Indirect Tax Laws · Supply under GST

Schedules II and III under GST: Goods or Services and Neither

Updated 5 October 2026 · Fact-checked

Schedule II tells you whether a transaction is a supply of goods or a supply of services, for example a works contract is a service and transfer of title in goods is a supply of goods. Schedule III lists activities that are neither, such as sale of land. To solve a question, find the activity, match it to a Schedule entry, then apply the consequences.

Understand Schedules II and III: Goods or Services and Neither

GST is levied on supply. But some transactions are not obviously goods or services. A builder constructs a flat. A company leases a machine. A person transfers a plot of land. You need a rule to decide the nature of each, because the nature drives the rate, time of supply and place of supply.

Schedule II gives that rule. It lists activities and says each is to be treated either as a supply of goods or a supply of services. It covers transfer of title in goods (supply of goods), transfer of right in goods without transfer of title (supply of services, for example leasing or hiring), renting and leasing of immovable property, construction of a complex or building (with a stated condition), temporary transfer or permitting use of intellectual property, development or supply of software, works contracts, and supply of food or drink as part of a service. It also deals with business assets. Under para 4(a), goods forming part of the assets of a business that are transferred or disposed of, by or under the direction of the person carrying on the business, so that they no longer form part of those assets, are a supply of goods. Under para 4(b), goods held or used for the business that are put to private use, or used or made available to any person for use for a non-business purpose, by or under that direction, are a supply of services. Both apply whether or not there is consideration. It also covers certain cases of transactions between a principal and an agent.

Schedule III works the opposite way. Activities listed there are neither a supply of goods nor a supply of services. So no GST applies, whatever the value. The main entries are: services by an employee to the employer in the course of employment; services by a court or tribunal; functions of members of Parliament, State Legislatures, Panchayats, Municipalities and other local authorities; duties of constitutional office holders; actionable claims other than lottery, betting and gambling; sale of land; sale of a building, subject to Schedule II para 5(b) (so it is outside GST only where the entire consideration is received after the completion certificate or first occupation, whichever is earlier); and funeral, burial, crematorium or mortuary services including transportation of the deceased. Three more entries were added in 2019: supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering India; high sea sales; and supply of warehoused goods to any person before clearance for home consumption. Check the current text of the Schedule before the exam for the exact list.

The link with Section 7 matters. Section 7 says Schedule III activities are outside supply, and Schedule II decides the character of what remains. A Schedule III activity is not a supply at all, so it is not an exempt supply in the ordinary sense. But for input tax credit, Section 17(3) provides that the value of exempt supply includes the value of sale of land and, subject to para 5(b) of Schedule II, sale of building. So if you make such sales and also use common inputs, the credit reversal rules (Rules 42 and 43) can apply to a limited extent. Do not write that a Schedule III activity has no ITC consequence. Check the current text of Section 17(3) before the exam.

Key rules to remember

Works contract: Works contract (as defined in the Act, relating to immovable property) = supply of services (Schedule II para 6(a)); Applies only to immovable property. A contract involving movable property is not a works contract under GST and is decided on its facts.
Transfer of title in goods: Transfer of title in goods = supply of goods (Schedule II para 1(a)); transfer of right in goods without transfer of title = supply of services (para 1(b)); transfer of title under an agreement that property passes at a future date on payment of full consideration = supply of goods (para 1(c)); Leasing or hiring of goods without transfer of title is a service under para 1(b). A transfer of title under an agreement that says property will pass at a future date on payment of full consideration is a supply of goods under para 1(c).
Land and building: Lease, tenancy, licence to occupy land = supply of services; sale of land = neither (Schedule III); Renting is a service. Outright sale of land is outside GST.
Construction of building: Construction of a complex, building or civil structure intended for sale = supply of services (Schedule II para 5(b)), except where the entire consideration is received after the completion certificate or first occupation, whichever is earlier; If the entire consideration is received after the certificate or first occupation, it falls under the Schedule III building entry and is not a supply. If any consideration is received before that date, para 5(b) applies and the supply is a service. The consideration received after the completion certificate (where required) or first occupation, whichever is earlier, is excluded from the value of that service. The deduction for the value of land is not part of Schedule II. It comes from the valuation rule (and the related rate notification), so apply it separately when you compute the value. Check current text.
Temporary transfer of IP and software: Temporary transfer or permitting use of IPR = supply of services; development, design, programming, customisation, adaptation, upgradation or enhancement of IT software = supply of services; Learn both entries as services.
Business assets: Goods forming part of business assets, transferred or disposed of by or under the direction of the person carrying on the business so that they no longer form part of those assets, whether or not for a consideration = supply of goods (Schedule II para 4(a)); goods held or used for the business that are put to private use, or used or made available to any person for use for a non-business purpose, by or under that direction, whether or not for a consideration = supply of services (para 4(b)); Para 4(a) is about goods leaving the business assets and applies even when the transfer is made for no consideration. Para 4(b) is about goods that stay in the business but are put to private or non-business use, and it is a supply of services.
Composite supply of works contract: Composite supply that is a works contract = a supply of services (Schedule II para 6(a)); any other composite supply is classified by its principal supply under Section 8; A composite supply of goods and services that is not a works contract is a service only if the principal supply is a service, and goods if the principal supply is goods.
Food and drink: Supply (by way of or as part of any service) of goods, being food or any other article for human consumption or any drink, for cash, deferred payment or other consideration = supply of service (Schedule II para 6(b)); Restaurant and catering are services.
Schedule III core list: Employee services in employment; court or tribunal services; legislators and local authority functions; actionable claims (other than lottery, betting, gambling); sale of land; sale of building (subject to Schedule II para 5(b)); funeral services = neither goods nor services; Memorise the headings. In the exam, quote the entry and conclude no GST. Remember that sale of land and building count in value of exempt supply for ITC reversal under Section 17(3).

How to solve Schedules II and III: Goods or Services and Neither questions

Use this order for any question on classification of a transaction under the two Schedules. It protects marks even when the facts are long.

1Identify the activity and the parties. Write what is actually being supplied, and whether it involves goods, services, land or a building.
2Check Schedule III first. If the activity matches an entry, such as sale of land or services by an employee to employer, conclude it is neither goods nor services and stop.
3Check the conditions. For employee services, check it is in the course of employment. For building sale, check the completion certificate or first occupation date against receipt of consideration.
4If Schedule III does not apply, check Schedule II. Match the activity to an entry and note whether it is goods or services.
5Check whether it is a composite supply or works contract. A works contract relating to immovable property is a service. Otherwise apply the principal supply test.
6State the conclusion in the form: provision, facts, conclusion. Name the entry and its character.
7Mention the consequences if the question asks: GST liability, time of supply, place of supply, and ITC treatment.

Quickest way: Three-question filter

When to use it: Use this for MCQs and short scenario questions where you have a minute or two.

Is it land, a building whose entire consideration comes after the completion certificate or first occupation, a court, a legislator, an employee in employment, an actionable claim or a funeral? If yes, answer neither, no GST.
Is it a lease or licence of land or building, a works contract, IP use, software development, hiring of goods without transfer of title, business goods put to private use or made available for non-business use, or food as part of a service? If yes, answer service.
Is it a transfer of title in goods, or business assets transferred or disposed of so that they no longer form part of the business assets? If yes, answer goods.
For a building under construction, ask one question: was any consideration received before the completion certificate or first occupation? If yes, para 5(b) applies and the supply is a service. The consideration received after the certificate or first occupation is excluded from its value. Any deduction for the value of land comes from the valuation rule, not from Schedule II.

Common mistakes in Schedules II and III: Goods or Services and Neither

Treating every land transaction as outside GST.
Students remember that sale of land is in Schedule III and apply it to all land dealings.
Fix: Only outright sale of land is outside GST. Lease, tenancy, licence or easement over land is a supply of service under Schedule II.
Calling a completed building sale taxable in all cases, or outside GST in all cases.
Students remember that construction services are taxable and forget the timing condition, or they remember the Schedule III entry and forget the Schedule II exception.
Fix: Look at when consideration was received. If the entire consideration is received after the completion certificate or first occupation, it is Schedule III. If any consideration is received before, Schedule II para 5(b) applies and the supply is a service. The consideration received after the certificate or first occupation, whichever is earlier, is excluded from the value of that service. Any deduction for the value of land comes from the valuation rule, not from Schedule II.
Saying Schedule III activities are exempt supplies.
Both give no tax, so students merge them.
Fix: Schedule III activities are not supplies at all. Exemption applies only to supplies. Use the word 'neither' in your answer. Mention separately that sale of land and building count in value of exempt supply for ITC reversal under Section 17(3).
Classifying a works contract as a supply of goods because material is used.
Students focus on the value of materials.
Fix: A works contract on immovable property is a supply of service by Schedule II para 6(a), regardless of the share of goods.
Applying the employee entry to payments for services outside employment.
Students read it as any service by an individual to a company.
Fix: Only services in the course of or in relation to employment are covered. A director's or consultant's fee for services outside an employment contract needs separate analysis.
Forgetting that business assets disposed of without consideration are a supply of goods, or mixing up para 4(a) and 4(b).
Students link supply with consideration under Section 7, and treat both limbs of para 4 as one rule.
Fix: Para 4(a) covers goods forming part of business assets that are transferred or disposed of so that they no longer form part of those assets. It is a supply of goods whether or not for a consideration. Para 4(b) covers goods held or used for the business that are put to private use or made available for non-business use. It is a supply of services.

Worked examples

Example 1

Alpha Developers, a registered person, is building a residential complex with flats for sale. Buyer Mr. Rao agrees to buy a flat and pays a booking amount of ₹5,00,000 in April, with the balance to be paid after the completion certificate is issued in December. Is the transaction a supply of goods, services or neither?

Show the solution

Activity: construction of a complex intended for sale to a buyer.
Schedule III does not cover the whole transaction, because part of the consideration was received before the completion certificate.
Schedule II para 5(b) treats construction of a complex, building or civil structure intended for sale as a supply of service, except where the entire consideration is received after the completion certificate or first occupation, whichever is earlier.
Here ₹5,00,000 was received in April, before the December certificate, so the entire consideration was not received after the certificate. Para 5(b) applies and the transaction is a supply of services.
The consideration received after the completion certificate or first occupation, whichever is earlier, is excluded from the value of that service. The balance is payable after the December certificate, so it is excluded from the value.
The ₹5,00,000 booking amount is an advance for a service, so GST is liable on it at the time of supply. Any deduction for the value of land comes from the valuation rule, not from Schedule II. The question does not give the total price, so you cannot state a fixed taxable value.

Answer: It is a supply of services under Schedule II para 5(b), because some consideration was received before the completion certificate. The booking amount is taxed at the time of supply, and the post-certificate balance is excluded from the value of the service. Any deduction for the value of land is applied separately under the valuation rule.

Example 2

Beta Ltd entered into two transactions. (a) It sold a plot of vacant land to Gamma for ₹80,00,000. (b) It gave a warehouse on rent to Delta for ₹2,00,000 a month. Classify each transaction under the Schedules.

Show the solution

Transaction (a): sale of land. Schedule III lists sale of land as neither a supply of goods nor a supply of services.
So there is no GST on the sale. It is outside the scope of supply. For ITC, however, Section 17(3) includes the value of sale of land in the value of exempt supply, so if Beta Ltd has common credits, reversal under Rules 42 and 43 may arise.
Transaction (b): renting of immovable property. Schedule II lists renting, leasing or letting out of immovable property as a supply of service.
So (b) is a taxable service, unless a specific exemption applies. Rent on a commercial warehouse generally attracts GST. Check any applicable exemption notification.

Answer: (a) Neither goods nor services under Schedule III, so no GST, but the value counts for ITC reversal under Section 17(3). (b) A supply of services under Schedule II, liable to GST at the applicable rate.

Exam tips

Write the Schedule and entry in your answer. Examiners award marks for the provision, then the facts, then the conclusion.
In case scenarios on construction, underline the dates of payment and the completion certificate. The answer turns on those dates.
Use the exact phrase 'neither a supply of goods nor a supply of services' for Schedule III. Do not write 'exempt'.
Keep a one-page list of Schedule II headings and Schedule III headings. Revise it before every mock test.
When a question mixes land, goods and services, split it into parts and classify each part separately, then combine in the conclusion.

Practice questions from Supply under GST

Schedules II and III: Goods or Services and Neither in other exams

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

Schedules II and III: Goods or Services and Neither: frequently asked questions

Is sale of land a supply under GST?

No. Sale of land is listed in Schedule III as neither a supply of goods nor a supply of services, so GST does not apply. Renting or leasing land is different and is a supply of service. For ITC, Section 17(3) still counts the value of sale of land in the value of exempt supply.

Is a works contract a supply of goods or services?

A works contract relating to immovable property is a supply of services under Schedule II para 6(a). This is so even when materials form a large part of the value.

What is the difference between Schedule III and an exemption?

Schedule III activities are not supplies, so they are outside GST. An exempt supply is a supply that is taxable in principle but relieved of tax by notification or by law. For ITC reversal, Section 17(3) brings sale of land and building into the value of exempt supply.

When is sale of a building outside GST?

A sale of a building is outside GST under Schedule III when the entire consideration is received after the completion certificate or first occupation, whichever is earlier. If any part is received before that, Schedule II para 5(b) applies and the supply is a service. The consideration received after the certificate or first occupation is excluded from the value of that service. Any deduction for the value of land comes from the valuation rule, not from Schedule II.