Exempted Supplies Under GST :- IV Chapter

Principles of Exemption

1. Basic principles of construction of exemption provisions

It is expected that Laws are drafted by experts in the chosen fields and the language employed would
therefore, leave little room for difficulties in construction / interpretation. But experience in reality is often different. When a draftsman translates his intent into law, while keeping in mind the objects and reasons for the relevant statute, there could always be a flaw. Therefore, ambiguous words, expressions, inconsistencies do creep in. Interpretation can be understood as follows:

•  Interpretation is independent of facts;
• The application of a provision would most certainly depend on facts of a given case and its surrounding circumstances.

In essence, interpretation means understanding the true sense of the provision which the legislature
intends to convey ensuring that the reader understands it the same way; The word construction is nothing but drawing conclusions that the provisions of law desire to convey. To that extent interpretation and construction are not synonymous. However, these words are being used interchangeably. The basic principles of construction of any provision, be it taxability or exemption are largely the same.

Some of these principles are the following:

(a) A construction of a statute must at the threshold be never open to judicial interpretation. For example, no law can be enacted unless the Constitution empowers the legislature to do so.
(b) A statute must be construed based on the intent of the person who wants to legislate. It must convey the “true and legal” meaning as the legislature intended; it must be exhaustive; it must cover all possible intended situations; the language employed must be simple, cogent and easy to understand while the words used must convey plainly the intent and object of the legislature; importantly the spirit of the legislature must be conveyed through the construction of a statute.
(c) It must be so drafted or constructed that it must be read as a whole and in its context; There must be no mischief; there must be no scope of vivisecting the construction; the purpose of the construction is to reach the intended recipient.
(d) Each word, phrase, expression or sentence must be so construed that the general purpose of the Act must be met.
(e) Equal attention must be paid in construction of a statute that it serves the dominant and ancillary
purposes with equal force.
(f) A beneficial interpretation of a statute must not result into an exercise in futility.
(g) A plain or literal reading of a statute must ensure equity without ambiguity;
(h) The language employed must ensure grammatical accuracy; must not permit addition, rejection or
substitution of words; avoid technical words, words used by business etc., to have the desired effect of a construction.
(i) The construction of a statute must ensure that there is no injustice, hardship or inconvenience caused to a person who is not the intended recipient.
(j) Headings, punctuations must be taken care of. These often cause ambiguity and lack of clarity to a reader.
(k) Illustrations can be provided to supply clarity;
(l) Wherever definitions are required they must be supplied by the statute. To the extent possible referential legislation must be avoided since different statutes may have different objects.
(m) Any construction involving a proviso must be clear – either to “except” or “include” or “qualify” and nothing more. Generally, a proviso must not lead to a different construction.
(n) The provision so enacted must lay emphasis on “substance” rather than on “form”.
(o) Many times, a provision contains an explanation. The job of an explanation is to explain the “words” contained in the provision. It is definitely a part and parcel of the provision. An explanation when inserted is generally understood to go back to the date on which the provision is deemed to be operational. When an explanation is appended to a clause in a Section then the explanation is deemed to apply only to that clause. However, when an explanation is added at the end of a section having several sub-sections / clauses then it is deemed to apply to all sub-sections and clauses unless the explanation qualifies with words such as “for the purposes of clause (a) of sub-section (3) of section 12” etc. An explanation generally supports the main object of the enactment itself.
(p) Sometimes a provision contains or refers to a Schedule. A Schedule attached or appended to an Act forms part of the enactment. A schedule generally carries details and it avoids a section being
overburdened with such details. Generally, a Schedule is a matter of convenience.
(q) Several provisions commence with the expressions “notwithstanding anything c ontained …..”. It is generally known as a non-obstante clause. It means the relevant provision has an over-riding effect
over a particular section or circumstance or any other enactment itself.
(r) Apart from all of these a provision sometimes uses the words “deem, deemed or deeming etc.,”.
Usage of such words implies that the provision creates a legal fiction. Normally, the fiction created is
for the purpose of that provision alone and it cannot be extended to any other provision of the
enactment.
These are some of the basic principles of construction of a provision. If a draftsman has to bear all these principles in mind and go ahead with constructing an exemption provision he will be overburdened. It is for these reasons that a draftsman generally constructs the provision first and then applies these legal principles to ensure that even in case of a judicial review or challenge the provision stands the test of law. It is certainly a huge responsibility on the part of a draftsman to keep these guiding principl es in mind while drafting an exemption provision which backs the legislative intent.

Non-GST supplies.

Often one gets confused between non-taxable supply and non-GST supply. Under Section 2(78) “nontaxable supply” means a supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act.
In common parlance, a non-GST supply is a transaction which is outside the scope of the GST legislation.
A transaction which qualifies to be called a supply can be taxable, non-taxable, Nil rated, Zero rated or an exempt supply. It must be noted that all such supplies are in fact “suppl ies” under the GST laws but by virtue of the statute they are not liable to tax.

2. Whether an exemption is mandatory or optional

One of the most burning issues that bothers the tax fraternity as well as trade and industry is whether to avail an exemption or not ?. More Importantly, whether availing an exemption can be optional or would it be mandatory. In order to answer this vexed issue, we need to understand some basics of availment / non-availment of exemptions:

(a) If the output stands exempted, it necessarily envisages that input tax credit shall accordingly stand
restricted.
(b) Once the output is exempt, there can be no tacit collection of taxes meaning the incidence of taxes
(even at the general rate) cannot be passed on to the customer through a pricing mechanism.
(c) If the exemption is product / service specific, entity specific, period or area specific, cap on value
etc., it appears that availment of such exemption is mandatory. It may not be possible to pay output
tax, say at a general rate and continue to avail input tax credits.
(d) Merely because a customer may be willing to pay taxes on exempted goods or services, it does not mean that the supplier can collect taxes; in fact, in such cases it will amount to excess / unauthorised collection of taxes resulting in forfeiture of taxes whereas input tax credits will continue to stand restricted. Thus, it can amount to a double whammy.
(e) Some tax experts believe that once tax stands collected on the output, availability of input tax credit would be automatic; This is an issue which has been subject to judicial reviews on several occasions and on most occasions, has been held in favour of Revenue;
(f) The principles underlying the grant of an exemption would generally be to alleviate the difficulties
faced by a particular sector of business and to make them more competitive or to boost or encourage the economy of a particular area in a State or country (and to make them competitive); or to encourage small and medium size trade and industry to invest the profits arising out of price advantage back into business resulting in higher economic activity etc. If these are broadly the underlying principles then availment of exemptions on an optional basis would defeat the very purpose of grant of exemption and thus, it appears that such a scheme would not be possible;
(g) Difficulty often arises when the trade and industry is not very certain as to whether a particular
product / service stands exempted since there may be a classification issues. In such over-riding circumstances, it is always better to seek an advance ruling to avoid possible forfeiture of taxes and thereafter, avail the input tax as a dis-allowance. Even in this situation it is advisable not to collect
taxes, since taxes collected are to be remitted to the exchequer. In such a situation, if later it turns
out that the goods / service is really exempt from payment of taxes then the question of restriction of
input tax credits will most certainly arise.
(h) In any of these situations it would be important to understand the effect of taxation in the following situations :

What if taxes are not collected by a Supplier considering the fact that goods / services stand exempt but it later turns out to be a taxable transaction :- This is a situation faced quite often by the trade and industry. Assuming that factually it is a legal issue and the supplier has not collected taxes Courts have often come to the rescue of the supplier by stating that if output taxes are payable, then the corresponding input taxes would stand allowed even if it is not availed (or restricted) in the original returns; however, once output tax becomes payable and the taxes are collected by the tax office in terms of section 74 then the recipient cannot avail any input tax credits under the provisions of the GST laws; this situation is quite scary and therefore the law to this extent needs a re-look.
Can the Supplier in the above situation pass on the output tax paid by him through a debit note or
supplementary invoice :- In the normal course, if before the tax office raises the issue and collects the taxes ,the supplier or recipient becomes aware that the transaction claimed as exempt is actually taxable, then a debit note could be raised. In this situation, it will turn out to be tax neutral so far as the supplier and the recipient are concerned. The challenge of availing input tax credits at a later date (assuming it is not claimed / availed within the prescribed period) would continue to haunt the supplier. This situation also needs to be looked into by f law makers.

Considering, each of the situations cited supra, the supplier has to be very careful. In case of a doubt, the best way would be to seek an advance ruling to settle the issue.

3. Retrospective application of an exemption

It is a settled position that the Union and the States are competent to legislate any law retrospectively within the Constitutional framework. This power is generally used for curing defects in law or to nullify the impact of Court judgements. It is also a settled position of law that there can be retroactive amendments imposing an additional liability. However, machinery and procedural provisions can be subject to retrospective amendment. A retrospective operation of law which is oppressive and appears to take away a benefit already bestowed can be held to be confiscatory in nature and it can therefore be said to be violative of Articles 14 and 19 of the Constitution.
A retrospective amendment cannot affect an existing right and create a new obligation. For instance, if exemption is provided to say, sale of footwear costing less than Rs.500/- then a retrospective amendment cannot be made to provide that it applies only to plastic footwear.

A taxing statute cannot be termed to be retrospective, if it taxes an event that is continuing when the
amendment or Act came into force. For instance, in respect of agreements entered into under the erstwhile laws between a developer and a customer, taxes can be levied under the GST laws to the extent the contract is continuing.
It is a settled position of law that any retrospective amendment, if beneficial, is deemed to be good law. In one of the States’ tax exemptions were granted to manufacturing industries located in a particular backward area. It so happened, that a few Granite Industries engaged purely in cutting and polishing of granites came up in that area and availed tax exemptions. The Department later took up a position that “cutting and polishing of granites” does not result in manufacture. All the granite industries in that area went up in arms – and the Government later relented and granted exemption retrospectively. Having understood this case history, let us now look at the issues that arise when the Government grants an exemption retrospectively:

(a) A registered person may have already collected taxes from his customers for the past tax periods
and may not have paid to the Government, in which case, such a retrospective amendment would
have the effect of an unjust enrichment in his hands (if taxes so collected have not been made over
to the Government). It is possible that he may have availed input tax credits, in which case, such
input tax credits already availed would need to be reversed resulting in payment of taxes along with
interest and penalties. The taxes so collected from his customers also need to be paid to the Government. In this scenario following consequences arise :

•  The customers from whom taxes have been collected and paid to the Government stand to get refunds.
•  Alternatively, the taxes so collected from customers and paid to the credit of the Government can stand forfeited, if such customers, do not come forward to make such refund claims. In this scenario, can the Government be said to be unjustly enriched.
•  Tax, interest and penalties levied on the registered person on account of input tax reversals would have to be borne by the supplier as costs.
•  If taxes have been collected by the registered person from his customers and not paid to the Government, then it could lead to initiation of prosecution proceedings depending on the quantum of taxes and nature of the offence.

(b) If the registered person has not collected taxes but has remitted taxes from his own pocket then :

•  it will result in a refund situation provided the Supplier has not availed any input tax set off;
• if he has availed input tax setoff, then the resultant effect could be a smaller or lower amount of refund. 

(c) Assume a situation where the Government denies exemption and thereafter, on litigation the Courts restore the exemption. It is a very painful exercise of litigation for the supplier and he has to go through the process cited in (a) and (b) above to prove the bona fides of his case. 

(d) What would be the position of a registered person having multiple branches in different States and when one State grants or allows exemption while another does not. The only option open to the supplier in this scenario, is to litigate in the State where exemption has been denied. However, on facts, if Courts or Appellate Authorities rule in favour of the supplier granting exemption, then there could be no further arguments, whereas if the Courts confirm the levy, then the State which has granted exemption would stand to re-open such assessments and initiate proceedings which is far more painful exercise. 

(e) It must be noted that in each of the cases, the law pre-supposes that taxes are deemed to have been collected by the supplier unless the supplier proves otherwise. The net impact of a retrospective exemption could be rather cumbersome for the supplier. 

(f) Let us now turn our attention to the recipient of such supply and analyse the situation. 

•  In cases, where taxes are charged by the supplier and input tax credits have been availed by the recipient, the presumption is that the supplier would have remitted such taxes to the Government. In such a situation, the availment of input tax credits by the recipient would stay unhindered; however, if the supplier has not remitted the taxes, then the question arises as to whether availment of such input tax credits in the hands of the recipient could be denied? 
•  In cases, where no taxes are charged whereas the supply is held to be a taxable supply in the hands of the supplier then the only question is can the supplier issue a debit note to the recipient. This is a contract between the supplier and the recipient and Government would have no role to play. However, the question is whether the recipient can avail input tax credits on the strength of debit note if within the prescribed time lines then the answer would be ‘yes’ – otherwise ‘no’. This view is however, subject to the provisions of section 74 of the CGST Act, 2017. 

(g) Some of the situations when retrospective exemptions are granted by the Government could be: 

     (i) To alleviate the difficulties caused by ambiguous words / text etc., used in notifications / circulars / legislative provisions etc. 

(ii) To give effect to the intent of Legislature which did not have the desired effect. 

(iii) To give effect to orders of judiciary; 

To conclude, one will have to exercise caution and care while interpreting the exemption provisions. While this publication would provide an insight, the facts and surrounding circumstances have to be considered while understanding a retrospective amendment to the exemption provisions.

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READ ALSO:- Exempted Supplies Under GST :- III Chapter