To fully grasp the Goods and Services Tax (GST) system, it is crucial to understand which items are exempt. With the expansion of taxable supplies under GST, specific exemptions have been clearly outlined. It is not enough to simply know the list of exempted items; understanding the implications of an item being exempt is equally vital, as this often involves conditions such as reversing Input Tax Credit (ITC). Furthermore, an item currently classified as nil-rated might be subject to a higher tax rate in the future. Therefore, distinguishing between terms like Nil Rated, Exempt, Zero-rated, and Non-GST supplies is essential for clarity within the GST framework. For a comprehensive overview, explore the list of exempted services under GST.

What is an Exempt Supply?

An exempt supply encompasses three distinct categories of provisions:

• Supplies subject to a zero percent (NIL) tax rate.
• Supplies fully or partially relieved from CGST or IGST, as stipulated by notifications that amend Section 11 of the CGST Act or Section 6 of the IGST Act.
• Non-taxable supplies, as defined under Section 2(78), which are not subject to taxation under the Act, such as alcoholic beverages meant for human consumption.

No tax payment is required for these supplies. However, any Input Tax Credit (ITC) directly related to exempt supplies cannot be claimed or set off. It is important to note that zero-rated supplies, like exports, are not categorized as supplies taxable at a NIL rate.

The Central or State Governments possess the authority to grant GST exemptions under specific conditions:

• The exemption must serve the public interest.
• It must be issued via a formal notification and be recommended by the GST Council.
• Exemptions can be absolute or conditional, applying to specific descriptions of goods and/or services.
• In exceptional situations, an exemption may be granted through a special order, rather than a notification.
• A registered supplier of absolutely exempt goods or services is prohibited from collecting tax at a rate higher than the effective exempted rate.

Classification of Exemptions

Exemptions under GST can be categorized based on the beneficiary of the exemption:

Supplier-Specific Exemption

Some exemptions are granted to the person or entity making the supplies, irrespective of the nature of the specific outward supply. An example includes services provided by charitable organizations.

Supply-Specific Exemption

Other exemptions apply to certain supplies due to their inherent nature and type, regardless of who the supplier is. All notified supplies in this category are eligible for the exemption. Examples include services involving the sponsorship of sporting events or public conveniences.

Types of Exemptions

GST exemptions are broadly classified into two main types:

Absolute Exemption

This type of exemption is granted without any attached conditions. For instance, the transmission or distribution of electricity by an electricity utility is an absolute exemption.

Conditional Exemption

This exemption is contingent upon meeting specific conditions. An example is healthcare services provided by a clinical establishment in a room (excluding Intensive Care Unit/Critical Care Unit/Intensive Cardiac Care Unit/Neonatal Intensive Care Unit) where the daily room charges exceed INR 5000.

A conditional or partial exemption also applies to intra-state supplies of goods and/or services received by a registered person from an unregistered person, where such supplies are exempted from reverse charge payment, provided their aggregate value from all suppliers does not exceed INR 5000 per day.

Exemption under One GST Law and Its Impact on AnotherGST Law

The relationship between exemptions granted under different GST laws is as follows:

Important Notifications for GST Exemptions

Several key notifications have been issued regarding exemptions from GST payments:

What Goods are Exempt from GST?

A comprehensive list of goods exempted from GST is regularly issued and updated by the relevant authorities through official notifications.

Treatment of Input Tax Credit (ITC) if Supply is Exempt

When supplies are exempt, the portion of Input Tax Credit (ITC) that is directly attributable to these exempt supplies must be reversed.

How to Determine the Credit Attributable to Exempt Supplies?

The credit amount attributable to exempt supplies is calculated using the following formula:

Credit attributable to exempt supplies = (A/T) x C

Where: A = Aggregate value of exempt supplies (encompassing all supplies other than taxable and zero-rated supplies). T = Total turnover of the person within the tax period. C = Common Credit.

The 'Common Credit' is derived from the total input tax for a period by subtracting the following:

• Tax exclusively for non-business purposes.
• Tax exclusively for exempt supplies.
• Ineligible credits as per Section 17(5) (e.g., works contract, rent-a-cab services).
• Tax exclusively for taxable supplies (including zero-rated supplies).

What is a Non-Taxable Supply?

A “non-taxable supply” refers to a supply of goods or services, or both, which is not subject to tax under the CGST Act or the IGST Act. For a transaction to be classified as a non-taxable supply under GST, it must first meet the definition of a 'supply' as per GST law. It is crucial to distinguish non-taxable supplies from non-GST supplies, as they are not outside the scope of GST, just not currently leviable to tax.

Examples include alcoholic liquor for human consumption and certain goods listed in Section 9(2):

• Petroleum crude
• High-speed diesel
• Motor spirit (petrol)
• Natural gas
• Aviation turbine fuel

The GST rate for these items has not yet been announced or notified.

The Negative List Under GST

Supplies that fall outside the ambit of GST are referred to as non-GST supplies. These activities or transactions are explicitly excluded from the definition of 'supply' and are similar to the negative list concept under the previous Service Tax regime. Such transactions are detailed in Schedule III of the GST Act as “Neither goods nor services”:

• Services rendered by an employee to an employer during the course of, or in relation to, employment.
• Funeral, burial, crematorium, or mortuary services.
• Sale of land.
• Sale of completed buildings.
• Actionable claims (excluding lottery, betting, and gambling).
• Services provided by any court or Tribunal.
• Functions executed by Members of Parliament (MPs), Members of Legislative Assembly (MLAs), etc.
• Duties performed by individuals holding any post under constitutional provisions in their official capacity.

Distinction Between Exempt, Nil Rated, Zero Rated, and Non-GST Supplies

Understanding the nuances between different types of supplies under GST is crucial. The table below outlines their key differences: