GST Exemption - Brief Understanding & Common Errors

It is essential for the government to issue certain exemptions and concessions considering the need of the economy and public policy for supporting certain initiatives and tax some highly to make up the revenues. Tax exemptions and concessions have been used as an instrument of fiscal policy to stimulate the economic growth of the Country.

The supplier of good or service or both (including person liable to pay GST under reverse charge) would be interested to understand to know the availability of any exemption. While examining the levy of GST, the interpretation beneficial to the assessee would be preferred. However, when the assessee wishes to avail the benefit of any exemption notification, it is the opposite i.e. the benefit would be towards revenue. Therefore, any person who is intending to avail exemption should ensure that all the conditions specified in the respective notification are substantially complied as held in the case of CCE v Hari Chand Shri Gopal 2010 (260) ELT 3 (SC). Otherwise the exemption may be denied resulting in payment of GST out of pocket expenses possibly without any credit (as it stands today) added with interest and penalties if applicable.

The recipient/ consumer of the goods or service would also require understanding the taxability or exemption for the specified services /service providers so as to compute their cost impact. The cost of exempted goods or services is the amount of taxes embedded which are unable to be passed on to the next stage.

Object of Exemption:

It is well-established principal in the tax law that there has be a good deal of flexibility in the incidence of taxation and the government would be empowered to determine the incidence with the wide degree of latitude so long as there is no discrimination or unreasonable disparity in the treatment. The exemptions are given considering numerous factors like economic conditions, demand and supply, imports and exports requirement, existing effective rates, cultural importance and customs of the people, essentials and habits of the people, trade representations and of course political agenda and other influencing factors.

Section 11 of the Central Goods and Service Tax grants power to the Government to issue exemption notifications if the Government is satisfied that it is necessary in the public interest to grant such exemption. Thus, exemptions granted without having public interest ultra virus the Sec 11 and could be challenged before the court of law.

Public interest cannot be defined but, it could be understood as something done considering the benefit of all / general public rather than own/individual selfish interest. Public interest is something which is beyond own goals and for general welfare.

However, notification issued under the given powers pre-supposes that it was issued in the public interest which is sine qua non (an essential condition; a thing that is absolutely necessary) for the purpose. Therefore, it is not necessary that wherever a notification is issued, the government is duty bound to disclose the exact nature of the public interest to make it operative. This view was upheld in case of Bombay Conductors & Electricals Vs GOI [1986 (23) ELT 87 (Del).

Absolute Vs Conditional Exemption:

The exemption Notifications would be issued based on the recommendations of the GST Council. The exemptions notified under the law are of two types namely;

 a. Absolute exemption where no conditions are to be fulfilled.

b. Conditional Exemptions where the exemptions come with satisfaction of certain conditions prescribed in the interest of protecting the revenue.

 Further Government has the power to issue special orders in exceptional circumstances to exempt certain taxable goods or services from payment of GST.

Explanation to Section 11 specifically provides that where an exemption in respect of any goods or services or both has been granted absolutely, the registered person supplying such goods or services or both cannot collect the tax on such supply of goods or services or both.

Hence, the law is clear that where there is an unconditional exemption there would be no option to pay GST. This has been borrowed from the Central Excise regime which was a fairly settled law. One, therefore, cannot choose to pay GST due to the fact that the receiver/ client is eligible for credit.

In Service Tax though the law was more than 22 years old, can be considered as developed and somewhat clear, the option to pay Service Tax in case of doubt was retained. Now if someone errs in favour of revenue he would be punished by possibly denying the credit!! This may be challenged in the Courts and maybe unfair for the tax compliant.

This also means that where there is a doubt it would certainly NOT be advisable to err towards revenue or not claiming of the unconditional exemption. 

Claim of Exemption - Common Errors to Guard Against

The common errors leading to claim of exemption which could later lead to disputes and demands could be as under:

1. Not understanding the trade and the alternative uses/ markets
2. Professionals accepting information given by those in trade blindly
3. Dried products being equated to fresh; Chilled being equated to frozen; Unit containers can mean plastic bags, sacks, tins etc.; Registered Brand Name- Maybe registered by anyone. If withdrawn only after withdrawal accorded.
4. Not reading fully the condition for applicability of tax.
5. Following what others are doing. (They may also not have taken a considered view)
6. Taking oral advice from consultants or revenue officers without independent confirmation. Written opinions or at least email confirmation required.
7. Depending on the clarifications given in GST sahatatha kendras, seminars by experts/ senior GST Officers without independent confirmation.
8. Fully relying on tweets, press releases or newspaper advertisement released by State/ Central Government which may at times not be in line with the GST tariff or provisions.
9. Not understanding the difference between seed quality (used for sowing) and other seeds for general consumption.
10. Using the condition for one heading for another.
11. Using logic to justify and claim exemption.
12. Billing in incorrect nomenclature which is at variance with the actual product being supplied.
13. Not relying on the judicial pronouncements in similar contentions.
14. Not seeking professional for a legal opinion on the eligibility and related matters.
15. And many more as this list is just starting to be prepared…

This article is adapted from the Book Classification & Exemption in GST to be published in August 2017 authored by CA Madhukar N Hiregange, CA Vasant Bhat & CA Nagendra Hegde.