Exempted Supplies Under GST :- II Chapter

Exempted Supplies Under GST :- II Chapter

Aspect of Exemption

1. Government's power to exempt specified goods and services

Exemption by Notification

As per section 11(1) of CGST Act and SGST Act, the Central Government and State Governments have the power to grant exemptions provided the following conditions are fulfilled:

•  Exemption should be in public interest
•  Exemptions are by way of issue of notification and on recommendation of GST Council
•  Exemption may be provided for any goods or services or both
•  Exemption may be absolute or conditional
•  Exemption may be granted for whole or any part of the tax leviable
•  Exemption shall come into force on date as may be specified in the notification

In exercise of powers conferred by section 11(1) of CGST Act and section 6(1) of IGST Act, the Central government has issued the following notifications to exempt supply of goods or services : -

Exemption by Special Order

As per section 11(2) of CGST Act and SGST Act, the Central Government and State Governments have power to grant exemptions provided the following conditions are fulfilled:

•  Exemption should be in public interest
•  Exemptions are by way of special order in each case and on the recommendations of GST council
•  Order should mention the circumstances of exceptional nature
• Exemption to any goods or services or both from payment of tax wholly

Retrospective Clarification

As per section 11(3) of CGST Act and SGST Act, the Central Government and State Governments may, with a view, to explain the scope of notification or order -:

•  insert an explanation
• for the purpose of clarifying scope or applicability of any notification issued or order issued
•  by way of notification
•  within 1 year of issue of notification or order
•  such Notification shall have retrospective effect

Registered person shall not collect tax in excess of the effective rate

The explanation provided under section 11, provides as follows:

•  Grant of absolute exemption from whole or part of tax
•  Registered person not to collect tax in excess of the effective rate
•  It provides a mandatory requirement to follow absolute exemptions

Effective Date of Exemption

The effective date of the notification would be the date which is mentioned in the notification as per section 11(1). However, GST law does not have any provision in cases where no date is mentioned in the notification. Section 5A of Central Excise Act, 1944 provide for such a situation which says that unless otherwise provided, the effective date of notification shall be:

•  The date of its issue for publication in the official gazette
•  The date on which it is made available on the official website of the Government Department.

Applicability of exemption notifications issued under CGST/ IGST to SGST/UTGST and vice-versa

As per section 11(4) of SGST Act and section 8(4) of UTGST Act, any notification issued by the Central Government, on the recommendations of the Council, under section 11(1) or order issued section 11(2) of the CGST Act shall be deemed to be a notification or, as the case may be, an order issued under SGST/ UTGST Act.

Comparative provisions under the erstwhile laws

The provisions relating to exemption are broadly similar to the exemption provisions under the erstwhile tax regime. There are no significant differences.

2. Supplies that lack consideration – Whether exempted?

At the very beginning it is stated that the discussions in this Chapter are in respect of those activities which are not listed in Schedule I to the CGST Act, 2017. Before we commence discussion on the various issues it is important to understand the meaning of the term ‘consideration’.

Supply without consideration

It was well understood that while a service provided without any consideration was excluded from the levy of service tax; similarly, sale made without a consideration was outside the purview for the purpose of levy under the Value-Added Tax Laws. Although the concept of supply without consideration existed under the indirect tax framework for e.g. under Central Excise, there existed a valuation mechanism for goods cleared as free samples. While several business situations can be thought of we will proceed to discuss the following two critical issues.

(i) Supply without consideration such as Free Samples and Free Goods / Promotional items,

Samples of Medicines etc. 

GST Input Tax Credit shall not be allowed for goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples. Accordingly, input tax credit is required to be reversed in respect of goods which have been disposed of by way of free samples. If free promotional items are provided with the taxable product, then the consideration for the same will be the value charged from the consumer.

(ii) Supply of free materials by Contractee

•  This was one of the most vexed issues under the erstwhile laws and it is going to be one under theGST laws as well. The Tax Department contended that the materials are supplied by the contractee as part of the impugned contract and therefore the value was, to be included in the gross amount charged for the levy of Service Tax treating the same as “Non-monetary consideration” and hence, includible in the value under Section 67(ii) of Chapter V the Finance Act, 1994. There were several judgements in this regard.
•  It is a settled position under the Sales Tax / VAT Laws that free supply would be construed as sale liable to Sales Tax / VAT when the value of the contractee supplied goods was deducted from the contract price payable which was inclusive of the value of the material.
•  The Customs Law vide Rule 10(1) of Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 specifically provides thatThe value, apportioned as appropriate, of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of imported goods, to the extent that such value has not been included in the price actually paid or payable, namely-

(a) Materials, components, parts and similar items incorporated in the imported goods;

(b) Tools, dies, moulds and similar items used in the production of the Imported goods;

(c) Materials consumed in the production of the imported goods;

shall be includible in the assessable value.

•  Similarly, under the Central excise law based on Section 4, Rule 6 [similar to Rule 10(1) above] and interpretations, an argument may be put forth that the value of free supplies made by the buyer shall be includable in the Assessable Value.

•  GST law on free supplies

Section 15(2) of the CGST Act reads “the value of supply shall include any amount that the Supplier

is liable to pay in relation to such supply but which has been incurred by the recipient of supply and

not included in the price actually paid or payable for the goods or services or both”.

This is the provision which the tax authorities could invoke on the following basis:

(a) Contract value included the value of goods that are being issued free of cost;

(b) Such goods are now being supplied by the contractee (recipient) whereas it ought to be supplied by the contractor (supplier);

(c) Such value is not included in the supply price of the supplier; and

(d) Therefore, it ought to be subjected to taxes under the GST laws.

In order to overcome this situation, and considering the fact that Input Tax Credit (ITC) may be

available in respect of the tax paid by the contractor, the whole exercise may end up becoming

revenue neutral to both parties, the takeaway being procedural compliance relating to raising invoice

by the contractor / contractee on such free supplies and the contractor also including the same for

valuation of his outward supply.

Valuation of such free supplies, whether the same value is to be adopted by both parties or whether

valuation is to be done independently, is another vexed issue that may arise.

•  Conclusion : Free Supplies GST

Considering the several implications the trade and industry believes that it would be advisable for the  Government to have a re-look at these provisions to avoid unnecessary litigation in the future. The

registered persons should sensitise their vendors, customers and stake holders in general so that

they are made aware of the above implications well in advance, and be prepared to take nec essary

corrective actions if required.

3. Supply of exempted goods and services

Supply of exempted goods and services is simple to understand. For eg., sale of fruits by a fruit seller shall require no further examination. However, when such exempt supply is a part of other supplies which might be taxable, one has to be cautious as to the determination of the classification. If such exempt supply is an integral part of two or more 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, then such package shall be classified as a composite supply. The principal supply shall decide the nature of the entire package and if such supply is taxable, the entire package shall be taxed at such rate but if the principal supply is exempt, then, the entire supply shall be exempted. For eg., a shop owner sells one box of glass bangles to a customer for Rs 10,000 and charges Rs. 150 as packing charges. Individually, packing services are taxable @18%, but, since they are incidental to a principal supply of goods, they (being part of composite supply) shall also be exempt from GST. However, in case an exempt supply is part of a customised package which is not a composite supply and consists of two or more individual supplies of goods or services, or any combination thereof, when made in conjunction with each other for a single price shall form part of a mixed supply. In case of a mixed supply, the highest rate supply determines the rate for the entire package. For eg., if a person sells a combo of fruits and chocolates for Rs 1000, then the entire package shall be taxed at the rate applicable for chocolates and value of fruits cannot be exempted in any manner.

4. Zero-rated supplies and exemptions

A person making exempt supplies is not supposed to pay tax on the value of his output. He is also not

eligible to claim input tax credit on his inward supply of goods and services used in providing such output exempt supplies. However, an exception has been carved out by law in case of zero rated supplies. The provisions as contained under section 16 of the Integrated Goods and Services Tax Act, 2017 (“IGST Act”) provides that while no tax shall be levied on certain categories of supplies termed as ‘zero rated supplies’, refund of input taxes, shall be allowed in such cases. Thus, while the output of such supplies remains exempt from payment of tax, such supplies can be distinguished from exempt supplies as input tax on goods and services used in providing such services has been allowed to the supplier. Following supplies

shall be treated as zero rated supplies-

(a) Export of goods or services or both;

(b) Supply of goods or services or both to a SEZ developer or SEZ unit.

Can I claim refund of input tax if I export exempted goods?

Any zero-rated supply is eligible for refund of input tax paid by such supplier. Even if the output is exempt, the law allows the benefit of refund of input taxes to such supplier also. For eg. Chanchan (P) Ltd. is exporting plastic bangles to Canada which is exempt under GST vide Notification No. 1/ 2017-Central Tax (Rate), dated 28-Jun-2017. For manufacturing plastic bangles, it bought plastic as raw material and other decorative items and paid tax amounting to Rs. 1,50,000/- on it. Since it is exporting an exempt item, Chanchan (P) Ltd. can claim refund of unutilized input tax credit paid on such inward supplies.

5. Exempt supplies and availability of input tax credit

If a person is supplying exempt goods / services, he cannot opt Input Tax Credit as available on his 

purchase of goods and services used for supply of such exempt output. For eg., a person who is selling banana and uses a warehouse for which rent is paid on which GST is levied. Since supply of banana is exempt, such person would not get Input tax credit of the GST paid on warehouse.

If my supply is exempt, can I get the refund of my Input tax credit?

If a person is supplying ‘nil’ rated or fully exempted goods / services, he cannot avail refund of the credit accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies. The position has been clarified in Section 54(3) of the CGST Act.

If a supply of service is exempt, will the recipient who is required to pay GST under reverse charge, be also exempted?

If a supply is ‘nil’ rated or fully exempt, even the recipient is not required to pay the tax under reverse

charge. For eg., when service of transportation of rice is exempt, even the person responsible for payment of tax under reverse charge is not required to pay tax under reverse charge.

 If a supplier supplies both taxable as well as exempted supplies, can he avail his entire input tax credit?

If a supplier is supplying both taxable (including zero rated) as well as exempted goods then, 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. Input tax credit is available on inputs, input services and capital goods procured by the supplier for supplying taxable supplies.

Determination of Input Tax Credit on Inputs and Input services

For determining such amount, the law has provided the following procedure in respect of inputs and input services:

•  Such person shall avail entire input tax credit on inputs and input services used for provision of exclusively taxable supplies.
•  Such person shall not avail entire input tax credit on inputs and input services used for provision of exclusively exempt supplies or for making supplies for the purposes other than business.
•  Such persons shall avail proportionate Input tax credit in relation to inputs and input services which are used for provision of both taxable as well exempt supplies. The proportion of Input tax credit attributable towards exempt supplies, be denoted as ‘D1’ and calculated as -

D1 = (E÷F) x C2

where,

‘E’ is the aggregate value of exempt supplies during the tax period, and

‘F’ is the total turnover in the State of the registered person during the tax period:

Further, the amount of credit attributable to non-business purposes if common inputs and input

services are used partly for business and partly for non-business purposes, be denoted as ‘D2’, and

shall be equal to five per cent. of C2.

Thus, the available common credit shall be as under:

ITC on inputs and input services used exclusively for provision of taxable services + Common

ITC minus D1 minus D2

The above formulae need to recomputed for the entire year considering the total exempted and

taxable supplies for the year for all tax periods before the due date for furnishing of the return for the

month of September following the end of the financial year to which such credit relates.

Determination of Input Tax Credit on Capital Goods

'Capital goods' is defined in section 2(19) of CGST Act to mean goods which have been capitalised in the books of accounts. In respect of capital goods, the entire ITC is available at the time of purchase of such Capital Goods. It is important to mention that no ITC is available to the extent of depreciation under Income Tax Act, 1961 has been claimed on such value. Further, Rule 43 provides that when such Capital Goods are partly used for the supply of exempted goods or exempted services, the ITC availed thereon has to be reversed every month on the amount of credit calculated by reducing the input tax @ 5% for every quarter or part thereof till 60 months from its date of purchase computed in the following manner:

ITC availed on the Capital Goods x 5% for every quarter or part thereof x E/F

Where, ‘E’ is the aggregate value of exempt supplies, made, during the tax period, and ‘F’ is the total

turnover of the registered person during the tax period.

Further, interest is to be paid on such value of ITC as attributable towards exempt supplies.

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