Dhaval H. Patwa
Friends at the time of implementation of GST law. it was said that G.S.T. means Good and Simple Tax and it will be so Good and so Simple that a neighbour’s child can explain it well but in our day to day practice we are observing that being a professional person how difficult is to advice our clients about different provisions of GST law. One of such provisions is regarding an Exempt Supply. If a person dealing in only exempt goods or services, we can describe the GST law as Good & Simple Tax though it is not like so, but when a person makes exempt as well as taxable supply, one has to take care of some provisions which requires special attention while determining liability of such person making such type of supply.
Let’s discuss about how various provisions of CGST Act effects to a person who is making only exempt supply or exempt supply with taxable supply. It doesn’t matter whether the quantum of exempt supply in total supply is major or minor, but sometimes very negligible part of exempt supply can also incur very huge liability of tax, interest & penalty for concerned person. I have tried here to analyze some of the GST provisions related to exempt supply which needs to keep in mind while advising our clients.
As per section 2(47) of CGST Act 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.
Section 11(1) of CGST Act says that 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.
Notification No.02/2017 – Central Tax (Rate) for goods and Notification No. 12/2017 – Central Tax (Rate) both dtd.28.06.2017 for services have been issued by using power given under section 11 of CGST Act. So goods and services mentioned in this two notifications are exempt as per definition of exempt supply.
Nil rated supply is nowhere defined in GST law but looking to the above provision we can say that Nil rated supply means supply on which tax is charged at Nil rate without exemption Notification.
As per section 2(78) non taxable 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.
So alcoholic liquor for human consumption as per Section 9(1) of CGST Act and petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel as per Section 9(2) of CGST Act will be considered as non taxable supply.
Exempt Supply & Registration:
As per secion 23(1)(a) of 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 this Act or under the IGST Act shall not be liable to take registration but as per sec 22(1) of CGST Act, if aggregate turnover of a supplier exceeds specified threshold limit, he shall be liable to get registered.
Here it is important to understand definition of aggregate turnover which is provided in section 2(6) of CGST Act. As per the definition, aggregate turnover means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies , exports of goods or services or both and inter-state supplies of persons having the same Permanent Account Number, to be computed on all india basis but excludes central tax, state tax , union terittory tax, intergrated tax and cess. Hence as per the definition of aggregate turnover, aggregate turnover includes exempt supply and so a person who is dealing in taxable as well as exempt supply he has to include turnover of exempt supply while making calculation of total turnover for the purpose of threshold limit.
In the recent case of Shree Sawai Manoharlal Rathi (GUJ/GAAR/R/2020/10 dtd.19.05.2020), advance ruling authority of Gujarat has held that the applicant is required to aggregate the value of exempted interest income earned by way of extending deposits in PPF & Bank Saving accounts and loans and advances given to his family/friends along with the value of the taxable supply i.e. “Renting of immovable property” for the purpose of calculating the threshold limit of Rs.20.00 Lakh for obtaining registration under GST law. How good it is…….
Exempt Supply & Compulsory Liability of Registration U/S 24 :
As per section 24 (iii) of CGST Act, a person who is required to pay tax under reverse charge shall be required to get registered under this act. By virtue of this section and advance ruling given by different advance ruling authority of different states, though a person engaged in exclusively making exempt supply, if he is liable to pay tax under RCM he is compulsorily liable to take registration. Can we say it really good….?
Exempt Supply & Composition Tax :
As per section 10(1) of CGST Act, a registered person, whose aggregate turnover in the preceding financial year did not exceed prescribed limit may opt to pay tax under composition levy. Here also a registered person has to include value of exempt supply (which is covered by aggregate turnover) while determinig prescribed threshold limit to opt in composition levy. Same way while opting out from the composition scheme due to increased turnover to the specified limit, one has to include exempt supply in taxable turnover to arrive at limit of aggregate turnover to opt out from the scheme.
Further Section 10(1) deals with supply of goods but second proviso of this section which has been inserted w.e.f. 01.02.19, provides that a person who opts to pay tax under composition levy may supply services (except services referred to in clause (b) of paragraph 6 of schedule II) of value upto 10 percent of turnover in a state or union terittory in the preceding financial year or five lakh rupees, which ever is higher. In this value of turnover in a state or union territory, the value of exempt supply of services provided by way of extending deposites, loans and advances in so far as the consideration is represented by way of interest or discount is specifically excluded by giving explanation under this section. Hence exempt supply of such services should not be included while determining value of turnover in a state or union territory for calculating 10 percent of turnover. How simple it is….
As per Section 10 of CGST Act, in case of manufacture GST @ 1% (0.5%+0.5%) and in case of restaurant GST @ 5% (2.5%+2.5%) is payable on turnover in a state or union territory. So tax is payable even on exempted goods also. But w.e.f. 01.01.2018, in case of traders GST @ 1%(0.5%+ 0.5%) is payable only on ‘turnover of taxable supplies. Hence upto 31.12.2017 traders were liable to pay tax on turnover within the state which includes exempted goods while manufacturers are still liable to pay tax on exempted goods. What we have to say…..Good or Simple?
Exempt Supply & ITC :
Under VAT Act, input tax credit is available only when tax is payable on output. If outward supply is not taxable or exempt from tax, ITC of input is not available. Same principle applies in GST also.
Section 17(2) of CGST Act provides that “where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero rated supplies under this Act or under IGST Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as attributable to the said taxable supplies including zero rated supplies”
So when some supplies are taxable and some are exempt the taxable person can take only proportionate input tax credit for which detailed calculation has been prescribed in rule 42 of CGST rules. This principle applies to input goods, input services and capital goods as provided in section 17 of CGST Act.
For the purpose of reversal of ITC, Section 17(3) of CGST Act provides that value of Exempt Supply shall include –
supply where GST is payable on reverse charge basis
transaction in securities
sale of land
sale of building ( except costruction of complex where supply is made before obtaining completion certificate )
For the purpose of determining the value of Exempt Supply as per above section explanation of rule 45 of CGST & SGST Act provides that –
the value of land and building shall be taken as the same as adopted for the purpose of paying stampt duty and
the value of security shall be taken as one percent of the sale value of such security.
Further Explanation 1 of rule 43(5)(b) says that for the purpose of rule 42 it is clarified that the aggregate value of exempt supplies shall exclude –
the value of services by way of accepting deposits, extending loans or advances in so far as the interest or discount, except in case of banking company or a financial institution including a non banking financial company, engaged in supplying services by way of accepting deposits, extending loans and advances.
In addition to above one has to keep in mind the following issues mainly which we are finding in our routine practice :
Renting of residential property will also be considered as exempt supply as per Sr. No.12 of Notification No.12/2017 dtd.28.06.2017 so rental income on residential property should be included while calculating value of Exempt Supply for the purpose of reversal of ITC.
Explanation of Section 17(3) provides that for the purpose of Section 17(2) “value of exempt supply” shall not include the value of activities or transaction specified in Schedule III, except those specified in paragraph 5 of the said schedule. Hence transaction of supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without entering into India which is popularly known as High Seas sales does not form part of exempt supply and no need to reverse ITC of that part as it is neither supply of goods not supply of services as per Schedule III.
As we have seen above, as per section 17(2) a taxable person can claim ITC of taxable supply which includes zero rated supply so zero rated supply would not lead to reversal of ITC and hence no need to reverse ITC on account of zero rated supply.
So while calculating the amount of exempt supply for the purpose of reversal of ITC attributable to exempt supply one should keep in mind above stated all aspects otherwise huge burden of tax, interest & penalty may arise during the course of adjudication. How simple it is……
Exempt Supply & Invoice :
A registered taxable person supplying exempted goods or services or both have to issue bill of supply instead of tax invoice as per the provision of section 31(3)(c) of CGST Act. But when a registered person supplying taxable as well as exempt goods or services or both to an unregistered person he can issue single invoice cum bill of supply as per rule 46A of CGST & SGST rules inserted w.e.f 13/10/17. So when supply of taxable as well as exempt goods or services or both have been made to registered person two different invoices (bill of supply for exempted goods or services and tax invoice for taxable goods or services) should be issued. It’s really good…..?
Composite Supply includes Exempt Supply :
As per section 2(30) of CGST Act, ‘composite supply’ means a supply made by a taxable person to a recipient comprising of two or more taxable supplies of goods or services or both, or any combination thereof which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.
So when two or more supplies are –
both are taxable and
one of which is a principal supply
the tax rate would be applicable which is applicable to principal taxable supply but when one supply is exempt supply and the another supply is taxable supply and both of them are naturally bundled with each other then whether such supply will be considered as composite supply ? And what will be treatment to this supply as it contains exempt supply ?
In the case of Columbia Asia Hospitals Pvt. Ltd. (KAR ADRG 26/2018 dtd.13.11.2018) karnataka advance ruling authority has held that –
The two or more supplies of goods or services or both which are naturally bundled in which principal supply is exempt and others are taxable can be treated as a composite supply of the principal supply if such principal supply is not a non – taxable supply as per section 2(78) of the CGST Act and such composite supply with the principal supply being exempt supply could be treated as an exempt composite supply.
If two or more supplies contains exempt supply then the registered person can claim credit of input tax only on for such taxes paid on the inputs, input services and capital goods which are attributable to the supplies of goods or services which are taxable under the provisions of CGST Act and not attributable to exempt supplies of goods or services under the CGST Act.
So when two or more supplies are naturally bundled and out of them principal supply is exempt and the other supply is taxable then whole supply will be considered as exempt composite supply and proportionate credit should be reversed which is attributable to exempt supplies. How simple it is…..
Mixed Supply includes Exempt Supply :
As per section 2(74) of CGST Act, “mixed supply” means two or more individual supplies of goods or services or any combination there of , made in conjunction with each other by a taxable person for a single price where such supply does not constitutes a composite supply.
Section 8(b) of CGST Act provides that a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax. Hence section itself says that when two or more individual supplies which are mixed supply in nature, the rate of tax applies of that particular supply which attracts the highest rate of tax and therefore, when two or more individual supplies contains exempt supply, the highest rate of tax applicable to the particular supply will be applicable to exempt supply also. Is it really good…?
Friends at present we are all passing through pandemic situation of COVID-19 and it is challengable for us to remain untouched from corona virus. Doctors are of the opinion that if a patient who is suffering only from corona virus, it is easier to cure such patient but if a patient is suffering from corona with multiple diseases, it is challenging task to treat a patient. In the same way, after looking above provisions, we can say that if a person who is dealing in exempt as well as taxable supplies, it is challengable for us to treat each transaction of such person where he is not aware about such provisions and in that sense we can not say G.S.T as Good & Simple Tax but we can say G.S.T. means God Save the Tax payer.