Exempted Service- Service Tax Regime and Exempted Supply- GST Regime

[Rachit Agarwal]

Definition of Exempted Service under Cenvat Credit Rules and CGST Act, 2017

Cenvat Credit Rules, 2004

CGST Act, 2017

[(e) “exempted service” means a - (1)    taxable service which is exempt from the whole of the service tax leviable thereon; or (2)    service, on which no service tax is leviable under section 66B of the Finance Act; or (3)    taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken; [but shall not include a service - (a)    which is exported in terms of rule 6A of the Service Tax Rules, 1994; or (b)    by way of transportation of goods by a vessel from customs station of clearance in India to a place outside India;]

Section 2(47) of CGST Act 2017 “exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply;

Power to Exempt Supply by Virtue of Section 11 of CGST Act, 2017

Exemption under CGST Act, 2017 for the goods and services shall be limited to Section 11.

Power to Exempt the supply of the goods or services conferred by Section 11.  Notification No-2 Central Tax Rate 28.06.2017 and Notification No- 12/2017- Central Tax Rate dated 28.06.2017 are issued by virtue of powers conferred under Section 11 of CGST Act, 2017.

Chargeability Provisions

In cases where the supply of goods or services and chargeability provision [Section 9(1)] fails, the same should not be treated as exempt supply.

Failure of Chargeability provision may occur on account of

1. absence of consideration amount or
2. the supply may not be in the course of business or furtherance of business.

Schedule-III of Section 7 of CGST Act, 2017

Dealing with goods or services as listed in Schedule-III of Section 7 of CGST Act, 2017 should not be treated as exempt supply. Nature of Activity referred in Schedule-III does not fall within the ambit of supply itself and hence the dealing with those goods or services does not fall within the ambit of exempt supply. Chargeability provision also fails with respect to goods or services in Schedule III read with Section 7 of CGST Act, 2017. Liability to pay tax can only arise when there is supply of goods or services or both.

Scope of Exempted Service under Service Tax Regime is much wider as compared to exempted supply in GST Regime.

Under Service Tax Regime definition of exempted services would also include the service whose taxability is based on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken.

Under the Service Tax regime, the services on which no tax is payable is also treated as exempted supply. This concept has not been retained in the GST Regime

Definition of Exempted Supply Enlarged for Limited Purpose- Section 17(2)

Further as per Section 17(3) of CGST Act, 2017

The value of exempt supply under section 17(2) shall be such as may be prescribed, and shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.

Hence the definition of Exempted Supply has been enlarged only for the limited purpose for the reversal of credit of input tax and includes within its ambit

1. supplies on which the recipient is liable to pay tax on reverse charge basis
2. transactions in securities
3. sale of land and
4. subject to clause (b) of paragraph 5 of Schedule II, sale of building

Rule 6(2) of Cenvat Credit Rules, 2004- A manufacturer who exclusively manufactures exempted goods for their clearance upto the place of removal or a service provider who exclusively provides exempted services shall pay the whole amount of credit of input and input services and shall, in effect, not be eligible for credit of any inputs and input services.]

Rule 6(3)(b) of Cenvat Credit Rules, 2004

a provider of output service who provides two classes of services, namely :-

 (i)    non-exempted services;

 (ii)   exempted services,

Definition of Exempted Supply is Limited- Section 18(4)

Section 18(4) of CGST Act, 2017- Where any registered person who has availed of input tax credit opts to pay tax under section 10 or, where the goods or services or both supplied by him become wholly exempt, he shall pay an amount, by way of debit in the electronic credit ledger or electronic cash ledger, equivalent to the credit of input tax in respect of inputs held in stock and inputs contained in semi-finished or finished goods held in stock and on capital goods, reduced by such percentage points as may be prescribed, on the day immediately preceding the date of exercising of such option or, as the case may be, the date of such exemption:

Similar provision were as per Rule 11(4) of Cenvat Credit Rules, 2004

A provider of output service shall be required to pay an amount equivalent to the CENVAT credit, if any, taken by him in respect of inputs received for providing the said service and is lying in stock or is contained in the taxable service pending to be provided, when he opts for exemption from payment of whole of the service tax leviable on such taxable service under a notification issued under section 93 of the Finance Act, 1994 (32 of 1994) and after deducting the said amount from the balance of CENVAT credit, if any, lying in his credit, the balance, if any, still remaining shall lapse and shall not be allowed to be utilized for payment of duty on any excisable goods, whether cleared for home consumption or for export or for payment of service tax on any other output service, whether provided in India or exported.]

On the basis of the plain and clear meaning, the reversal of the credit of the input tax has to be done only for the goods or services which become wholly exempt for the stock and inputs contained in semi-finished or finished goods held in stock.

As per Section 18(4), exempt supply shall be limited to the supply of goods or services listed in Notification No-2 Central Tax Rate 28.06.2017 and Notification No- 12/2017- Central Tax Rate dated 28.06.2017

Definition of Exempted Supply Enlarged for Limited Purpose- Notification No- 11/2017 dated 28.06.2017

Under the GST Regime (Notification No- 11/2017 Central Tax Rate dated 28.06.2017),

Explanation 4(iv)

Wherever a rate has been prescribed in this notification subject to the condition that credit of input tax charged on goods or services used in supplying the service has not been taken, it shall mean that,-

1. credit of input tax charged on goods or services used exclusively in supplying such service has not been taken; and

2. credit of input tax charged on goods or services used partly for supplying such service and partly for effecting other supplies eligible for input tax credits,

is reversed as if supply of such service is an exempt supply and attracts provisions of sub-section (2) of section 17 of the Central Goods and Services Tax Act, 2017 and the rules made thereunder.

In view of the above only purpose of reversal of credit of input tax in relation to exempted supply,  the value of supply of goods/ services s shall also include the value of goods or services whose taxability are subject to the condition that no credit of input tax has been availed shall be included.

Conclusion-

Under the GST Regime- The definition of exempt supply has been enlarged only for the purpose of reversal of Credit of Input Tax.