Understanding Transactions and Items Excluded from GST
This article clarifies the items and transactions that are not subject to GST in India, primarily focusing on those listed in Schedule III of the CGST Act. It differentiates these exclusions from exempt, zero-rated, nil-rated, and non-taxable supplies, detailing ten specific entries in Schedule III. Key exclusions include employee services, court services, duties of public officials, funeral services, and the sale of completed buildings. The piece also explains the concept of non-GST supplies and their distinct nature within the Indian tax framework.
Only a specific number of items and transactions fall outside the purview of the Goods and Services Tax (GST) framework in India. These are primarily categories detailed in Schedule III of the Central Goods and Services Tax (CGST) Act. It is crucial to distinguish these items from exempt or non-taxable supplies under GST. This article will provide a comprehensive overview of the entries within Schedule III of the CGST Act that are not subject to GST, along with an explanation of non-GST supplies.
Identifying Goods and Services Not Covered by GST
While India's GST legislation encompasses nearly all goods and services, alongside their corresponding tax rates, a select group of items and services remains explicitly excluded from its scope. These exclusions are specifically enumerated in Schedule III of the Central Goods and Services Tax (CGST) Act and are also referred to as non-GST supplies. The subsequent section will delve into Schedule III, outlining these goods and services that are outside GST's ambit.
What Constitutes Schedule III Under GST?
The GST Council is responsible for determining GST rates for various goods and services and for publishing a list of exempted items. In contrast, certain activities and transactions are explicitly not considered a 'supply' under GST law. These activities are entirely outside the GST framework, meaning GST does not apply because they are fundamentally neither a supply of goods nor a supply of services. This concept is analogous to the negative list previously used in the Service Tax regime. These transactions are designated under Schedule III of the GST Act as 'Neither goods nor services'.
Section 7(3) of the CGST Act, which defines 'Supply', specifically refers to Schedule III. It states that:
- Irrespective of subsection (1), (a) activities or transactions listed in Schedule III; or (b) specific activities or transactions carried out by the Central Government, a State Government, or any local authority acting as public authorities, as designated by the Government based on GST Council recommendations, shall not be treated as a supply of goods or a supply of services.
Before exploring the specific entries in Schedule III, it is essential to understand the distinctions among exempt supplies, zero-rated supplies, nil-rated supplies, non-taxable supplies, non-GST supplies, and Schedule III supplies.
Differentiating Between Various Supply Types Under GST
| Comparison Criteria | Exempt Supply | Zero-rated Supply | Nil-rated Supply | Non-Taxable Supply | Non-GST Supply | Schedule III Supply |
|---|---|---|---|---|---|---|
| Meaning | These are supplies that are typically taxable under the GST Act but have been explicitly exempted from GST through official notifications. | As defined by the IGST Act, these supplies are zero-rated, meaning both the sales and the associated inputs or input services can be entirely free of GST. | For these particular supplies, the GST Act has formally notified a tax rate of '0%'. | These supplies are within the conceptual scope of GST, but their specific GST rates have not yet been declared or notified. | These supplies are not mentioned within GST legislation, as they are constitutionally designated to be outside the GST framework and thus fall completely out of scope. | If these supplies had not been explicitly listed in Schedule III, they would typically be classified as a 'supply' and consequently subject to GST. |
| Included in GST Supply Scope? | Yes | Yes | Yes | Yes | No | No |
| Input Tax Credit (ITC) Available? | Not available | Available | Available | Not available | Not available | Not available |
| Examples | Fresh fruits, fresh milk, curd, bread, etc. | Exports and supplies made to SEZ units or SEZ developers, of both goods and services. | Grains, salt, jaggery, etc. | Alcohol for human consumption, natural gas, petrol and its products, etc. | Money and security | Funeral and burial services, certain actionable claims, etc. |
Detailed List of Entries in Schedule III of the CGST Act
Schedule III of the CGST Act specifically outlines activities or transactions that are neither considered a supply of goods nor a supply of services. Currently, there are ten distinct entries within Schedule III of the CGST Act:
1. Employee Services Under an Employment Agreement
The first entry covers "Services by an employee to the employer, in the course of or in relation to his employment." While the employer-employee relationship is generally considered among related parties under GST law, which initially raised concerns about the taxability of employment services, this entry clarifies the exclusion. However, if an employer provides any service to employees that goes beyond the scope of employment, it may be deemed a taxable service. This falls under Schedule I, Entry 2, when read with GST Valuation Rules, with the exception of gifts valued up to Rs. 50,000. For instance, facilities like cafeterias, recreation, and sports provided to employees might attract GST.
It is important to note that CGST Circular No: 140/10/2020 – GST clarified that remuneration paid to independent directors or other non-executive directors, who are not employees of the company, is taxable under GST through the reverse charge mechanism, payable by the company.
2. Services by a Court or Tribunal
The second entry includes "Services by any court or tribunal established under any law for the time being in force." Consequently, services rendered by judicial bodies such as district courts, high courts, and the Supreme Court are not subject to GST. These courts do not levy GST for issuing judgments. However, services provided by an arbitral tribunal to a business entity are explicitly subject to tax under the reverse charge mechanism.
3. Services Provided by Public Officials or Constitutional Post Holders
Duties performed by the following individuals in their official capacities do not attract GST:
- Members of Parliament, State Legislatures, Panchayats, Municipalities, and other local authorities.
- Any individual holding a post under the provisions of the Constitution.
- A Chairperson, Member, or Director in a body established by the state/central government or a local body, provided they are not an employee of that entity.
It is noteworthy that legal services provided by these same MPs/MLAs would be taxable under GST if rendered to a business entity, but would be exempt if provided to any other person.
4. Funeral and Related Services
The fourth entry specifies that "Services of funeral, burial, crematorium or mortuary including transportation of the deceased" are not covered under GST. Therefore, funeral services, regardless of religion, are exempt from GST.
5. Sale of Land and/or a Completed Building
The fifth entry lists "Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building." This means that proceeds from the sale of land, irrespective of its form or purpose, and the sale of a completed building, subject to Para 5(b) of Schedule II, do not attract GST.
To clarify, construction services for a new building are subject to GST as a works contract. Furthermore, if a sale agreement for a building is executed before the issuance of a completion certificate, the entire sale consideration becomes taxable under GST as a service, as per Schedule II. However, any developed land might still be considered a supply for the developmental charges collected.
6. Actionable Claims (Excluding Lottery, Betting, and Gambling)
Actionable claims refer to claims that can be legally enforced through a suit. Examples include an unsecured book debt, a bill of exchange, a promissory note, or a beneficial interest in movable property not in the claimant's possession. While the definition of 'Goods' under GST typically includes actionable claims (other than money), their exclusion via Schedule III means they are neither a supply of goods nor services. These claims are viewed as a substitute for money. Consequently, GST generally does not apply to such activities. However, specific actionable claims like lottery, betting, and gambling are exceptions and attract higher GST rates. While lottery is categorized as goods, gambling and betting are treated as a supply of services.
7. Sales Between Non-taxable Territories
This entry specifies that "Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India" falls outside the scope of GST supply. These transactions are also known as third-country exports.
GST is thus only triggered if goods "enter India" as part of a supply from a non-taxable territory. "Out and out" supplies (merchant trading), sales of goods within customs bonded warehouses, and high-sea sales are not considered supplies under the GST Act, and therefore, GST is not applicable.
8. Transactions Within Customs Ports Prior to Home Consumption
This entry covers supplies within a customs port before goods are cleared for home consumption, as follows:
(a) Supply of warehoused goods to any person prior to their clearance for home consumption. (b) Supply of goods by the consignee to another party through an endorsement of documents of title, after the goods have been dispatched from their foreign port of origin but before their clearance for home consumption.
Note: In Budget 2023, these entries were proposed to apply retrospectively from July 1, 2017. However, no refunds will be issued for taxes collected between July 1, 2017, and January 31, 2019 (the date of insertion into the Act). Furthermore, Section 17(3) of the CGST Act has been amended to restrict Input Tax Credit (ITC) on the "Supply of warehoused goods to any person before clearance for home consumption," by including the value of such transactions under exempt supplies.
9. Apportionment of Co-insurance Premium
The activity where a lead insurer apportions co-insurance premiums to a co-insurer, when insurance services are jointly provided by both to the insured under co-insurance agreements, will not be considered a supply under GST. This is contingent on the lead insurer paying the applicable CGST, SGST, UTGST, or IGST on the full premium amount paid by the insured.
10. Services from Insurer to Reinsurer
The services furnished by an insurer to a reinsurer, for which a ceding commission or a reinsurance commission is deducted from the reinsurance premium paid by the insurer to the reinsurer, will not be treated as a supply under GST. This is conditional on the reinsurer paying the CGST, SGST, UTGST, or IGST on the gross reinsurance premium payable by the insurer to the reinsurer, inclusive of the aforementioned ceding or reinsurance commission.
Understanding Non-GST Supplies
Having clarified the items not covered by GST, let's elaborate on non-GST supplies. These refer to supplies explicitly excluded from GST law due to constitutional provisions. Consequently, they fall outside the GST's scope, are not subject to GST liability, and no input tax credit can be claimed for them as GST is not levied on such items.
Examples of non-GST supplies include money, securities, and activities or transactions undertaken by the Central Government, State Government, or any local authority acting in their capacity as public authorities.
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