Indirect Tax Laws · Exemptions from GST

Exemption Based Practical Questions and Case Laws under GST

Updated 5 October 2026 · Fact-checked

Exemption-based questions test whether a supply is exempt under a notification, and what happens when exempt and taxable elements are bundled. Read the entry word by word, check each condition, then classify the supply as composite or mixed. A composite supply follows its principal supply; a mixed supply follows the highest-rate item. Then state the ITC effect.

Understand Exemption Based Practical Questions and Case Laws

An exempt supply is a supply on which no GST is payable, because the Government has exempted it by notification or the law itself treats it as exempt. Exemption notifications list a supply in an entry. Each entry has a description, sometimes a condition, and sometimes a limit on value or on who the recipient is. A supply gets the exemption only if it fits the entry fully.

Exam questions rarely ask you to recite an entry. They give you a scenario and ask whether tax is payable. The marks come from matching the facts to the words of the entry. A small change in facts, such as who the recipient is, what the service is called or whether a condition is met, can change the answer.

The second layer is bundling. First identify the supply and check whether a specific notification entry covers the whole bundle. If one does, that entry decides the treatment. If none does, apply Section 8. Ask whether the bundle is a composite supply (naturally bundled, with one principal supply) or a mixed supply (supplied together for a single price, but not naturally bundled). In a composite supply the whole bundle is taxed as the principal supply. If the principal supply is exempt, the whole bundle is exempt. In a mixed supply the whole bundle is taxed as the supply attracting the highest rate of tax.

The third layer is the consequence. Input tax credit is not available on inputs and input services used for exempt supplies. Where inputs or input services are common to taxable and exempt supplies, the credit is apportioned and the part attributable to exempt supplies is reversed proportionately under Section 17(2) and Rules 42 and 43. Zero-rated supplies such as exports are different and do not trigger this restriction.

Exempt supplies are included in aggregate turnover (Section 2(6)). But a person engaged exclusively in wholly exempt supplies is not liable to register under Section 23(1)(a). Registration may still be needed if the person also makes taxable supplies above the threshold or falls under a compulsory registration category.

Courts and advance rulings add interpretation. The consistent approach is that an exemption is read strictly and the person claiming it must prove they fit it, while the words of the entry are read in their ordinary meaning and in their context. An advance ruling binds only the applicant and the jurisdictional officer on the question it decided. Use rulings to understand how an entry is read, but answer from the notification and the Act.

Key rules to remember

Composite supply: Tax treatment of the whole bundle = treatment of the principal supply; Applies under Section 8 where the supplies are naturally bundled and supplied together in the ordinary course of business, and no specific notification entry covers the whole bundle. If the principal supply is exempt, the whole bundle is exempt. If it is taxable, the whole bundle is taxed at the rate applicable to that principal supply.
Mixed supply: Tax rate on the whole bundle = rate of the item attracting the highest rate of tax; Applies under Section 8 where two or more individual supplies are made together for a single price and are not a composite supply, and no specific notification entry covers the whole bundle.
Exemption test: Exempt only if description matches AND every condition is met AND any limit is not crossed; Failing any one part means the exemption is lost and the supply is taxable at the rate applicable to that supply.
ITC on exempt supplies: No ITC on inputs and input services used for exempt supplies; common credit is apportioned and the exempt share reversed (Section 17(2), Rules 42 and 43); State this consequence in every answer where the supplier makes an exempt supply, unless the question is only about tax on the outward supply. Credit on inputs used exclusively for taxable supplies is not affected.
Binding effect of advance ruling: Binds the applicant and the jurisdictional officer, for the question and the supply covered by the ruling; It is not a general precedent for other taxpayers. Use it only to show how an entry has been read.

How to solve Exemption Based Practical Questions and Case Laws questions

Use this order for any exemption scenario. It keeps your answer in provision, facts and conclusion form.

1Identify the supply. Say whether it is goods or services, who the supplier and recipient are, and what is actually being provided.
2Find the entry. Pick the notification entry that fits the supply: goods or services, and the matching heading. If the question gives the text, quote its key words.
3Break the entry into parts: description, condition, limit on value, and type of recipient or supplier. Tick each part against the facts.
4Check for bundling. First see whether a specific entry covers the whole bundle. If not, decide under Section 8 whether it is composite or mixed, and name the principal supply if it is composite.
5Apply the bundle rule. For composite, follow the principal supply. For mixed, apply the highest rate. If the principal supply is exempt, the whole composite supply is exempt.
6State the consequence: tax payable or nil, any ITC restriction or proportionate reversal, and any registration or turnover point the facts raise.
7Write the conclusion in one clear line, with the reason. Do not leave the answer as a list of rules.

Quickest way: Four-line exemption check

When to use it: Use it for short MCQs and for the first minute of a descriptive question when time is tight.

Underline the supply, the recipient and any amount or condition in the facts.
Ask: does the entry's wording cover this exact supply? If a condition or limit is missed, the answer is taxable.
If there is a bundle, ask: does a specific entry cover it? If not, is it a natural bundle with one main supply (composite) or a single price for unrelated items (mixed)?
Answer in this form: exempt or taxable, at what rate, and what happens to ITC.

Common mistakes in Exemption Based Practical Questions and Case Laws

Treating a supply as exempt because it looks similar to an exempt one.
Students match the general nature of the supply and skip the wording and conditions of the entry.
Fix: Quote the entry's key words and tick each condition against the facts. If one is missing, say the exemption is not available.
Calling a bundle a mixed supply when the items are naturally bundled.
Students see a single price and stop, without testing whether the items are bundled in the ordinary course of business.
Fix: Ask first whether the items are naturally bundled with one principal supply. Only if not, treat it as mixed.
Applying the highest rate to a composite supply.
The highest-rate rule belongs to mixed supply, and the two rules get swapped.
Fix: Composite follows the principal supply. Mixed follows the highest rate. Write the definition before applying the rule.
Forgetting the ITC consequence of an exempt supply, or applying it to the whole business.
Students stop once they have said no tax is payable on the outward supply, or they assume all credit is blocked when only part relates to exempt supplies.
Fix: Add one line: credit on inputs and input services used for the exempt supply is not available. For common inputs, the credit is apportioned and the exempt share is reversed under Section 17(2) and Rules 42 and 43.
Treating an advance ruling as a rule for all taxpayers.
A ruling sounds authoritative, so students quote it as a general law.
Fix: State that the ruling binds only the applicant and the jurisdictional officer, and answer from the notification and the Act.
Ignoring the value limit or the type of recipient in the entry.
Students read the headline of the entry and miss the limit or recipient in the detail.
Fix: Circle every number and every named person in the entry text. Compare each with the facts before concluding.

Worked examples

Example 1

Assume for this question that a notification exempts service X, and service Y is taxable at 18%. No specific entry covers the package as a whole. Medha Services supplies a package to a customer in which service Y is provided only as a natural part of service X, and the package is sold together in the ordinary course of business. The charges are ₹1,00,000 for X and ₹20,000 for Y. Advise on the GST on the package and on credit.

Show the solution

The two services are naturally bundled and supplied together in the ordinary course of business. This is a composite supply under Section 8.
The principal supply is service X, because it is the one the customer actually wants. Y is only a part of it.
A composite supply is treated as the principal supply. X is exempt, so the whole package is exempt.
The value of the package is ₹1,00,000 + ₹20,000 = ₹1,20,000. No GST is charged on any part of it.
As the package is exempt, credit on inputs and input services used for it is not available. If some inputs are common to this and Medha's taxable supplies, the credit is apportioned and the exempt share is reversed under Section 17(2) and Rules 42 and 43.

Answer: The package is a composite supply with X as the principal supply. The entire ₹1,20,000 is exempt, so no GST is payable. Credit attributable to this exempt package is not available; common credit is apportioned and the exempt share reversed.

Example 2

Assume for this question that item A is exempt, item B is taxable at 5% and item C is taxable at 18%. Kavya Traders sells a gift hamper of A, B and C to a customer for a single price of ₹3,000. The items are not naturally bundled and are not sold in this form in the ordinary course of business. No specific entry covers the hamper. Determine the GST on the hamper. (Individual values: A ₹500, B ₹1,000, C ₹1,500.)

Show the solution

The items are supplied together for a single price and are not naturally bundled. The hamper is a mixed supply, not a composite supply.
A mixed supply is taxed at the rate of the item that attracts the highest rate of tax. Here the rates are nil (exempt), 5% and 18%, so the highest is 18%.
The whole value of the hamper is taxed at 18%, including the exempt item A. The value is ₹3,000.
GST = ₹3,000 × 18% = ₹540. This is split equally into CGST and SGST of ₹270 each if the supply is intra-State.
The invoice total is ₹3,000 + ₹540 = ₹3,540.

Answer: The hamper is a mixed supply taxed at 18%, the highest rate among its items. GST is ₹540 on ₹3,000, so the customer pays ₹3,540. The exempt item A gets no separate relief.

Exam tips

In every scenario, write the name of the supply type first (composite or mixed) and its definition in one line, then apply the rule. The marks follow the reasoning.
Read each number and each named person in the facts. Questions often change the value, the recipient or one condition so that the exemption fails.
Where a question gives you the text of an entry or notification, use its words in your answer. Where it does not, state the rule in plain words and avoid quoting section or entry numbers you are unsure of.
Always add the ITC consequence for an exempt outward supply, and remember that common credit is reversed proportionately. It is a quick mark that many students skip.
For MCQs with no negative marking, eliminate options that treat a composite supply as a mixed one, then check the value limits in the facts.

Practice questions from Exemptions from GST

Exemption Based Practical Questions and Case Laws in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CMA FinalBenchmarking Applications and Practical Questions

Exemption Based Practical Questions and Case Laws: frequently asked questions

How do I treat a composite supply that has an exempt service in it?

First identify the supply and check whether a specific notification entry covers the whole bundle; if it does, that entry takes precedence. Otherwise apply Section 8 and find the principal supply. If the principal supply is exempt, the whole composite supply is exempt. If it is taxable, the whole bundle is taxed at the rate applicable to that principal supply.

What is the tax rate on a mixed supply that includes an exempt item?

Where no specific entry covers the bundle, a mixed supply is taxed at the rate of the item that attracts the highest rate of tax. The exempt item is taxed along with the rest at that highest rate. It does not get separate relief inside the bundle.

Can I rely on an advance ruling in the exam to prove an exemption?

Use it only to show how an entry has been read. An advance ruling binds the applicant and the jurisdictional officer only. Base the final conclusion on the notification and the Act.

Do I need to remember notification entry numbers for these questions?

Learn the major notifications and the headings under them, such as the ones for services and goods. In the answer, describe the exemption in words and the conditions clearly. State an entry number only when you are sure of it or when the question supplies it.