Not all goods and services are subject to GST. Certain supplies are granted exemptions, which can be conditional, nil-rated, zero-rated, and more. The reasons for these exemptions vary, making it essential to understand the nuances of GST for effective financial planning and enhancing the competitiveness of your goods and services. This understanding can significantly improve profitability and cash flow.
In this blog, we will explore the various GST exemptions and the rationale behind them.
Table of Contents
What is GST Exemption?
GST exemption means that certain goods or services are not subject to the Goods and Services Tax (GST). This implies that the seller does not collect GST from the buyer and consequently, does not have to pay any tax to the government for those sales.
These exemptions are provided for various reasons, such as alleviating the tax burden on essential goods and services or supporting specific sectors. They vary across geographical regions and can be updated or modified periodically by the respective governments of each country.
Related Read: Find the List of Goods and Service Tax (GST) Rates
What are the Goods Exempted from GST?
As per GST guidelines, here is a list of goods that are exempt (nil-rated) from GST.
Category |
Products |
| Animal products | Live animals: Cows, sheep, goats, poultry
Meat: Fresh and frozen meat from cows, goats, pigs, horses Fish: Fresh or frozen |
| Natural and agricultural products | Natural products: Honey, fresh and pasteurized milk, cheese, eggs
Live trees and plants: Bulbs, roots, flowers, foliage Vegetables: Tomatoes, potatoes, onions Fruits: Bananas, grapes, apples Dry fruits: Cashew nuts, walnuts Grains and cereals: Wheat, rice, oats, barley Products of the milling industry: Various types of flour Seeds: Flower seeds, oil seeds, cereal husks |
| Beverages and spices | Tea, coffee, and spices: Coffee beans, tea leaves, turmeric, ginger
Water: Mineral water, tender coconut water |
| Processed and baked goods | Sugar products: Sugar, jaggery
Baked goods: Bread, pizza base, puffed rice |
| Energy and industrial goods | Fossil fuels: Electrical energy
Fertilizers: Goods and organic manure |
| Health and personal care products | Drugs and pharmaceuticals: Human blood, contraceptives
Beauty products: Bindi, kajal, kumkum |
| Waste and recycling | Waste: Sewage sludge, municipal waste |
| Accessories and Printed Items | Ornaments: Plastic and glass bangles
Newsprint: Judicial stamp paper, envelopes, rupee notes Printed items: Printed books, newspapers, maps |
| Textiles and Handicrafts | Fabrics: Raw silk, silkworm cocoon, khadi
Hand tools: Spade, hammer Pottery: Earthen pots, clay lamps |
What are the Services Exempted from GST?
As per GST guidelines, Here is the list of services that are exempted from GST.
Service Category |
Description |
| Judicial and legal assistance | Includes services by arbitral tribunals, partnership firms of advocates, and senior advocates to entities with turnovers up to INR 40 lakhs. |
| Agricultural services | Includes cultivation, farm labor supply, harvesting, warehouse activities, and rental of agricultural machinery. Also covers services by commission agents or Agricultural Produce Marketing Committee for buying or selling agricultural produce. |
| Government and administrative support | Encompasses postal services, transportation of goods or people, services provided by foreign diplomats in India, offerings by the Reserve Bank of India, and diplomatic services. |
| Transportation services | Covers road, rail, and water transport of goods, toll payments, air passenger transport, and transportation of goods where the transport cost is less than INR 1500. |
| Educational support | Services related to transportation of faculty or students, mid-day meal schemes, examination services, and services provided by Indian Institutes of Management (IIMs). |
| Medical and healthcare services | Covers ambulance services, charitable medical services, veterinary services, and medical professionals (excluding cosmetic surgeries). |
| Organizational and event coordination | Encompasses services by exhibition organizers for international business exhibitions and tour operators catering to foreign tourists. |
| Miscellaneous services | Includes services by GSTN to Central or State Governments or Union Territories, and admission fees to theaters, circuses, or sports events charging fees up to INR 250. |
Different Types of GST Exemptions
1. Absolute
These types of exemptions apply to the full amount without any conditions or restrictions.
Example of Absolute GST Exemption
The supply of electricity by an electricity transmission or distribution utility is exempt from GST.
2. Conditional
These exemptions are subject to specific conditions or limits.
Example of Conditional GST Exemption
Health care services with room charges receive GST exemptions up to a specific threshold, beyond which the tax applies.
3. Partial
These apply when exemptions are granted up to a certain limit.
Example of Partial GST Exemption
Small-scale suppliers are exempt from GST on supplies within a state if the total value does not exceed a specified limit per day.
Classification of GST exemption
Exemptions under GST can apply either to specific types of supplies or to designated suppliers.
For instance, exemptions granted to not-for-profit entities engaged in social services fall under the category of supplier-based exemptions.
On the other hand, certain supplies, regardless of the supplier, are exempt from GST based on the nature and classification of the goods or services. Such exemptions are formally notified and uniformly exempt from GST regulations.
Distinguishing between Exempt, Nil Rated, Zero Rated, and Non-GST supplies
Supplies can be categorized into Exempt, Nil Rated, Zero Rated, and Non-GST supplies. Though they sound similar, there are subtle differences and uniqueness in their purpose that make them relevant.
Here’s a lowdown:
| Exempt | Those supplies that are not charged GST. No ITC can be claimed in these cases. For example: essential supplies like milk or vegetables fall under this category |
| Nil Rated | Those supplies that are specifically taxed at 0% GST are called Nil Rates supplies |
| Zero Rated | Zero Rated supplies are similar to Nil Rated supplies but are specifically intended for the export of goods and services, including supplies made to Special Economic Zones (SEZs) or SEZ developers |
| Non-GST | Supplies that do not come under the purview of GST. For example, petroleum. |
What is an Exempt Supply Under GST?
Exempt supplies under GST refer to transactions that do not attract GST.
These supplies fall into three categories:
- Supplies taxed at a ‘NIL’ rate of tax (0% tax), which means no tax is levied on these items.
- Supplies that are fully or partially exempted from CGST or IGST under specific notifications amending Section 11 of the CGST Act or Section 6 of the IGST Act.
- Supplies classified as non-taxable under Section 2(78) of the Act, such as alcoholic liquor for human consumption, which are explicitly excluded from GST.
For these exempt supplies, no GST is charged, and businesses cannot claim ITC on the taxes paid for these transactions. It’s important to note that zero-rated supplies, such as exports, are distinct and not classified as supplies taxable at a ‘NIL’ rate of tax.
GST Exemption from Registration
- An individual whose annual turnover does not exceed INR 40 lakhs for goods, INR 20 lakhs for services, or INR 20 lakhs and INR 10 lakhs for specific categories in special category states.
- Certain individuals and entities, including agriculturists, are exempt from GST registration.
- Additionally, individuals making Nil Rated and Exempt supplies, such as fresh milk are exempt.
- Those engaged in activities not covered under the supply of goods and services such as petroleum products are also exempt.
- Individuals supplying goods under reverse charge mechanisms do not require GST registration.
GST Exemption for Business
Small and medium-scale businesses can avail GST exemptions if their annual aggregate turnover doesn’t exceed specified limits. For goods, the threshold is INR 40 lakhs, reduced to INR 20 lakhs in hilly and north-eastern states. For services, the limit is INR 20 lakhs, with a INR 10 lakhs cap for businesses in hilly and north-eastern regions.
What are reasons for exemption under GST?
GST exemptions are guided by policy objectives, socio-economic factors, and the need for administrative ease.
Here are some common reasons:
1. Supporting public wellbeing
Essential goods and services, like basic food items (rice, milk), healthcare, and education, may be exempt to make them more affordable for everyone.
2. Empowering small businesses
To reduce compliance burdens and simplify operations, businesses with lower turnover thresholds may be exempt from GST or benefit from lower rates.
3. Boosting exports
Since exports generally have a zero GST rate, they remain competitive in the global market without the burden of domestic taxes.
4. Enhancing interstate trade
To encourage the free flow of goods and services across state borders, certain interstate supplies may be exempt or taxed at a lower rate.
5. Promoting agriculture
Numerous agricultural products and related services are exempt to support the agricultural sector’s growth.
6. Streamlining government operations
Specific government or local authority services are exempt to avoid double taxation and simplify accounting procedures.
7. Facilitating financial services
Certain financial services, like banking and insurance, may be exempt or have special GST liability rules.
8. Respecting cultural and religious practices
Goods and services used for cultural, religious, or charitable purposes may be exempt.
9. Simplifying tax administration
Exempting specific goods or services can make the GST system easier to understand and administer for both businesses and taxpayers.
10. Managing transition
During the initial implementation of GST, specific exemptions or lower rates may be offered to ease the transition process for businesses
How to calculate credit allocated to exempt supplies?
The credit allocated to Exempt supplies can be calculated using the formula:
Formula: (A/T) x C
Here,
A = Aggregate value of exempt supplies
T = Total turnover
C= Common Credit
Significant Notifications Regarding GST Exemptions
1. Notification 02/2017-Central Tax (Rate) dated 28.06.2017 for Goods
- Approximately 149 items exempted from GST under Section 11(1) of the CGST Act, 2017.
- Includes items like electricity, salt, fresh fruits, and passenger baggage.
- Subsequently amended by Notification Nos. 28/2017, 35/2017, 42/2017, 7/2018, and 19/2018 – Central Tax (Rate).
2. Notification 12/2017-Central Tax (Rate) dated 28.06.2017 for Services
- Provides exemptions for specified services under the CGST Act.
- Exemptions largely mirror those under the previous service tax law.
- Subsequently amended by Notification Nos. 21/2017, 25/2017, 32/2017, 47/2017, and 2/2018 – Central Tax (Rate).
Recent changes in GST exemption policies
1. 53rd GST Council Meeting 2024
SEZ incentives
A significant boost for Special Economic Zones (SEZs) came with the exemption of Compensation Cess on imports made by SEZ Units/developers for authorized operations, effective from July 1st, 2017.
Relief for rail passengers
Focusing on the common man, the Council exempted specific services provided by the Indian Railways, along with internal railway supplies, from GST. This could potentially lead to lower travel costs.
Accommodation exemptions for students and professionals
The Council introduced targeted exemptions related to accommodation services, offering some financial relief to students and working professionals.
Read More About: 53rd GST Council Meeting
2. 47th GST Council meeting 2022
GST Exemption List Rationalized
The council decided to trim down the list of items exempt from GST. This aimed to simplify the tax structure and potentially broaden the tax base.
Public Input on GSTR-3B Format
The council opened up modifications to the GSTR-3B format for public suggestions. This facilitated greater stakeholder participation and potentially led to a more user-friendly return filing process.
FAQs
1. Who is exempted under GST?
Individuals and entities below the threshold limit, those making Exempt/Nil Rated supplies, and those in excluded activities.
2. What are exempt GST examples?
Examples for goods and services that are exempt from GST include fresh milk, basic food items, healthcare, educational services.
3. What is the GST exemption limit?
Rs. 40 lakhs for goods (Rs. 20 lakhs in special states), Rs. 20 lakhs for services (Rs. 10 lakhs in special states).
4. Is salary exempt from GST?
Yes, salaries are exempt from GST as they are not a supply of goods or services.
5. Which businesses are exempt from GST?
Businesses that are below threshold limit, making Exempt/Nil Rated supplies, or in excluded activities (e.g. petroleum).
6. How do GST exemptions benefit businesses?
GST exemptions benefit business in a number of ways. For example it could reduce compliance burden and lower the tax rates.
7. Can businesses claiming GST exemptions still register under GST?
Yes, businesses can undertake voluntary registration.
8. Are there any conditions attached to GST exemptions?
Exemptions can be absolute (no conditions), conditional (meeting specific criteria), or partial (limited exemption).
9. How often are GST exemptions updated?
The GST Council reviews and updates exemption policies periodically. The lastest one was the 53rd GST Council Meet held in New Delhi on 22nd June 2024.
10. Is the GST registration limit 20 lakhs or 40 lakhs?
The threshold for mandatory registration is Rs. 40 lakh annually for most businesses, with some special category states having a lower threshold of Rs. 20 lakh.
