EXEMPT SUPPLY UNDER GST

Introduction:

In the complex landscape of the Goods and Services Tax (GST), not all transactions are created equal. While GST is designed as a "One Nation, One Tax" system, the government acknowledges that certain essential goods and services must remain affordable for the general public or serve specific socio-economic goals. This is where Exempt Supplies come into play.

Definition:

According to Section 2(47) of the CGST Act, 2017, "exempt supply" means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the IGST Act, and includes non-taxable supply.

What Qualifies as an Exempt Supply?

As per Section 2(47) of the CGST Act, 2017 the term "Exempt Supply" is actually an umbrella for 3 distinct categories:

1. Nil-Rated Supplies: Goods or services that have a 0% tax rate assigned in the GST tariff (e.g., salt, fresh vegetables).
2. Exempt Supplies: Items specifically exempted by the government through official notifications (e.g., healthcare, education).
3. Non-Taxable Supplies: Items that are currently outside the scope of GST laws (e.g., alcohol for human consumption and five specific petroleum products).

Section 11. Power to grant Exemption

1. Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by notification, exempt generally, either absolutely or subject to such conditions as may be specified therein, goods or services or both of any specified description from the whole or any part of the tax leviable thereon with effect from such date as may be specified in such notification.
2. Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by special order in each case, under circumstances of an exceptional nature to be stated in such order, exempt from payment of tax any goods or services or both on which tax is leviable.
3. The Government may, if it considers necessary or expedient so to do for the purpose of clarifying the scope or applicability of any notification issued under sub-Section (1) or order issued under sub-Section (2), insert an explanation in such notification or order, as the case may be, by notification at any time within one year of issue of the notification under sub-Section (1) or order under sub-Section (2), and every such explanation shall have effect as if it had always been the part of the first such notification or order, as the case may be.

Explanation. - For the purposes of this Section, 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.

Restriction on Input Tax Credit:

As per Section 17(2) of the CGST Act, 2017 where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies, the amount of credit shall be restricted to so much amount of the Input tax as is attributable to the said taxable supplies including zero rated supplies.

As per Section 17(3) The value of exempt supply under sub-section (2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

As per explanation to Rule 43 of CGST rules, the aggregate value of exempt supplies shall exclude:-

a) the value of services by way of accepting deposits, extending loans or advances in so far as the consideration is represented by way of interest or discount, except in case of a banking company or a financial institution including a non-banking financial company, engaged in supplying services by way of accepting deposits, extending loans or advances; and

b) the value of supply of services by way of transportation of goods by a vessel from the customs station of clearance in India to a place outside India.

c) the value of supply of Duty Credit Scrips specified in the notification of the Government of India, Ministry of Finance, Department of Revenue No. 35/2017-CT(R), dt. 13.10.2017.

As per explanation to Rule 43 of CGST rules, for determining the value of an exempt supply as referred to in sub-section (3) of Section 17 -

a)      the value of land and building shall be taken as the same as adopted for the purpose of paying stamp duty; and

b)      the value of security shall be taken as 1% of the sale value of such security

Registration:

As per section 23 of the CGST Act, 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 CGST Act or under the IGST Act shall not be liable to registration.

However, as per section 24 (iii) of the CGST Act, persons who are required to pay tax under reverse charge are required to be obtain GST registration.

Therefore, a person is required to obtain registration even he engaged exclusively supplying goods or services or both which are not liable to tax or wholly exempt from tax under CGST Act or under the IGST Act, when the person required to pay tax under reverse charge.

Circulars relating to exempt supply:

Circular No. 16/16/2017-GST, Dt. 15.11.2017 clarifies that processed products such as tea (i.e. black tea, white tea etc.), processed coffee beans or powder, pulses (de-husked or split), jaggery, processed spices, processed dry fruits, processed cashew nuts etc. fall outside the definition of agricultural produce. Hence, the exemption from GST is not available to their loading, packing, warehousing etc.

Circular No. 19/19/2017-GST, Dt. 20.11.2017 clarifies that milling of paddy into rice is not eligible for exemption.

Circular No. 27/01/2018-GST, Dt. 04.01.2018 clarifies that rent on rooms provided to in-patients in hospitals is exempted.

Circular No. 32/06/2018-GST, Dt. 12.02.2018 clarifies the following matters.

·      Health care services provided by a clinical establishment, an authorised medical practitioner or para-medics are exempt.

·      The entire amount charged by Health care services providers (i.e., hospitals) from the patients including the retention money and the fee/payments made to the doctors etc., is towards the healthcare services to the patients are exempt.

· Food supplied to the in-patients as advised by the doctor/nutritionists is a part of composite supply of healthcare and not separately taxable.

Circular No. 34/8/2018-GST, Dt. 01.03.2018 clarifies that Service by way of transmission or distribution of electricity by an electricity transmission or distribution utility is exempt.

Circular No. 51/25/2018-GST, Dt. 31.07.2018 clarifies that the services provided by Government and private service providers (PSPs) by way of transportation of patients in an ambulance is exempt.

The service provided by PSPs to the State Governments by way of transportation of patients on behalf of the State Governments against consideration in the form of fee or otherwise charged from the State Government also exempt.

• if it is a pure service and not a composite supply involving supply of any goods, and
• f it is a composite supply of goods and services in which the value of supply of goods constitutes not more than 25% of the value of the said composite supply.

Circular No. 52/26/2018-GST, Dt. 09.08.2018 clarifies the following matters.

• Toned milk fortified (with vitamins ‘A’ and ‘D’) attracts NIL rate of GST.
• Supply of drinking water for public purposes, if it is not supplied in a sealed container, is exempt.

Circular No. 55/29/2018-GST, Dt. 10.08.2018 clarifies that,

• Services provided by a private Industrial Training Institutes (ITI) in respect of designated trades are exempt.
• Designated trades, services provided by a private ITI by way of conduct of entrance examination against consideration in the form of entrance fee will also be exempt.
• Designated trades, services provided to an educational institution, by way of, services relating to admission to or conduct of examination by a private ITI will also be exempt.
• Services provided by a Government ITI to individual trainees/students, is exempt.

Circular No. 66/40/2018-GST, Dt. 26.09.2018 clarifies that the services provided by entity registered under Section 12AA of the Income Tax Act, 1961 by way of advancement of religion, spirituality or yoga are exempt. Fee or consideration charged in any other form from the participants for participating in a religious, Yoga or meditation programme or camp meant for advancement of religion, spirituality or yoga shall be exempt as long as the primary and predominant activity, objective and purpose of such residential programmes or camps is advancement of religion, spirituality or yoga.

Circular No. 82/01/2019-GST, Dt. 01.01.2019 clarifies that services provided by Indian Institutes of Managements to their students- in all such long duration programs (one year or more) are exempt (w.e.f. 31.01.2018)

Circular No. 83/02/2019-GST, Dt. 01.01.2019 clarifies that the services provided by International Finance Corporation (IFC) and Asian Development Bank (ADB) are exempt from GST. The exemption will be available only to the services provided by ADB and IFC and not to any entity appointed by or working on behalf of ADB or IFC.

Circular No. 85/04/2019-GST, Dt. 01.01.2019 clarifies that that supply of food and beverages by an educational institution to its students, faculty and staff, where such supply is made by the educational institution itself, is exempt. But, supply by any person other than the educational institutions based on a contractual arrangement is not exempt.

Circular No. 86/05/2019-GST, Dt. 01.01.2019 clarifies that the services provided by a Business Facilitator (BF) or a Business Correspondent (BC) to a banking company must satisfy two conditions for avail the exemption under Sl. No. 39 of N. No. 12/2017- CT (R) Dt. 28.06.2017.

• The services should fall under the Heading 9971.
• The services must be with respect to accounts in a branch of the banking company located in a rural area.

Circular No. 100/19/2019-GST, Dt. 30.04.2019 clarifies that

• all the charges, including those for issue of seed certificates/tags by the Seed Certification Agencies of state/ central government to the seed producing organization/ companies are collected for the composite supply of seed testing and certification, which is exempt under N. No. 12/2017- CT(R) S. No. 47 (services by Central/State Governments by way of testing/certification relating to safety of consumers and public at large, required under any law).
• Supply of seed tags by the other departments/manufacturers to the State Government/Seed Certification Agencies is a supply of goods liable to tax.

Circular No. 101/20/2019-GST, Dt. 30.04.2019 clarifies that the upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable for long term lease (of 30 years, or more) of industrial plots or plots for development of infrastructure for financial business is exempt.

Circular No. 102/21/2019-GST, Dt. 28.06.2019 clarifies that any service fee, charge, or other similar levy by a lender in relation to extending deposits, loans, or advances does not qualify as 'interest' and is not exempt from GST.

Circular No. 109/28/2019-GST, Dt. 22.07.2019 clarifies that Supply of service by unincorporated body or a non- profit entity registered under any law to its own members by way of reimbursement of charges or share of contribution up to an amount of Rs. 7,500 per month per member for providing services and goods for the common use of its members in a housing society or a residential complex are exempt from GST. (w.e.f. 25.01.2018)

Circular No. 113/32/2019-GST, Dt. 11.10.2019 clarifies that,

• Leguminous vegetables, subjected to mere heat treatment for removing moisture, or for softening and puffing or removing the skin would be exempted.
• If leguminous vegetables branded and packed in a unit container or mixed with other ingredients such as salt and oil would not be exempted.
• Imported stores for use in Indian navy ships are entitled to exemption.
• In respect of goods imported on temporary basis, aircrafts, aircraft engines and other aircraft parts imported into India under a transaction covered by item 1(b) or 5(f) of Schedule II of the CGST Act, 2017 are exempted from IGST subject to the condition No. 102 of the N. No. 50/2017-Customs Dt. 30.06.2017.
• Rigs and ancillary items imported for oil or gas exploration and production taken on lease by the importer for use after import have also been exempted.
• All goods, vessels, ships (other than motor vehicles) imported under lease, by the importer for use after import, were also exempted subject to the condition No. 102 of the N. No. 50/2017-Customs Dt. 30.06.2017.

Circular No. 116/35/2019-GST, Dt. 11.10.2019 clarifies that GST is not leviable from Individual donors provide financial help or any other support in the form of donation or gift to institutions such as religious institutions, charitable organisations, schools, hospitals, orphanages, old age homes etc. when the following conditions are satisfied:

• the gift or donation is made to a charitable organization
• the payment has the character of gift or donation
• the purpose is philanthropic and not advertisement.

Circular No. 117/36/2019-GST, Dt. 11.10.2019 clarifies that the Maritime Institutes are educational institutions under GST Law and the courses conducted by them are exempt subject to meeting the conditions specified at Sl. No. 66 of the N. No. 12/ 2017- CT(R) Dt. 28.06.2017.

Circular No. 149/05/2021-GST, Dt. 17.06.2021 clarifies that Educational institutions as defined in the Entry 66 of N. No. 12/2017-CT(R) Dt., 28.06.2017, include aganwadi. Hence, serving of food to anganwadi shall also exempt even its funding from government grants or corporate donations.

Circular No. 150/06/2021-GST, Dt. 17.06.2021 clarifies that the annuity (deferred payments) paid for the construction of roads is not exempt.

Circular No. 151/07/2021-GST, Dt. 17.06.2021 clarifies that,

• Services provided by Central or State Boards including the boards such as National Board of Examination (NBE) by way of conduct of examination for the students, including conduct of entrance examination for admission to educational institution is exempt.
• Input services relating to admission to, or conduct of examination, such as online testing service, result publication, printing of notification for examination, admit card and questions papers etc, when provided to such Boards is also exempt.

Circular No. 153/09/2021-GST, Dt. 17.06.2021 clarifies that composite supply of milling wheat including fortification into flour or paddy into rice for a State Government for distribution under Public Distribution System (PDS) is eligible for exemption if the value of goods supplied in the composite supply does not exceed 25% of the total value of the composite supply.

Circular No. 154/10/2021-GST, Dt. 17.06.2021 clarifies that guaranteeing of loans by Central or State Government for their undertaking or Public Sector Undertakings (PSU) is exempt.

Circular No. 163/19/2021-GST, Dt. 06.10.2021 clarifies that,

• fresh fruits and nuts which are not frozen or dried in any manner are exempt
• Tamarind and other seeds falling under heading 1209 are exempt if supplied as seed for sowing. (w.e.f. 01.10.2021)
• Exemption available to Coconut, fresh or dried, whether or not shelled or peeled. But not available to Copra (dried flesh of coconut generally used for the extraction of coconut oil)

Circular No. 164/20/2021-GST, Dt. 06.10.2021 clarifies that

• Services provided by any institutions/ NGOs under the central scheme of “Scholarships for students with Disabilities” where total expenditure is borne by the Government is exempt from.
• Satellite launch services supplied by M/s New Space India Limited (NSIL) to international customers are considered 'Export of Service' and are zero-rated.
• Overloaded vehicles were allowed to ply on the national highways after payment of fees. Such overloading charges at toll plazas is exempt.
• Services by way of giving on hire (include renting) vehicles to a State Transport Undertaking or a local authority is exempt.

Circular No. 177/09/2022-TRU, Dt. 03.08.2022 clarifies that

• The amount or fee charged from prospective students for entrance or admission, or for issuance of eligibility certificate to them in the process of their entrance/admission as well as the fee charged for issuance of migration certificates by educational institutions to the leaving or ex-students is covered by exemption.
• Services associated with transit cargo both to and from Nepal and Bhutan, including the movement of empty containers returning from these countries are exempt.
• Pure services & composite supplies services are procured by Indian Army or any other Government for performing functions listed in the 11th and 12th schedule of the constitution are excempt.
• Location charges or preferential location charges (PLC) paid upfront in addition to the lease premium for long term lease of land constitute part of upfront amount charged for long term lease of land eligible for exemption.
• Additional fee collected in the form of higher toll charges from vehicles not having Fastag is essentially payment of toll for allowing access to roads or bridges is exempt.
• Services by way of In vitro fertilization (IVF) are also covered under the definition of health care services and it is exempt.
• Sale of land after some development such as levelling, laying down of drainage lines, water lines, electricity lines, etc. is also sale of land and it is neither a supply of goods nor a supply of services.
• Where the body corporate avails the passenger transport service for specific journeys or voyages and does not take vehicle on rent for any particular period of time, the service would fall under Heading 9964 and the body corporate shall not be liable to pay GST on the same under RCM.
• ‘Public transport’ only means that the transport should be open to public. It can be privately or publicly owned. Hence, exemption would apply to tickets purchased for transportation from one point to another irrespective of whether the ferry is owned or operated by a private sector enterprise or by a PSU/Government.

Circular No. 179/11/2022-GST, Dt. 03.08.2022 clarifies that Supply of treated sewage water is exempt (w.e.f. 18-07-2022)

Circular No. 234/28/2024-GST, Dt. 11.10.2024 clarifies that

• the supply of affiliation services provided by Central and State educational boards or Councils, or other similar bodies, by whatever name called to government schools i.e. schools established, owned or controlled by the Central Government, State Government, Union Territory, local authority, Governmental authority or Government entity is exempted (w.e.f. 10.10.24)
• the approved flying training courses conducted by Flying Training Organizations (FTOs) approved by Directorate General of Civil Aviation (DGCA) is exempt.
• import of services by an establishment of a foreign airlines company from a related person or any of its establishment outside India, when made without consideration is exempt (w.e.f. 10.10.2024)
• supply of services by way of providing metering equipment on rent, testing for meters/ transformers/capacitors etc., releasing electricity connection, shifting of meters/service lines, issuing duplicate bills etc., which are incidental or ancillary to the supply of transmission and distribution of electricity provided by transmission and distribution utilities to their consumers are exempted (w.e.f. 10.10.2024)

Circular No. 247/04/2025-GST, Dt. 14.02.2025 clarifies that

• An agriculturist supplying dried pepper is exempt.
•  An agriculturist supplying raisins is exempt.

Conclusion:

In simple, an exempt supply is a supply of goods or services that attracts a nil rate of tax or is specifically declared as exempt by the government. Understanding the provisions of Exempt Supply is crucial because it is a key factor for registration, tax collection and availing input tax credit.