Exempt Supplies and Nil-Rated, Non-GST Supplies

Understand Exempt Supplies and Nil-Rated, Non-GST Supplies

Key rules to remember

Exempt supply (section 2(47) CGST)

Exempt supply = nil-rated supply + wholly exempt supply (section 11 CGST / section 6 IGST) + non-taxable supply

Non-taxable supply is expressly included. Zero-rated supply is not part of exempt supply.

Non-taxable supply (section 2(78) CGST)

Supply not leviable to tax under the CGST Act or the IGST Act

It differs from a wholly exempt supply, which is leviable but exempted by notification.

ITC restriction (section 17(2))

Eligible ITC on common inputs = credit attributable to taxable supplies (including zero-rated supplies)

Credit on inputs used exclusively for exempt supplies is not available.

Rule 42 common credit reversal (inputs and input services)

Reversal = Common credit × (Value of exempt supplies ÷ Total turnover in the State/UT of the registered person for the period)

Common credit means total ITC less exclusive taxable credit, exclusive exempt credit, non-business credit and blocked credit. Value of exempt supplies is as defined in the Explanation to section 17, which excludes supplies on which the recipient pays tax under reverse charge. The denominator is total turnover in the State/UT, after the exclusions specified in Rule 42 and the Explanation to section 17, not 'aggregate turnover' under section 2(6). The reversal is worked provisionally each month and finalised as an annual computation on the annual common credit and annual turnover, with interest on any shortfall.

Rule 43 capital goods

Monthly credit Ta = ITC on the capital goods ÷ 60. Exempt portion Te = Ta × (Exempt turnover ÷ Total turnover of the tax period). Te is added to the output tax liability of the month, which reverses that part of the credit.

Rule 43 applies to capital goods used or intended to be used partly for exempt supplies and partly for taxable supplies (or non-business use). The 60 months reflect a five-year life. The ratio is exempt turnover to total turnover of the tax period. Capital goods used exclusively for exempt supplies get no credit.

How to solve Exempt Supplies and Nil-Rated, Non-GST Supplies questions

1. 1List every supply in the facts and tag each as taxable, zero-rated, nil-rated, wholly exempt or non-taxable.
2. 2Check the source: a 0% entry in the rate schedule means nil-rated; a section 11 or section 6 IGST notification means wholly exempt; a supply outside the levy, such as alcohol for human consumption or petrol, is non-taxable.
3. 3Apply section 2(47): put nil-rated, wholly exempt and non-taxable supplies together as exempt supplies. Keep exports and SEZ supplies out of this group.
4. 4Group the inputs: used only for taxable or zero-rated supplies (full ITC), used only for exempt supplies (no ITC), blocked under section 17(5), non-business use, and common use.
5. 5Compute common credit and the ratio. The numerator is the value of exempt supplies as defined in the Explanation to section 17 (it includes securities, land and, subject to para 5(b) of Schedule II, building, and excludes supplies on which the recipient pays tax under reverse charge). The denominator is the total turnover in the State/UT of the registered person for the period, as per Rule 42 and the Explanation to section 17.
6. 6Reverse common credit × ratio under Rule 42. For capital goods, take 1/60 of the ITC per month (Ta) under Rule 43, find its exempt portion Te using the ratio of exempt turnover to total turnover of the tax period, and add Te to the output tax liability of the month.
7. 7State the conclusion: eligible ITC, amount reversed, and that it is adjusted in the return, with annual adjustment and interest if reversed less than due.

Quickest way: Three-column tagging and ratio

Common mistakes in Exempt Supplies and Nil-Rated, Non-GST Supplies

• Treating non-taxable supply as outside the reversal rule because it is 'not under GST'.

  Students think non-GST means no GST consequence at all.

  Fix: Section 2(47) includes non-taxable supply in exempt supply. ITC on inputs used for it is restricted under section 17(2).

• Treating exports or SEZ supplies as exempt and reversing ITC.

  Both carry no tax on the invoice, so they look similar.

  Fix: These are zero-rated and taxable. ITC is allowed, and the tax or refund route applies.

• Applying the exempt turnover ratio to total ITC instead of only common credit.

  Students rush to use the formula without separating the credit.

  Fix: First remove exclusive taxable, exclusive exempt, blocked and non-business credit. Apply the ratio only to the common balance.

• Saying nil-rated and wholly exempt are the same thing.

  Both result in no tax being paid, and the ITC result is the same.

  Fix: Nil-rated means a 0% rate is prescribed. Wholly exempt means leviable but exempted by notification under section 11. State the difference and then the common ITC effect.

• Getting the value of exempt supply wrong by ignoring the Explanation to section 17, for example leaving out sale of land or securities, or counting reverse charge supplies.

  Students look only at supplies listed as exempt in notifications.

  Fix: Read the Explanation to section 17. Include transactions in securities, sale of land and, subject to para 5(b) of Schedule II, sale of building. Exclude supplies on which the recipient pays tax under reverse charge.

• Working Rule 43 with a fresh monthly turnover ratio or forgetting to add the exempt portion to the output tax liability.

  Students read 'spread over 60 months' as a month-by-month ratio exercise.

  Fix: Take 1/60 of the capital goods ITC as Ta each month, apply the exempt-to-total turnover ratio of the tax period to find Te, and add Te to the output tax liability of the month.

Worked examples