Indirect Tax Laws and Practice · Supply under GST

Schedule II, Schedule III and Section 7(2) Exclusions in GST

Updated 11 October 2026 · Fact-checked

Schedule II decides whether an activity that is already a supply is treated as a supply of goods or of services. Schedule III and Section 7(2) list activities treated as neither goods nor services, so no GST applies. To solve a question, first confirm supply, then check Schedule III or notified government activities, then classify using Schedule II.

Understand Schedule II, Schedule III and Section 7(2) Exclusions

Section 7(1) of the CGST Act tells you what a supply includes. Once something is a supply, you still need to know if it is goods or services, because rate, time of supply and place of supply differ. Section 7(1A) handles this. Where activities or transactions constitute a supply under Section 7(1), they are treated as a supply of goods or of services as referred to in Schedule II.

Schedule II is a classification table. It does not create a supply. Typical entries: transfer of title in goods is a supply of goods, while transfer of the right to use goods without transfer of title is a supply of services. Lease or letting of land and building is a supply of services. Treatment or process applied to another person's goods is a supply of services. Works contract is a supply of services. Supply of food or drink as part of a service is a supply of services. Business assets transferred or disposed of so they no longer form part of the business are treated as a supply of goods, unless the business continues with a successor.

Section 7(2) works the other way. It starts with the words "notwithstanding anything contained in sub-section (1)" and says two kinds of activities are treated neither as a supply of goods nor as a supply of services: (a) activities or transactions specified in Schedule III, and (b) activities undertaken by the Central Government, a State Government or any local authority as public authorities, as notified by the Government on the Council's recommendation. Section 7(2) overrides Section 7(1). So Schedule III items and notified government activities are not supplies, even if there is consideration.

Schedule III covers items such as services by an employee to the employer in the course of employment, services by a court or tribunal, functions of MPs, MLAs and panchayat members, funeral and burial services, actionable claims other than lottery, betting and gambling, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building, and certain supplies of goods before clearance for home consumption (such as warehoused goods). Learn the list as groups, not as one long string.

Section 7(3) adds one more tool. The Government may notify, on the Council's recommendation, that certain transactions are goods and not services, or services and not goods, subject to Section 7(1), (1A) and (2). Finally, remember the link to credit. Under Section 17(3), the value of exempt supply includes sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building. The Explanation to Section 17(3) says the value of Schedule III activities is not part of the value of exempt supply, except (i) the value of activities in paragraph 5 of Schedule III and (ii) the prescribed value of activities under clause (a) of paragraph 8 of Schedule III. So these items are not supplies, yet their value is counted for apportionment and they can reduce your input tax credit.

Key rules to remember

Classification rule (Section 7(1A)): Supply under Section 7(1) → goods or services as per Schedule II; Schedule II classifies only. It does not decide whether a supply exists.
Neither-supply rule (Section 7(2)(a)): Schedule III activity → neither supply of goods nor supply of services; Applies notwithstanding Section 7(1), so consideration does not matter.
Government activities (Section 7(2)(b)): Notified activities of Central/State Government or local authority as public authority → neither goods nor services; Only activities that are notified qualify, and only when done as a public authority.
Power to notify (Section 7(3)): Government may notify a transaction as goods and not services, or services and not goods; Subject to Section 7(1), (1A) and (2). It cannot override Schedule III.
Exempt supply value for credit (Section 17(3)): Value of exempt supply includes sale of land and (subject to Schedule II para 5(b)) sale of building; other Schedule III value is excluded, except the prescribed value of activities under para 8(a) of Schedule III; Also included: supplies on reverse charge where the recipient pays tax and transactions in securities. Land and building sales are counted by this rule even though they are not supplies.

How to solve Schedule II, Schedule III and Section 7(2) Exclusions questions

Use the same order every time. The order matters because Section 7(2) overrides Section 7(1): a Schedule III item or a notified government activity is not a supply, even if consideration is paid.

1Identify the transaction and who the parties are. Note whether it is for consideration and whether it is in the course or furtherance of business.
2Check Section 7(2) first. Is the activity in Schedule III, or a notified activity of the Government or a local authority as a public authority? If yes, it is neither goods nor services. Stop and say no GST applies.
3If not excluded, confirm it is a supply under Section 7(1): consideration and business, or Schedule I, or import of services.
4Open Schedule II and find the matching entry. Decide goods or services. State the entry you rely on.
5If no Schedule II entry fits, classify on the normal meaning of goods and services, and mention any Section 7(3) notification only if the question gives one.
6State the consequence: the correct time and place of supply rules, or the effect on input tax credit under Section 17(3) if land or building is involved.
7Close with a one-line conclusion that answers exactly what was asked.

Quickest way: Three-gate filter

When to use it: Use this for MCQs and for the first line of any written answer.

Gate 1: Is it in Schedule III or a notified public-authority activity? If yes, answer neither goods nor services.
Gate 2: Is it a supply at all? If no consideration and not in Schedule I, it is not a supply.
Gate 3: Pick goods or services from Schedule II. Title transferred means goods. Right to use only, land or building letting, treatment of another's goods, works contract, and food served as part of a service all mean services.

Common mistakes in Schedule II, Schedule III and Section 7(2) Exclusions

Treating Schedule II as the list of what is taxable.
Students see 'Schedule' and assume it creates the supply.
Fix: Remember Schedule II only labels a supply as goods or services after Section 7(1) is satisfied.
Saying a Schedule III item is exempt supply.
Both are outside tax, so they seem the same.
Fix: Schedule III is neither goods nor services, so it is not a supply. Exempt supply is a supply. The credit effect differs: Section 17(3) counts only sale of land and building (and the prescribed value for para 8(a)) in the value of exempt supply for apportionment, and other Schedule III value is left out.
Treating every activity of Government as outside GST.
Students read Section 7(2)(b) loosely.
Fix: Only activities notified by the Government, on the Council's recommendation, and undertaken as a public authority qualify.
Classifying a lease of goods as a sale of goods.
Money changes hands and goods are used, so it looks like a sale.
Fix: If title does not pass, the transfer of right to use is a supply of services. Goods only if title is transferred, including under an agreement where property passes at a future date on payment.
Treating a works contract as a supply of goods because materials are used.
Students look at the material component.
Fix: Schedule II treats a works contract as a supply of services. Say so and apply the services rules.
Assuming sale of building is always Schedule III.
Students remember 'sale of building' in the list and stop.
Fix: The Schedule III entry covers sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building. Always read that Schedule II clause before you call a building transaction neither goods nor services.

Worked examples

Example 1

Classify each of the following for GST and give the reason: (a) Anil, an employee of Kaveri Pharma Ltd, works under a contract of employment and receives salary; (b) Kaveri Pharma Ltd gives a machine on rent for three years without transferring title; (c) Surya Builders executes a works contract for a customer to construct a factory building; (d) A tribunal hears and decides a dispute.

Show the solution

Item (a): Services by an employee to the employer in the course of employment are in Schedule III. By Section 7(2)(a) they are neither goods nor services.
Item (b): Business, consideration and no transfer of title. It is a supply. Under Schedule II, transfer of the right to use goods without title is a supply of services.
Item (c): A works contract is a supply under Section 7(1). Schedule II treats it as a supply of services. The materials used do not change this.
Item (d): Services by any court or tribunal are in Schedule III, so they are neither goods nor services.

Answer: (a) neither goods nor services; (b) supply of services; (c) supply of services; (d) neither goods nor services.

Example 2

Meera Enterprises, a registered person, makes taxable supplies of machinery and also sells a plot of land it owns as an investment. A student says the land sale is outside GST so it has no effect on Meera's credit. Examine whether the student is correct.

Show the solution

Sale of land is a Schedule III activity. By Section 7(2)(a) it is neither a supply of goods nor of services, so no GST is charged on it. This part of the student's view is correct.
Section 17(2) restricts credit to the input tax attributable to taxable supplies, including zero-rated supplies, where inputs are used partly for exempt supplies.
Section 17(3) says the value of exempt supply includes sale of land. This is a deeming rule for apportionment under Section 17(2). The land sale is still not itself a supply.
The Explanation to Section 17(3) excludes Schedule III value generally, but excepts the value of activities in paragraph 5 of Schedule III (sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building) and the prescribed value of activities under para 8(a). Land sale falls in the exception.
So the land sale value counts in the value of exempt supply used to work out the credit restriction on common inputs, as prescribed.
The student is therefore wrong on the credit effect.

Answer: No GST is charged on the land sale, because it is not a supply. But under Section 17(3) its value is included in the value of exempt supply for apportionment, so Meera may have to restrict credit on common inputs under Section 17(2).

Exam tips

Start every written answer with the three gates: Schedule III, supply test, Schedule II. Examiners reward the order.
Quote Section 7(2), 7(1A) or Schedule II by name, but give a paragraph number only if you are sure of it. The safe ones are para 5 of Schedule III and para 5(b) of Schedule II.
In MCQs, watch for 'neither goods nor services' versus 'exempt supply'. They are different options on purpose.
In case scenarios, look for words like employee, court, funeral, land, building, lease and works contract. Each points to a specific entry.
When land or building appears, add one line on Section 17(3) and credit. Many students miss this link.

Practice questions from Supply under GST

Schedule II, Schedule III and Section 7(2) Exclusions in other exams

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

Schedule II, Schedule III and Section 7(2) Exclusions: frequently asked questions

What is the difference between Schedule II and Schedule III of the CGST Act?

Schedule II classifies a supply as goods or services once it is a supply. Schedule III lists activities that are treated as neither goods nor services, so they are not supplies at all.

Is a works contract a supply of goods or services?

Schedule II treats a works contract as a supply of services. This holds even when goods are used in the work.

Is sale of land taxable under GST?

No. Sale of land is in Schedule III, so it is neither a supply of goods nor of services. However, Section 17(3) includes its value in the value of exempt supply when you apportion credit, even though the sale is not itself a supply.

Are all government activities outside GST under Section 7(2)?

No. Section 7(2)(b) covers only activities notified by the Government on the Council's recommendation, and only when the Central Government, a State Government or a local authority carries them out as a public authority.

Does Schedule III apply even when consideration is received?

Yes. Section 7(2) begins with 'notwithstanding anything contained in sub-section (1)'. A Schedule III activity is not a supply even if it is done for consideration.