Direct and Indirect Taxation · Concept of Supply including Composite and Mixed Supplies

Schedule II and Schedule III of the CGST Act Explained

Updated 10 October 2026 · Fact-checked

Schedule II decides whether a transaction that is already a supply is treated as a supply of goods or a supply of services, as section 7(1A) says. Schedule III lists activities that are neither goods nor services under section 7(2), so no GST applies. To solve a question, check Schedule III first, then classify under Schedule II.

Understand Schedule II, Schedule III and Activities Not Treated as Supply

Section 7 of the CGST Act defines supply. Once an activity qualifies as a supply under section 7(1), the next question is what kind it is: goods or services. That matters because rate, place of supply and time of supply differ for goods and services.

Schedule II answers this. Section 7(1A) says that where activities or transactions constitute a supply under section 7(1), they are treated either as a supply of goods or as a supply of services as referred to in Schedule II. So Schedule II does not create supply. It only labels it.

From Schedule II, remember these themes. 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, tenancy or licence to occupy land, and letting of a building for business, are services. Job work or treatment or process applied to another person's goods is a service. Business assets permanently transferred out of the business are a supply of goods, whether or not for consideration. Business goods put to private use are treated as a supply of services. Works contract is a supply of services. So is serving food or drink as part of a service, such as in a restaurant. Schedule II has further service entries, such as agreeing to refrain from or tolerate an act. Check your study material for the exact wording of the full list.

Schedule III works the other way. Section 7(2)(a) says activities or transactions specified in Schedule III are treated neither as a supply of goods nor a supply of services, even if section 7(1) would otherwise cover them. Examples: services by an employee to the employer in the course of employment, services by a court or tribunal, services of funeral, burial, crematorium or mortuary, sale of land and (subject to clause (b) of paragraph 5 of Schedule II) sale of building, and actionable claims other than lottery, betting and gambling. Supply of warehoused goods before clearance for home consumption and high sea sales are also in Schedule III.

Section 7(2)(b) adds that notified activities undertaken by the Central Government, a State Government or a local authority as public authorities are also neither goods nor services. Under section 7(3), the Government may, on the Council's recommendation, notify transactions to be treated as goods and not services, or services and not goods.

There is a link to input tax credit. Under section 17(3), the value of exempt supply for apportionment of credit includes sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building. So the Schedule II paragraph 5(b) wording decides how a construction sale is treated. Check that paragraph in your study material. The Explanation to section 17(3) excludes the value of Schedule III activities, except those in paragraph 5 of Schedule III (sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building) and such activities as may be prescribed under clause (a) of paragraph 8 of that Schedule. So 'neither goods nor services' does not always mean 'ignore it' for credit reversal.

Key rules to remember

Role of Schedule II: Section 7(1) supply + Schedule II = treated as supply of goods OR supply of services; Section 7(1A). Schedule II classifies a supply. It does not decide whether there is a supply.
Role of Schedule III: Schedule III activity = neither supply of goods nor supply of services; Section 7(2)(a). It applies notwithstanding section 7(1). No GST arises on such activities.
Government activities: Notified activities of Central Government, State Government or local authority as public authorities = neither goods nor services; Section 7(2)(b). Only those activities that are notified on the Council's recommendation.
Title versus right to use: Transfer of title in goods = goods; transfer of right to use goods without title = services; Core Schedule II distinction. Hire or lease without transfer of title is a service.
Land and building: Lease, tenancy or licence to occupy land = services; sale of land = Schedule III; sale of building = Schedule III, subject to clause (b) of paragraph 5 of Schedule II; Building sold before completion certificate or first occupation (where full consideration is not received after that) is taxed as a service of construction. This is the Schedule II paragraph 5(b) rule. Check the exact wording in your study material.
Business assets: Permanent transfer or disposal of business goods = supply of goods, with or without consideration; business goods put to private use = supply of services; Schedule II. Check the exact conditions and exceptions in your study material.
Credit apportionment link: Value of exempt supply (section 17(3)) includes sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building; Section 17(3) uses these words. Schedule III activities are excluded from this value, except paragraph 5 of Schedule III and prescribed activities under clause (a) of paragraph 8 of that Schedule. Check the Schedule II paragraph 5(b) wording for construction sales.

How to solve Schedule II, Schedule III and Activities Not Treated as Supply questions

Use the same order every time. Checking Schedule III before Schedule II avoids the most common wrong answer.

1Read the facts and list each transaction separately. One question often has four or five.
2Check whether it is a supply at all under section 7(1): a supply of goods or services, for a consideration, in the course or furtherance of business, or an item in Schedule I without consideration, or import of services.
3Check Schedule III. If the activity is listed there (employee services, court services, funeral services, sale of land, actionable claims other than lottery, betting and gambling, warehoused goods, high sea sales), write that it is neither goods nor services and stop.
4If it is not in Schedule III, match it to Schedule II: title transfer, right to use, land and building, treatment or process, business assets, works contract, food or drink as a service, and the other service entries.
5Decide the label: goods or services. Quote the section 7(1A) basis and the Schedule II entry in your own words.
6Check the traps. Is title passing? Is the building sold before completion certificate or first occupation? Is the activity by an employee towards the employer, or to outsiders?
7If credit is asked, apply sections 17(2) and 17(3): section 17(3) includes sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building in the value of exempt supply. Credit on inputs used for such supplies is restricted under section 17(2) in the prescribed manner. The restriction applies only to the extent the inputs are used for such supplies, so do not say that reversal arises on every sale. For a construction sale, check the wording of Schedule II paragraph 5(b) before you decide how it is treated.
8State the conclusion in one line, such as 'Supply of services, taxable'.

Quickest way: Three-question filter for MCQs and short cases

When to use it: Use it for 2-mark MCQs and for the first line of a 14-mark case question, when time is short.

Q1: Is it in the Schedule III list? If yes, the answer is neither goods nor services.
Q2: Does title in goods pass? If yes, goods. If only the right to use passes, services.
Q3: Is it lease or licence of land, work on someone else's goods, a works contract, food as part of a service, or an obligation to tolerate an act? These are services.
Remember: business goods permanently given away or disposed of are goods. Business goods taken for private use are services.

Common mistakes in Schedule II, Schedule III and Activities Not Treated as Supply

Treating Schedule II as the list of things that are taxable supplies
The name suggests it lists supplies, so students assume it creates liability.
Fix: Schedule II only classifies as goods or services a transaction that is already a supply under section 7(1).
Calling renting or leasing of goods a supply of goods
Students focus on the goods and forget that the title does not move.
Fix: Ask if title passes. Transfer of right to use without title is a supply of services.
Treating sale of a building as always outside GST
Schedule III lists sale of building, and students stop reading.
Fix: Schedule III covers it only subject to clause (b) of paragraph 5 of Schedule II. Construction sold before completion certificate or first occupation (where the entire consideration is not received after that) is a service.
Treating all services by an employee as outside GST
Students remember 'employee' and ignore the condition.
Fix: Only services by an employee to the employer in the course of or in relation to employment are in Schedule III. Services to others are not covered.
Saying that all actionable claims are outside supply
The exception is dropped from memory.
Fix: Actionable claims are in Schedule III other than lottery, betting and gambling, which stay taxable.
Ignoring Schedule III in input tax credit questions
Students think 'neither goods nor services' means no effect anywhere.
Fix: Under section 17(3), sale of land and (subject to Schedule II paragraph 5(b)) building is included in exempt supply value, and Schedule III value is otherwise excluded except as stated in the Explanation.

Worked examples

Example 1

Bharat Tools Ltd, Pune, has the following transactions in a month. (a) Sells a used machine to a buyer for ₹5,00,000, with title passing. (b) Leases another machine for three years to a firm, without transferring title. (c) Pays salary to its factory manager for his work. (d) Sells a vacant plot of land that it held for future use. Classify each under the CGST Act.

Show the solution

(a) The sale is for consideration in the course of business, so it is a supply. Under Schedule II, transfer of title in goods is a supply of goods.
(b) Leasing is a supply under section 7(1)(a). Transfer of the right to use goods without transfer of title is treated under Schedule II as a supply of services.
(c) The manager's services to the employer in the course of employment are in Schedule III. Under section 7(2)(a) they are neither goods nor services.
(d) Sale of land is in Schedule III. It is neither goods nor services, though under section 17(3) its value is counted in exempt supply value for credit apportionment.

Answer: (a) Supply of goods. (b) Supply of services. (c) Neither goods nor services (Schedule III). (d) Neither goods nor services (Schedule III), but included in exempt supply value for section 17(3).

Example 2

Distinguish between Schedule II and Schedule III of the CGST Act, 2017, with two examples of each.

Show the solution

Purpose: Schedule II applies under section 7(1A). It tells whether a supply is goods or services. Schedule III applies under section 7(2)(a). It lists activities that are neither goods nor services.
Effect: Schedule II activities are supplies and are taxed as per their classification. Schedule III activities are not a supply, so no GST is levied on them.
Relationship: Section 7(2) begins with the words 'Notwithstanding anything contained in sub-section (1)', so Schedule III overrides section 7(1). Schedule II operates only after section 7(1) is satisfied.
Examples of Schedule II: transfer of title in goods is goods. Works contract is services.
Examples of Schedule III: services by an employee to the employer in the course of employment. Sale of land.
Link: sale of building is in Schedule III subject to clause (b) of paragraph 5 of Schedule II, so the two Schedules interact.

Answer: Schedule II classifies a transaction that is a supply as goods or services (for example, transfer of title in goods is goods, works contract is services). Schedule III lists activities that are neither goods nor services (for example, employee services to the employer, sale of land), so they attract no GST.

Exam tips

For MCQs, check Schedule III first. Most 'trap' options place a Schedule III item as a taxable service.
In written answers, quote section 7(1A) for Schedule II and section 7(2) for Schedule III. This earns the step marks.
Always test 'does title pass?' in every goods, lease or hire fact pattern.
Learn the exceptions: lottery, betting and gambling in actionable claims, and Schedule II paragraph 5(b) in sale of building.
In credit questions, mention sections 17(2) and 17(3). Section 17(3) includes sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building in the value of exempt supply, so credit attributable to inputs used for them is restricted in the prescribed manner, only to the extent of that use. For a construction sale, state the Schedule II paragraph 5(b) position in the words of your study material.

Practice questions from Concept of Supply including Composite and Mixed Supplies

Schedule II, Schedule III and Activities Not Treated as Supply 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 Activities Not Treated as Supply: 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 under section 7(1A). Schedule III lists activities that are neither goods nor services under section 7(2). Schedule II items are supplies. Schedule III items are outside GST.

Is sale of land or building a supply under GST?

Sale of land is in Schedule III, so it is neither goods nor services. Sale of building is also in Schedule III, but subject to clause (b) of paragraph 5 of Schedule II, which treats certain construction sold before completion as a service. For credit apportionment, section 17(3) includes sale of land and, subject to that paragraph 5(b), sale of building in the value of exempt supply. Credit attributable to inputs used for them is then restricted under section 17(2) in the prescribed manner.

Is renting a machine a supply of goods or services?

If the right to use the machine is given without transferring title, Schedule II treats it as a supply of services. If title passes, it is a supply of goods.

Can the Government add to the list of activities that are neither goods nor services?

Under section 7(2)(b), activities by the Central Government, a State Government or a local authority as public authorities can be notified as neither goods nor services, on the Council's recommendation. Under section 7(3), the Government can also notify transactions as goods and not services or services and not goods.