129 exemptions & zero rating - icai - 280820

Exemptions &
Zero Rated Supplies
Under GST
Deepak Kumar Jain
B.Com., ACA., ACS., LLB
28-Aug-2020

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Index
• Understanding types of supply
• Definition of exempt supplies
• Meaning of zero rated supplies
• Issues connected with, exempt/ zero rated supplies
• Practical issues and its perspective
2

Types of Supply
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Exempt Supply of
Goods & Services
Non-taxable Supply
of Goods or
Services
Supply that is
neither of Goods
or Services
Taxable Supply of
Goods or Services
Classification of Supply
• Taxable Supply of Goods or Services
• Exempt Supply of Goods or Services
• Non-taxable Supply of Goods or Services
• Supply of neither goods or services

Exempt Supply
• Section 2(47):
Exempt supply means supply of any
goods and/ or services
• which attract nil rate of tax; or
• which may be exempt from tax under
Section 11 or Section 6 of IGST Act
• and includes non-taxable supply
4
Exempt Supply (illustrations)
Goods taxable at Nil Rate
• Notification No. 02/ 2017-CT (Rate), dated 28-Jun-2017,
exempts various lists of goods (jumbo notification)
Services taxable at Nil Rate
exempts various lists of services (jumbo notification)
Exempt u/s. 11 of CGST Act
grants exemption to supplies of goods by CSD or unit run
canteens to specified recipients
Exempt u/s. 6 of IGST Act
• Notification No. 30/ 2017-IT (Rate), dated 22-Sep-2017,
grants exemption to inter-State supply of skimmed milk
powder or concentrated milk

Power to exempt a supply
5
Central or State Government, based on the recommendation of the Council
On taxable goods and/ or services of any specified description
Necessary, in public interest
By Notification
Section 11(1)/ Section 6(1)
Exempt Generally
By Special Order
Section 11(2)/ Section 6(2)
Exempt
Under exceptional circumstances,
explicitly specified in such Order
Whole tax
• Absolutely; or
• Subject to conditions
• Whole tax; or
• Part of the tax

Non-taxable Supply
• Section 2(78):
Non-taxable supply means a supply of
goods and/or services, which is not
leviable to tax under this Act or IGST Act
6
Non-taxable supply
• Section 9(1): Subject to the provisions of sub-section (2),
there shall be levied a tax called the central goods and
services tax on all intra-State supplies of goods or services
or both, except on the supply of alcoholic liquor for
human consumption, on the..
• Section 9(2): The central tax on the supply of petroleum
crude, high speed diesel, motor spirit (commonly
known as petrol), natural gas and aviation turbine fuel
shall be levied with effect from such date as may be notified

Transaction neither supply of goods or services
• Schedule III to CGST Act, specifies transactions which are neither supply of goods nor supply of services,
and therefore becomes a special category, which is neither exempt supply nor as a non-taxable supply:
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1 Services by employee to employer
2 Services by any Court or Tribunal established under any law for the time being in force.
3 Functions performed by MP, MLA or members of Panchayats or local authorities
4 Services by a foreign diplomatic mission located in India.
5 Services of funeral, burial, crematorium or mortuary including transportation of the deceased
6 Services provided by a Government or local authority to another Government or local authority excluding the
following services other than department of posts, life insurance, aircraft, vessel or transportation of passengers
7 Services provided by a Government or local authority to individuals in discharge of its statutory powers or
functions such as issuance of passport, visa, driving licence, birth certificate or death Certificate and assignment
of right to use natural resources to an individual farmer for the purpose of agriculture
8 Services provided by a Government or local authority or a governmental authority by way of healthcare, education
and other specified services of Government

Related questions
• Supply of samples: Is it taxable supply or exempt supply?
o It is a supply which is taxable at zero value i.e. the transaction in the instant case lacks consideration
• Whether an exemption is mandatory or optional?
o Explanation to Section 11 states that, where an exemption in respect of any goods or services or
both from the whole or part of the tax leviable thereon has been granted absolutely, the registered
person supplying such goods or services or both shall not collect the tax, in excess of the effective
rate, on such supply of goods or services or both.
• Is registration under GST required for supply of exempt goods or services?
o Section 22 provides that a supplier who is engaged in the supply of any taxable goods or services,
shall be liable to take registration, when supply crosses the threshold limit
o Section 23 of the CGST Act provides that any person engaged exclusively in the business of
supplying goods or services or both that are not liable to tax or wholly exempt from tax under this
Act or under the Integrated Goods and Services Tax Act, shall not be liable for registration
8

Zero-rated Supply
• Section 16(1) of IGST Act:
zero-rated supply means any of the following supplies of
goods and/or services, namely:
a) Export of goods and/or services
b) Supply of goods and/or services to a SEZ developer or an
SEZ unit
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Supply taxable at
zero rate

Zero Rating: Objective & Conditions
• The rate of tax on output i.e. outward supplies is made taxable at 0%, to promote exports
(including through SEZ)
• The input taxes are allowed in full, without the requirement for any reversal
• The un-utilized input tax credit i.e. on input & input services is allowed as refund – thereby
nullifying the incidence of input taxes on exports including for supplies to SEZ [Section
54(3)]
• Refund of credit pertaining to capital goods used for exports is not allowed (similar to pre-
GST regime)
• Exporter needs to execute Letter of Undertaking (LUT) [May be required only for refund?]
• Refund of un-utilized credit is allowed based on export turnover ration
• Benefit extended to output supplies that are generally exempt but exported [Section 16(2)]
10

Related questions
• Is Zero-rated supply an exempt supply?
o The supply is not nil rated nor is exempt u/s. 11 or u/s. 6 of IGST
• Whether execution of LUT is must for exports and in the absence whether exports would become taxable
o Section 16 does not impose the condition for LUT for a transaction to be regarded as zero rated
o Rules prescribes the condition for execution of LUT for export (Procedural lapse Vs. Substantial lapse)
• In case exports are made in INR, whether the condition for export in convertible foreign exchange violated
o INR is fully convertible for current account transactions
o A person shall be deemed to have repatriated the realized foreign exchange to India when he receives in India
payment in rupees from the account of a bank or an exchange house situated in any country outside India,
maintained with an authorized dealer [Notification No. FEMA 9 /2000-RB dated 3rd May 2000]
o Appropriate amendment made by IGST (Amendment) Act, 2018, w.e.f. 1-2-2019, for realization in INR
o Requirement to reverse ITC in case of export of samples?
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Practical Issues: educational institution
• Services provided by an educational institution to its students or faculty or staff were exempt
“educational institution” is defined as an institution providing services by way of:
• Pre-school education and education up to higher secondary school or equivalent;
• Education as a part of a curriculum for obtaining a qualification recognized by any law for the time being
in force;
• Education as a part of an approved vocational education course
• Educational institutions collect
• Fee outside the curriculum – say swimming fee, music fee, additional tuition fee,
• Application fee for students not enrolled
• Taxability of consideration not as part of curriculum?
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1

Practical Issues: charitable purpose
• Services by an entity registered under section 12AA of the Income-tax Act, 1961 (43 of
1961) by way of charitable activities.
• Section 2(r) "charitable activities" means activities relating to -
(i) public health by way of,-
(A) care or counseling of
(I) terminally ill persons or persons with severe physical or mental disability,
(II) persons afflicted with HIV or AIDS,
(III) persons addicted to a dependence-forming substance such as narcotics drugs or alcohol;
(B) public awareness of preventive health, family planning or prevention of HIV infection;
(ii) advancement of religion, spirituality or yoga
(iii)…
• Donations given with the specific direction to promote the brand of donor?
13
2

Practical Issues: sale of unit on going concern
• Exempt services [Notification No. 12/ 2017-CT (Rate), dated 28-Jun-2017]
• Services by way of transfer of a going concern, as a whole or an independent part thereof.
• How can transfer of unit on going concern be exempted services?
• Requirement to reverse input tax credit on exempted services will become applicable on
transferor company [Section 17(2)]
14
3

Practical Issues: residential dwelling
• Services by way of renting of residential dwelling for use as residence.
• The term ‘Residential dwelling’ is not defined
• Is Company owned guest houses, which are used as residence for company employees,
exempt as residential dwelling for use as residence
• A hotel, motel, inn, guest house, camp-site, lodge, house boat, or like places meant for
temporary stay or for commercial purposes, is not residential dwelling
• Company owned guest houses, while used for residence, is for a commercial objective and
hence would not fall within the meaning of residential dwelling and accordingly, taxable
15
4

Practical Issues: medicines vs. health-care services
• Services by way of
(a) health care services by a clinical establishment, an authorised medical practitioner or paramedics;
(b) services provided by way of transportation of a patient in an ambulance, other than those specified
in (a) above.
• Composite Supply:
• Supply of medicines, consumables, surgical items, items such as needles, reagents etc used in laboratory,
room rent
• used in the course of providing health care services to in-patients for diagnosis or treatments,
• which are naturally bundled and are provided in conjunction with each other,
• would be considered as “Composite Supply” and is considered as eligible for exemption under the
category ‘health care services’
• Hospitals make huge margins on sale of medicines, while they may be administered at MRP
• Sale of medicines, other than for treatment are subjected to GST
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5

Practical Issues: electricity/water charges - tenant
• Exempt services
• Transmission or distribution of electricity by an electricity transmission or distribution utility [Notification
No. 12/ 2017-CT (Rate), dated 28-Jun-2017]
• Supply of electricity (as goods) [Notification No. 02/ 2017-CT (Rate), dated 28-Jun-2017], vide HSN 2716
• Transmission or distribution of electricity (SAC 9969) by other than electricity transmission
or distribution utility is taxable
• Recovery of electricity and water charges at actuals is considered as taxable supply [AAR
M/s Keysight Technologies International India Pvt. Ltd. (GST AAR Haryana)]
• Will the pure agent test not be applicable?
• Service tax decisions holding in favour of assesse:
• ICC Reality (India) Pvt. Ltd v. CCE [(2013) 32 STR 427 (Tri-Mum)]
• EON Hinjewadi infra. Pvt. Ltd [(2012 TIOL-1688-CESTAT-Mum)]
17
6

Practical Issues: domestic reverse charge - SEZ
• Exemption to SEZ
• Services imported by a unit or a developer in the Special Economic Zone for authorised operations, are
exempted vide Notification No. 18/2017 -Integrated Tax (Rate)
• Similar exemption notification is not available for domestic reverse charge
• Section 2(10) IGST Act: ‘‘import of services” means the supply of any service, where––
i. the supplier of service is located outside India;
ii. the recipient of service is located in India; and
iii. the place of supply of service is in India;”
• In terms of Section 7(5), supply to SEZ developer or unit is treated as inter-state supply
• Accordingly, domestic supply of services, which are subject to reverse charge, is not
exempted when received by SEZ units
• SEZ units may pay the tax, claim credit and if remaining un-utilized, claim refund
18
7

Practical Issues: Export rebate – EOU
• Section 16(3) of IGST Law, read with Section 54(3) of CGST Law, allows exporter to pay
tax on exports and claim refund of the said tax paid on exports.
• However, in terms of Notification No. 16/2020, dated 23-Mar-2020, issued with
retrospective effect from 23-Oct-2017, an exporter wanting to pay tax on exports, should
not avail the specified concessions including IGST & Cess exemption on inputs for EOUs,
Supplies against Advance Authorisation, supplies to merchant exporter @ 0.1% etc.
• Presumably, an exporter availing the said benefits, is barred to pay tax on exports
• An EOU availing import concession is not allowed to pay tax on exports
• Is one-to-one co-relation required?
• Consequent to retrospective changes, what happens to units who have availed the benefit
and which was valid when availed?
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8

Practical Issues: Testing Vs. Export
• Section 13 (3) of the IGST Act, 2017: In respect of services performed on goods, the
ordinary place of supply shall be the location where the services are actually performed
• However, where the services are actually performed in case of goods temporarily imported
into India for ‘repairs or for any other treatment or process’ and exported without being put
to use, the place of supply will be the location of the recipient, the place of supply shall be
based on location of receipient
• 28th GST Council meeting dated 21-Jul-2018, clarified that ‘any other treatment or process’
is for ‘Job Work’
• Whether ‘testing services’, done on stand-alone basis, be regarded as ‘Job work’ and not be
subject to tax, based on place of performance being in India?
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9

Practical Challenges: miscellaneous
1. The value of export of goods, to be captured in GSTR-1 should be FOB value and not
the value as considered in books
2. Consideration should be realised with one year from the date of issue of invoice
(Applicable for both SEZ supply and Exports)
3. Turnover of zero rated supplies: FOB value or value which is 1.5 times the value of like
goods domestically supplied by the same or, similarly placed, supplier, as declared by the
supplier, whichever is less
• Is it applicable to EOU
• In case similar goods are not supplied domestically?
4. Supply by DTA to SEZ under "Bill To Ship To" model, where ‘bill to’ is on SEZ, & ‘ship
to’ is on DTA unit: Whether it would be regarded as supply to SEZ unit?
5. After execution of LUT, whether exporter can pay tax on exports and claim rebate?
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