Goods and Services Tax (GST) and Corporate Tax Planning · Supply under GST

Schedule I, II and III of the CGST Act Explained

Updated 11 October 2026 · Fact-checked

Schedules I, II and III work with section 7 of the CGST Act. Schedule I makes certain activities taxable supply even without consideration. Schedule II decides whether a supply is goods or services. Schedule III lists activities that are neither goods nor services, so no GST applies. Test every fact pattern against all three.

Understand Schedule I, II and III: Deemed Supply, Goods or Services, Neither

Section 7 defines supply. The general rule is that a supply needs consideration and must be made in the course or furtherance of business. The three Schedules adjust this rule. They add some cases, classify others and remove some.

Schedule I applies through section 7(1)(c). It covers activities made or agreed to be made without consideration, which are still treated as supply. Typical items are: permanent transfer or disposal of business assets on which ITC was availed; supplies between related persons or distinct persons (section 25) in the course or furtherance of business; supplies between principal and agent where the agent supplies or receives the goods on behalf of the principal; and import of services from a related person or from another establishment outside India in the course or furtherance of business. Under the related-person entry, gifts by an employer to an employee not exceeding ₹50,000 in a financial year are not a supply.

Schedule II applies through section 7(1A). Once something is a supply, Schedule II says whether it is a supply of goods or of services. This matters because the rate, time of supply and place of supply depend on the classification. Examples: transfer of title in goods is a supply of goods. Transfer of the right to use goods without transfer of title is a supply of services. Lease or licence of land or building is a supply of services. Treatment or processing of another person's goods is a supply of services. Works contract is a supply of services. Construction of a complex or building before the completion certificate or first occupation is a supply of services, unless the entire consideration is received after the completion certificate or first occupation (paragraph 5, clause (b)).

Schedule III applies through section 7(2)(a). These activities are treated neither as a supply of goods nor as a supply of services, even if money changes hands. Examples: services by an employee to the employer in the course of employment; services by a court or tribunal; funeral, burial and crematorium services; sale of land and, subject to the completion-certificate rule above, sale of building; and actionable claims other than lottery, betting and gambling. Certain high-seas and warehoused-goods transactions are also listed.

Section 7(2)(b) adds activities undertaken by the Government or a local authority as public authorities, if notified. Section 7(3) lets the Government notify transactions as goods rather than services, or the reverse.

A Schedule III activity is not an exempt supply. Even so, section 17(3) says the value of exempt supply includes supplies on which the recipient pays tax under reverse charge, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building. The Explanation to section 17(3) adds that the value of exempt supply does not include Schedule III activities, except paragraph 5 of Schedule III (sale of land and sale of building) and such activities as may be prescribed under clause (a) of paragraph 8. These are counted for the ITC apportionment under section 17(2).

Only a sale of building that actually falls in Schedule III (entire consideration received after the completion certificate or first occupation) counts in this way. Construction before that point is a service under Schedule II, paragraph 5(b). It is a taxable supply, not an exempt supply.

Key rules to remember

General rule of supply: Supply = supply of goods or services or both for consideration, in the course or furtherance of business (section 7(1)(a)); Import of services for consideration is a supply even if not in the course or furtherance of business (section 7(1)(b)).
Schedule I rule: Activity in Schedule I, made or agreed to be made without consideration = supply (section 7(1)(c)); Related-person and distinct-person supplies must be in the course or furtherance of business. Gifts by an employer to an employee not exceeding ₹50,000 in a financial year are not a supply.
Schedule II rule: Supply under section 7(1) → classified as goods or services as per Schedule II (section 7(1A)); It classifies; it does not create a supply. Example: transfer of title in goods = goods; transfer of right to use goods without title = services.
Schedule III rule: Schedule III activity = neither supply of goods nor supply of services (section 7(2)(a)); No GST is levied. Section 7(2)(b) separately covers notified public-authority activities.
Under-construction property: Construction before completion certificate or first occupation = service; entire consideration after it = sale of building, not a supply; Linked to paragraph 5, clause (b) of Schedule II and sale of building in Schedule III. The service is a taxable supply.
Section 17(3) link: Explanation to section 17(3): value of exempt supply excludes Schedule III, except paragraph 5 of Schedule III and prescribed activities under paragraph 8(a); Sale of land and sale of building (falling in Schedule III) count in the value of exempt supply for ITC apportionment. Construction service under Schedule II, paragraph 5(b), is taxable, not exempt.

How to solve Schedule I, II and III: Deemed Supply, Goods or Services, Neither questions

Use this order for any case-based question. It follows the provision, analysis, conclusion format examiners expect.

1Identify the transaction and the parties. Note whether consideration is paid and whether they are related or distinct persons.
2State the section 7(1) test: supply, consideration, and course or furtherance of business.
3If there is no consideration, check Schedule I. Match the facts to the exact entry, such as asset transfer, related persons, principal and agent, or import of services from a related person.
4Check Schedule III next. If the activity is listed, conclude that it is neither goods nor services and stop there.
5If it is a supply, apply Schedule II to classify it as goods or services. Check title transfer, right to use, land or building lease, works contract, and construction before the completion certificate.
6Check for notifications under section 7(2)(b) or 7(3), and for section 17 consequences such as the value of exempt supply.
7Conclude clearly: taxable supply of goods or services, or not a supply. Add the compliance point, such as valuation, invoice or ITC reversal.

Quickest way: Three-gate filter

When to use it: Use it in short-note questions and when a long case has many transactions to classify.

Gate 1: Is it in Schedule III? If yes, answer 'neither goods nor services'.
Gate 2: Is there consideration? If not, is it in Schedule I? If not, answer 'not a supply'.
Gate 3: For a supply, name the Schedule II entry and write goods or services.
Write one line of reasoning per gate and the section reference (7(1)(c), 7(1A), 7(2)(a)).

Common mistakes in Schedule I, II and III: Deemed Supply, Goods or Services, Neither

Treating every transaction without consideration as a supply.
Students remember Schedule I but forget it is a closed list of entries.
Fix: Match the facts to a specific Schedule I entry. If none fits, the transaction is not a supply.
Applying Schedule I to a free supply between related persons that is not business-related.
Students drop the words 'in the course or furtherance of business'.
Fix: Quote the condition in your answer and check it against the facts before concluding.
Saying Schedule II creates a supply.
The Schedule's heading looks like a list of taxable items.
Fix: Write that Schedule II only classifies an existing supply as goods or services under section 7(1A).
Calling Schedule III activities exempt supplies.
Both result in no GST payable, so they look the same.
Fix: Say Schedule III is outside supply altogether. Mention that, under section 17(3) and its Explanation, sale of land and sale of building (paragraph 5 of Schedule III) are still counted in the value of exempt supply for ITC apportionment.
Taxing all under-construction flat sales or exempting all of them.
Students ignore the completion-certificate condition.
Fix: Check when the consideration was received. If any part came before the completion certificate or first occupation, it is a taxable service. If the entire consideration came after, it is a sale of building under Schedule III.
Taxing an employee's salary services.
Services for pay look like a business supply.
Fix: Services by an employee to the employer in the course of employment are in Schedule III. They are not a supply.

Worked examples

Example 1

Sunrise Textiles Ltd, Surat, transfers machinery worth ₹8,00,000 free of cost to its wholly owned subsidiary, Sunrise Exports Pvt Ltd, in the course of business. The company had availed ITC on the machinery. Is it a supply?

Show the solution

Facts: the transfer is without consideration, between related persons, in the course of business.
Section 7(1)(a) does not apply because there is no consideration.
Schedule I applies through section 7(1)(c). Two entries fit: supply between related persons in the course or furtherance of business, and permanent transfer of business assets on which ITC was availed.
Schedule III does not list this transaction.
Under Schedule II, transfer of title in goods is a supply of goods.

Answer: It is a taxable supply of goods even though there is no consideration. GST must be paid on its value as determined under the valuation provisions, and a tax invoice must be issued.

Example 2

Meera Constructions sells a flat in a project in Pune. The buyer pays ₹20,00,000 as a booking advance before the completion certificate and the balance after it. In another project, a buyer pays the entire price only after the completion certificate is issued. Classify both transactions.

Show the solution

First project: part of the consideration is received before the completion certificate.
Under Schedule II, paragraph 5, clause (b), construction of a building intended for sale before the completion certificate or first occupation is a supply of services, unless the entire consideration is received after it.
Here the condition 'entire consideration after' is not met, so it is a supply of services.
Second project: the entire consideration is received after the completion certificate. The exception in Schedule II applies, so there is no supply of services.
The transaction is then a sale of building, which is listed in Schedule III and is neither goods nor services.

Answer: The first sale is a supply of services and attracts GST. It is a taxable supply, not an exempt supply, so it does not enter the value of exempt supply. The second is a sale of building under Schedule III and is not a supply. Under section 17(3) and its Explanation, only this second sale's value is counted in the value of exempt supply for ITC apportionment.

Exam tips

Quote the sub-section with the Schedule: Schedule I with section 7(1)(c), Schedule II with 7(1A), Schedule III with 7(2)(a).
In case-based questions, write the exact condition from the entry, such as 'in the course or furtherance of business' or 'before the completion certificate'.
Always give a clear classification: supply of goods, supply of services, or neither. A hedged answer loses marks.
Link to section 17 when the facts mention land, building or ITC. It shows you know the practical consequence.
Keep the ₹50,000 employee-gift limit and the no-GST result for employee services ready. They are common short-note points.

Practice questions from Supply under GST

Schedule I, II and III: Deemed Supply, Goods or Services, Neither in other exams

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

Schedule I, II and III: Deemed Supply, Goods or Services, Neither: 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. Schedule III lists activities that are neither goods nor services, so they are not a supply at all. Schedule II answers 'which type of supply'. Schedule III answers 'is there any supply'.

Is a supply without consideration always taxable under GST?

No. It is taxable only if it falls within a Schedule I entry, such as supplies between related persons in the course or furtherance of business. Otherwise, section 7(1)(a) needs consideration, so a free supply is not a supply.

Are Schedule III activities exempt supplies?

No. They are outside the definition of supply. For ITC apportionment, the Explanation to section 17(3) excludes most Schedule III activities from the value of exempt supply. The exceptions are paragraph 5 of Schedule III (sale of land and sale of building) and prescribed activities under paragraph 8(a).

Is the sale of a completed building taxable?

A sale of a building where the entire consideration is received after the completion certificate or first occupation is in Schedule III and is not a supply. Its value is still counted in the value of exempt supply for ITC apportionment under section 17(3). If any consideration is received before that point, it is a taxable supply of services under Schedule II.