supplies that are made to Special Economic Zones (SEZ) or SEZ Developers.
• Nil Rated Supplies: Items that are charged a 0% GST rate. Examples are salt, grains, and jaggery.
• Non-GST Supplies: These goods fall outside the scope of the GST law. Examples include alcohol for human consumption and petrol.

Frequently Asked Questions

Who has the authority to grant exemption from tax payments?

Only the government possesses the power to grant tax exemptions. By following the recommendations of the GST Council, the government can provide tax exemptions through notifications.

When does the exemption become effective? Is it from the date of notification or the publication date?

The exemption specified in notifications becomes effective from the specified date mentioned in the notification itself.

I am a trader dealing solely with exempt supplies. Must I register under GST if my turnover surpasses Rs. 20 lakh?

If a person exclusively deals with 100% exempt supplies, there is no obligation to register under GST even if the turnover exceeds Rs. 20 lakh.

What is the significance of exemption from GST registration?

While GST registration is compulsory for every business operator in India, exemptions from registration apply in certain cases.

• Characteristics of Agriculturists under GST
• Criteria for Agriculturists to be exempt from GST registration
• Types of supplies made by Agriculturists exempt from GST
• Treatment of exempt goods under GST
• Invoicing requirements for supplies of exempt goods
• Clarification on the tax status of specific goods like petrol
• E-way bill necessity for movement of exempt supplies

Characteristics of Agriculturists under GST

Agriculturists who fall below the GST registration threshold and engage solely in nil-rated, exempt, or non-taxable supplies are exempt from GST obligations. Additionally, activities not classified as goods or services and supplies subject to reverse charge mechanism are included.

Criteria for Agriculturists to be exempt from GST registration

Agriculturists are exempt from GST registration if their turnover remains within the prescribed threshold, and their supplies exclusively fall under nil-rated, exempt, or non-taxable categories. Moreover, if their activities do not constitute supply of goods or services, or if they only deal with supplies covered by the reverse charge mechanism, GST registration is not mandatory.

Types of supplies made by Agriculturists exempt from GST

Agriculturists are not required to pay GST on supplies categorized as nil-rated or exempt from the tax. Additionally, any supplies that are considered non-taxable under the GST regime are also exempt for Agriculturists.

Treatment of exempt goods under GST

Goods classified as exempt under GST are considered non-taxable supplies. Consequently, such supplies do not necessitate GST registration, input tax credit claims, or compliance with other relevant provisions of the GST law.

Invoicing requirements for supplies of exempt goods

When dealing with exempt goods or services, a registered dealer must issue a 'Bill of Supply' instead of a tax invoice. For instance, if a registered taxpayer sells handloom products, they are obligated to issue a Bill of Supply in lieu of a tax invoice.

Clarification on the tax status of specific goods like petrol

Petrol is classified as a non-taxable good because it is currently excluded from tax levy. As a result, no GST is applicable on petrol at the present time.

E-way bill necessity for movement of exempt supplies

According to CGST Rules, the generation of an e-way bill is not mandatory for the transportation of goods specified in specific notifications, excluding de-oiled cake. Notably, goods specified in these notifications are primarily exempt goods, hence exempt from e-way bill requirements.

Reporting Exempt Supplies in GSTR-1 Return

• Exempt supplies should be reported separately in GSTR-1 under the tile "8A, 8B, 8C, 8D - Nil Rated Supplies".

Reporting Exempt Supplies in GSTR-3B Return

• Exempt supplies must be reported in the GSTR-3B return under Section "3.1 Tax on outward and reverse charge inward supplies" for nil rated and exempted outward supplies.
• Details of exempt, nil, and Non-GST inward supplies should be reported in Section "5. Exempt, nil and Non-GST inward supplies".

Tax Treatment for Supply Shifts to Taxable from Exempt

When a supply becomes taxable after being exempt, the taxpayer is entitled to the following:

• Credit on inputs related to the previously exempt supply can be claimed based on stock held before the supply became taxable.
• For capital goods exclusively used for exempt supply, the credit is reduced by 5 percentage points for every quarter from the issue date of the invoice.

Tax Treatment for Supply Shifts to Exempt from Taxable

When a supply transitions from taxable to exempt:

• An amount equal to the credit of tax on stock held and capital goods before the exempt supply date must be paid, with input tax credit being fully restricted.
• However, the taxpayer can choose to pay using available credit.

Summary of GST Concepts

• Claiming Input Tax Credit for Capital Goods

  A taxpayer cannot claim tax paid on capital goods used for both taxable and exempt supplies.

• Exemption from CGST and SGST

  Exemption from Central GST automatically applies as an exemption from State GST under specific notifications.

• Exemption from IGST and CGST

  Exemption from Integrated GST does not automatically apply as an exemption from Central GST due to lack of corresponding sections.

• Supplies Included in Exempt Supplies for ITC Reversal

  Exempt supplies, according to section 17(3) and rule 45, include supplies subject to reverse charge, transactions in securities, sale of land, and sale of building.

• Finding GST Rate of Goods

  Utilize tools like ClearTax HSN Code List & GST Rate Finder to determine the relevant GST rate applicable to goods.

• Understanding Exempt Supply
  • Exploring the concept of Exempt Supply in GST
  • Differentiating between Exempt, Nil Rated, Zero Rated, and Non-GST supplies
  • Impact of Exemption under one GST Law on another
  • Noteworthy Notifications related to exemption from GST payment
• Types and Classification of Exemptions
  • Categorizing Exemptions under GST
  • Distinguishing between various Types of Exemptions
  • Interplay of Exemptions across different GST Laws
  • Overview of significant Notifications concerning GST payment exemptions
• Goods Exempted from GST
  • Listing and discussing items exempted from Goods and Services Tax
• Treatment of Input Tax Credit (ITC) for Exempt Supplies
  • Understanding how to allocate credit for exempt supplies
  • Methods for determining the credit linked to exempt supplies
• Non-Taxable Supplies and Negative List under GST
  • Defining non-taxable supplies under GST regulations
  • Identifying the items listed in the negative list under GST
• Frequently Asked Questions (FAQs)

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