Exempted Supplies Under GST :- III Chapter

Classification

1. Classification and levy of GST on supply of goods and services

Need for Classification

Classification plays an important role in determining whether a supply is a supply of goods or services, whether it is a composite supply or mixed supply, what is the principal supply in case of composite supply, whether a supply is taxable supply or exempt supply and the like. In order to arrive at the applicable rate of tax, it is important to classify the goods or services correctly. Let’s have a look at some examples which explain why classification is necessary:

•  ‘Dabur Lal Dant Manjan’ is to be considered as ayurvedic medicament or toilet preparation.
•  Apple drink ‘Appy fizz’ is to be considered as Fruit Beverage or Cold Drink with aerated water
•  A candle stand is to be considered as metal product or home décor
•  A soap made of natural herbs for curing skin infections is to be considered as ayurvedic medicament or beauty/ personal care product or toilet preparation.

It is clearly visible from the above examples that classification is not free from doubts and may become an area of litigation. Classification should not be based on the decision of a particular person or on common parlance but one should take the guidance from law itself.

Classification under GST

Under GST, the Government has issued various notifications specifying the rate of tax using HSN based classification adopted from Customs Tariff Act, 1975. Notification No. 01/ 2017–Central Tax (Rate), dated 28-Jun-2017 prescribes the rate of tax on goods and Notification No. 11/ 2017-Central Tax (Rate), dated 28-Jun-2017 prescribes the rate of tax on services; Notification No. 2/ 2017-Central Tax (Rate), dated 28- Jun-2017 prescribes goods or class of goods which are exempt from tax and Notification No. 12/ 2017- Central Tax (Rate), dated 28-Jun-2017 prescribes the services or class of services which are exempt from tax in terms of section 11(1) of CGST Act. These notifications contain the explanations as to how the classification must be undertaken.

Rate Notifications have specified the approach which is to be followed for the purpose of classification . The same is summarized hereunder-

•  For classification of goods the notification requires reference to be made to the First Schedule to the Customs Tariff Act, 1975.
•  For classification of services the notification requires reference to be made to the Annexure which contains the scheme of classification.
•   Rules of interpretation mentioned in the First Schedule to the Customs Tariff Act 1975 may apply to both interpretation of notification relating to goods and to the interpretation of heading 9988 for services which includes manufacturing services on physical inputs (goods) owned by others.

Understanding Harmonized System of Nomenclature (HSN)

HSN is a multipurpose international product nomenclature developed by the World Customs Organization (WCO). The main purpose of HSN is to classify goods from all over the world in a systematic and logical manner. This brings uniformity in classification of goods and facilitates international trade. HSN standardizes the classification of goods under sections, chapters, headings, and sub-headings.

HSN Code was initially adopted for Customs purposes in India in 1975 and readapted (with some changes) for Central Excise in 1985 and now in 2017 for the purpose of GST. In India, an eight digit HSN is assigned to goods by organizing them in a hierarchical manner. However, goods can be identified broadly by using no less than 2 digits, and very specifically by using all the 8 digits.

The First Schedule of the Customs Tariff Act comprises of 21 sections which are further divided into 98 Chapters.

(i) Sections: A group of Chapters representing a particular class of goods
(ii) Chapter: Each section is divided into various Chapters and sub-Chapters. Each Chapter contains goods of one class.
(iii) Chapter Notes: They are mentioned at the beginning of each Chapter. These notes are part of the statute and hence have the legal authority in determining the classification of goods.
(iv) Heading: Each Chapter and sub-Chapter is further divided into various headings.
(v) Sub-Heading: Each heading is further divided into various sub-headings.

HSN Code under GST will remove the need to upload the detailed description of goods while filing returns under GST. The Government, vide Notification No. 12/ 2017-Central Tax, dated 28-Jun-2017 had notified the class of registered persons who shall mention HSN on tax invoices issued by them as under -

Along the lines of HSN, the customs tariff has a set of six Rules of Interpretation and three General

Explanatory Notes.

Example -Hierarchical structure of HSN

n respect of services, an Annexure is appended to Notification No. 11/ 2017-Central Tax (Rate), dated 28- Jun-2017 which provides for the Scheme of Classification of services. CBIC has recently issued

explanatory notes to the Scheme of Classification of Services which is based on explanatory notes to the United Nations Central Product Classification (UNCPC). The explanatory notes indicate the scope and coverage of the heading, groups and service codes of the Scheme of Classification of Services. These may be used by the assessee and the tax administration as a guiding tool for classification of services. It may be noted that where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description.

Rules of Interpretation: Customs Tariff Act, 1975

The rules of interpretation provided in the Customs Tariff Act, 1975 gives guidance regarding the approach to be followed for reading and interpreting the tariff items. Legal provisions of rules read as under: -

Summary of Rules explaining classification under Customs Tariff Act.

Rule 1:

•  Sections, Chapters and sub-Chapters are for ease of reference only.
•  For legal purpose, refer to headings and sub-headings for classification.

Rule 2(a):

•  If the goods are incomplete/ unfinished but still have the essential character of the finished product, then it is to be classified as finished product by referring to the heading.
•  It also includes the goods that are in unassembled/ disassembled form.

Rule 2(b):

•  Any reference to a material or substance includes mixture or combination of that material or substance with other material or substances.
•  Classification of goods containing more than one material or substance shall be as per rule 3.

Rule 3:

When by applying rule 2(b), goods are classifiable under two or more headings then classification shall be done as follows:

•  Most specific description shall be preferred over more general description. [Rule 3(a)]
•  Mixtures/ composite goods should be classified as per the material or substance that gives them their essential character. [Rule 3(b)]
•  When unable to classify by applying rules 3(a) & 3(b) then classify under the heading that occurs last in numerical order. [Rule 3(c)]

Rule 4:

•  If goods cannot be classified as per the above rules, they are to be classified according to the goods to which they are most akin.

Rule 5(a):

•  Containers specifically designed for the article and suitable for long-term use will be classified along with that article. This rule does not apply if the container gives the whole of its essential character.

Rule 5(b):

•  Packing materials and containers are also to be classified with the related goods except when the packing is for repetitive use.

Rule 6:

•  For legal purposes, the classification of goods in the sub-headings of a heading shall be determined according to the terms of those sub-headings related to it.
•  Compare the sub-headings only if they are at same level.

Hence, by applying the above rules a taxable person would be able to identify the right HSN code of its tariff item.

Classification of Exemption

Exemptions granted as per section 11 of CGST Act, 2017 are absolute or conditional from whole of tax or part of tax. These exemptions are capable of carving out a portion from an entry so as to differentially alter the rate of tax applicable to goods or services in that entry. Further, we can classify the exemptions under three parts:

•  Qua-supplier: This type of exemption is provided only to a particular supplier like exemption to the services provided by a charitable trust registered under section 12AA of Income-Tax Act, 1961.
•  Qua-Recipient: This type of exemption is provided to recipients like supplies made to exporter are taxable @ 0.05%-CGST and 0.05% SGST as per the Notification No. 40/ 2017-Central Tax (Rate), dated 23-Oct-2017.
•  Qua-Supplies: This type of exemption is provided to a particular supply like exemption to the supply of fresh fruits, vegetables and milk.

Burden to prove availability of Exemption is on the supplier

Every supplier claiming his goods or services as exempt needs to establish the same to the revenue

authorities. In its judgment in the case of CC(Import), Mumbai Dilip Kumar and Company & Ors (Civil Appeal No. 3327 of 2007), the Constitution Bench of the Supreme Court held that an exemption notification should be interpreted strictly and the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification.

It was further held that when there is ambiguity in the exemption notification which is subject to strict

interpretation, the benefit of such ambiguity cannot be claimed by the subject / assessee and it must be interpreted in favour of the Revenue.

2. Procedure to avail exemptions

There is no specified procedure to avail an exemption. Any person supplying exempted goods or services can avail exemption subject to the precautions in terms of determining his classification of such exempted goods or services. Certain items require clarity while availing an exemption and can be material in determining an exemption, some of which are as follows:

Notification

One should check whether the exemption intended to be availed falls under any of the notifications issued by Government in terms of section 11(1) of CGST Act. Whether goods or services fall under Notification No. 02/ 2017-Central Tax (Rate), dated 28-June-2018 or Notification No. 12/ 2017-Central Tax (Rate), dated 28-June-2017 or any other notification.

Definitions given below Notification

One should carefully analyze the definitions provided below the exemption notification before claiming exemption. Understanding the exemption without considering the definitions given below the notifications is incomplete.

Principles of interpretation

Understanding of rules of interpretation and general explanatory notes provided in the First Schedule to the Customs Tariff Act, 1975 will help in identifying more accurate heading of the supply and thereby, arriving at the conclusion as to whether the supply is an exempt supply or not.

Advance rulings on the subject

One should check whether there is any advance ruling related to the exemption intended to be availed which can assist in better decision making.

Court rulings etc. may be taken care of

Any other judicial pronouncements related to the exemption must be considered before availing of any exemption.

Issue related to principal contractor and sub-contractor service

Under GST, the services provided by way of pure labour contracts of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of a civil structure or any other original works pertaining to the beneficiary-led individual house construction or enhancement under the Housing for All (Urban) Mission or Pradhan Mantri Awas Yojana and services by way of pure labour contracts of construction, erection, commissioning, or installation of original works pertaining to a single residential unit otherwise than as a part of a residential complex are exempt.

Any reference to a supply shall not mean a reference to its subsidiary supplies i.e. supply taken to provide such supply. Such input supply shall be considered in its individual capacity and any rate or exemption as applicable to the main supply does not automatically apply to sub supplies. For eg., if any supply is provided to the government by a contractor (Mr X) and such supply is exempt, then the supply of subcontractor (Mr Y) to the main contractor shall not be exempt and shall need to be examined as to whether any exemption is available to such supply as well. Mr Y cannot be said to have provided supply to government.

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