POWER OF EXEMPTION UNDER GST

[Dr. Sanjiv Agarwal]

Exemptions are governed by the exemptions notifications notified in that respect. While most of the notifications are prospective and applicable from the date of issuance of notifications, if specifically specified, such exemption may also apply retrospectively.

Power to Grant Exemption

The power to grant exemptions in GST is covered by section 11 of the CGST Act, 2017 as follows:

"Power to grant exemption from tax [w.e.f. 01-07-2017]

(1)   Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by notification, exempt generally, either absolutely or subject to such conditions as may be specified therein, goods or services or both of any specified description from the whole or any part of the tax leviable thereon with effect from such date as may be specified in such notification.

(2)   Where the Government is satisfied that it is necessary in the public interest so to do, it may, on the recommendations of the Council, by special order in each case, under circumstances of an exceptional nature to be stated in such order, exempt from payment of tax any goods or services or both on which tax is leviable.

(3)   The Government may, if it considers necessary or expedient so to do for the purpose of clarifying the scope or applicability of any notification issued under sub-section (1) or order issued under sub-section (2), insert an explanation in such notification or order, as the case may be, by notification at any time within one year of issue of the notification under sub-section (1) or order under sub-section (2), and every such explanation shall have effect as if it had always been the part of the first such notification or order, as the case may be.

Explanation.––For the purposes of this section, where an exemption in respect of any goods or services or both from the whole or part of the tax leviable thereon has been granted absolutely, the registered person supplying such goods or services or both shall not collect the tax, in excess of the effective rate, on such supply of goods or services or both."

In GST regime, general exemptions have been notified vide Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 as amended. Similar notifications have been issued under SGST/UTGST/IGST.

Exempt Supply

The term ‘Exempt Supply’ has been defined in sec 2(47) of the GST Act to mean:

Supply of goods or services or both, which:

• attracts Nil rate of tax, or
• may be wholly exempt from tax under sec 11, or
• may be wholly exempt from tax under sec 6 of IGST Act, and
• includes non taxable supplies.

It is important to note that the non-taxable supply means supply which is not leviable to tax under GST or IGST.

In M/S. MANGALAM ORGANICS LTD. VERSUS UNION OF INDIA - 2017 (4) TMI 1223 - SUPREME COURT, it was observed that for issuance of an exemption notification, it is power of Central Government not to recover duties of excise or to recover lesser duty than what is normally payable.

For this purpose, Government has various considerations. Merely because conditions in statutory provision are satisfied, it would not necessarily issue notification. It is purely policy matter. Though principle against arbitrariness also extend to subordinate legislation, scope of judicial review in such cases is limited. Court would not interfere with exercise of statutory discretionary power of administrative authority, unless it is with oblique end or extraneous purposes/considerations or arbitrarily, without applying its mind to relevant considerations or where it is not guided by norms relevant to object to be achieved.

To quote, the Apex Court held as follows :

“When ‘power’ is given to the Central Government to issue a notification to the effect not to recover duty of excise or recover lesser duty than what is normally payable under the Act, for deciding whether to issue such a Notification or not, there may be various considerations in the mind of the Government. Merely because conditions laid in the said provisions are satisfied, would not be a reason to necessarily issue such a notification. It is purely a policy matter. No doubt, the principle against arbitrariness has been extended to subordinate legislation as well [See : INDIAN EXPRESS NEWSPAPERS (BOMBAY) PVT. LIMITED AND OTHERS VERSUS UNION OF INDIA (THROUGH THE INCOME-TAX OFFICER)- 1984 (12) TMI 65 - SUPREME COURT]. At the same time, the scope of judicial review in such cases is very limited. Where the statute vests a discretionary power in an administrative authority, the Court would not interfere with the exercise of such discretion unless it is made with oblique end or extraneous purposes or upon extraneous considerations, or arbitrarily, without applying its mind to the relevant considerations, or where it is not guided by any norms which are relevant to the object to be achieved.

Examination of the matter in the aforesaid perspective would provide an answer to most of the arguments of the appellants. It would neither be a case of discrimination nor it can be said that the appellants have any right under Article 14 or Article 19(1)(g) of the Constitution which has been violated by non-issuance of notification under Section 11C of the Act. Once the appellant accepts that in law it was liable to pay the duty, even if some of the units have been able to escape payment of duty for certain reasons, the appellant cannot say that no duty should be recovered from it by invoking Article 14 of the Constitution. It is well established that the equality clause enshrined in Article 14 of the Constitution is a positive concept and cannot be applied in the negative.”

In M/S HERO MOTOCORP LTD. VERSUS UNION OF INDIA & ORS. - 2022 (10) TMI 677 - SUPREME COURT, on the issue of continuity of exemption in GST period of exemption notification prevalent in pre-GST period, the apex court held that the Government is not bound to continue such exemption notification.      

The Apex Court observed that undisputedly, the Notification dated 18th July 2017 withdrawing the exemption notifications was issued in pursuance of the statutory mandate as provided under Section 174(2)(c) of the CGST Act. If the contention as raised by the appellants is to be accepted, it would make the provisions under the proviso to Section 174(2)(c) of the CGST Act redundant and otiose. The legislature in its wisdom has specifically incorporated the proviso to Section 174(2)(c) providing therein that any tax exemption granted as an incentive against investment through a notification shall not continue as privilege if the said notification is rescinded. If the contention is accepted, it will amount to enforcing a representation made in the said O.M. of 2003 and 2003 Notification contrary to the legislative incorporation in the proviso to Section 174(2)(c) of the CGST Act. In other words, it will permit an estoppel to be operated against the legislative functions of the Parliament. Thus, the claim of the appellants on estoppel is without merit and deserved to be rejected.

It was further observed that Apex Court has also consistently held that when an exemption granted earlier is withdrawn by a subsequent notification based on a change in policy, even in such cases, the doctrine of promissory estoppel could not be invoked. It has been consistently held that where the change of policy is in the larger public interest, the State cannot be prevented from withdrawing an incentive which it had granted through an earlier notification.

The Apex Court also observed that the GST Council is a constitutional body. It has powers to make recommendations on wide-ranging issues concerning GST, including grant of exemptions from the GST. It also has power to make recommendations with regard to special provisions governing North Eastern and Himalayan States. Taking into consideration that the units like the appellants have been established in the Himalayan and North-Eastern States based on the said O.M. of 2003 and that lakhs of persons are employed in such industries, we are of the view that it will be appropriate that such States should also consider to correspondingly reimburse such units out of the share of revenue received by them through devolution from the Central Government. It also said that it will also be appropriate that the GST Council considers making appropriate recommendations to the States in that regard, it was therefore, held that after the enactment of the Central Goods and Services Tax Act in 2017, the Centre is not bound to continue with its pre-existing 100 per cent outright excise duty exemption policy of 2003 to promote industrial activities in certain less-industrialized states like Uttarakhand and Sikkim.

When an exemption granted earlier is withdrawn by a subsequent notification based on a change in policy, even in such cases, the doctrine of promissory estoppel could not be invoked. Where the change of policy is in the larger public interest, the State cannot be prevented from withdrawing an incentive which it had granted through an earlier notification.