What Is a GST Exemption?

Bio

An Alumnus of IIM and DU with almost a decade of experience in the banking and finance sectors. I had the opportunity to work with all types of institutions in BFSI ecosystem like Bank, NBFC, Fintech, Consulting and Auditor. I started my professional journey at KPMG and subsequently worked in leading names of the BFSI sector including Ujjivan Bank, Vistaar Finance. Currently building a fintech startup ( PICE) by handling alliances, compliance and creation of GTM strategy for payments and credit product.

6 Nov 24
9 mins

Saurabh Agrawal

08 Mins
06-11-24

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Table of Contents

What Qualifies as an Exempt Supply Under GST?
Different Types of GST Exemptions
Comprehensive List of GST Exemptions
Leveraging GST Exemptions for Business Growth
Why Are Certain Goods Exempted from GST?
GST Exemptions for Small and Medium-Sized Businesses
How Is ITC Treated if a Supply Is Exempt?
How to Identify the Credit Attributable to Exempt Supplies?
Conclusion

GST exemptions apply to essential goods and services, including basic food items, healthcare, and education, which incur no GST.
Exempt supplies under GST are divided into nil-rated supplies, fully or partially exempted items, and non-taxable supplies like alcohol.
Small businesses may qualify for GST exemptions based on turnover, helping to reduce compliance and support growth.
Exemptions improve cash flow for businesses by reducing tax liabilities, which can enhance financial stability and support when applying for loans.
Understanding GST exemptions helps businesses optimize tax planning and maintain compliance, especially valuable for MSMEs.

The Goods and Services Tax (GST) has replaced various indirect taxes like VAT and service tax, to make a unified tax structure for the value of goods and services. Various GST rates apply depending on the type of goods or services. However, in certain cases, GST does not apply to certain goods and services. This is known as GST exemption. A GST exemption covers specific goods, and services, often referred to as exempted goods under GST.

What Qualifies as an Exempt Supply Under GST?

Exempt supplies under GST are those transactions that do not incur GST. These supplies can be divided into three types:

Supplies taxable at nil tax rate (0% tax) means no GST is applied to these goods or services.
Supplies fully or partially exempted from CGST or IGST through specific notifications issued under Section 11 of the CGST Act or Section 6 of the IGST Act.
Supplies considered non-taxable under Section 2(78) of the Act, such as alcoholic beverages for human consumption, which are explicitly outside the scope of GST.

For these exempt supplies, GST is not charged, and businesses are not eligible to claim input tax credit (ITC) on taxes paid. It is crucial to differentiate that zero-rated supplies, such as exports, are not categorised as supplies taxed at an NIL rate.

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Different Types of GST Exemptions

The following mentions the types of exemptions under GST:

Absolute Exemptions

These exemptions apply fully without any conditions or limitations. The supply of electricity by an electricity transmission or distribution company is completely exempt from GST.

Conditional Exemptions

Such exemptions come with specific conditions or criteria. Healthcare services with room charges enjoy a GST exemption up to a certain threshold, beyond which the tax is applicable.

Partial Exemptions

In these cases, GST exemptions are given only up to a certain limit. Small-scale suppliers within a state can avail GST exemption if their total supply value stays below a designated limit per day.

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Comprehensive List of GST Exemptions

The following is a list of GST-exempt goods:

Types of Goods	Examples
Live animals	Cows, asses, goats, sheep, poultry, etc.
Fish	Fresh or frozen fish meat
Meat	Fresh meat and frozen meat of sheep, cows, goats, pigs, horses, etc.
Live trees and plants	Bulbs, flowers, roots, foliage, etc.
Natural products	Honey, fresh and pasteurized milk, cheese, eggs, etc.
Vegetables	Potatoes, tomatoes, onions, etc.
Dry fruits	Cashew nuts, walnuts, etc.
Fresh Fruits	Grapes, bananas, apples, etc.
Coffee, tea and spices	Tea leaves, coffee beans, turmeric, ginger, etc.
Sugar	Sugar, jaggery, etc.
Grains	Rice, wheat, oats, barley, etc.
Seeds	Oil seeds, flower seeds, cereal husks, etc.
Products of the milling industry	Different types of flour
Water	Mineral water, tender coconut water, etc.
Baked goods	Bread, pizza base, puffed rice, etc.
Fossil fuels	Electrical energy
Drugs and pharmaceuticals	Human blood, contraceptives, etc.
Fertilisers	Goods and organic manure
Beauty products	Bindi, kumkum, kajal, etc.
Newsprint	Rupee notes, judicial stamp paper, envelopes, etc.
Ornaments	Plastic and glass bangles, etc.
Printed items	Printed books, maps, newspapers, etc.
Fabrics	Silkworm cocoon, silk waste, raw silk, khadi, etc.
Waste	Municipal waste, sewage sludge, etc.
Pottery	Clay lamps, earthen pots, etc.
Hand tools	Hammer, spade, etc.

Here is a list of GST exemption services:

Types of services	Examples
Government services	Transportation of goods or people, postal service, services offered by the Reserve Bank of India, services by a foreign diplomat in India, services offered to diplomats, etc.
Agricultural services	Cultivation, harvesting, supplying farm labour, renting or leading agricultural machinery, warehouse-related activities, services provided by a commission agent or the Board for buying or selling agricultural produce or Agricultural Produce Marketing Committee, etc.
Transportation services	Transportation of passengers by air, transportation of goods by road, water, rail, etc., payment of toll, transportation of goods where the cost of transport is less than ₹1,500, etc.
Judicial services	Services given by the partnership firm of advocates, arbitral tribunal or senior advocates to an individual or business entity whose aggregate turnover is up to ₹40 lakhs
Organisational services	Services provided by tour operators for foreign tourists, exhibition organisers for international business exhibitions, etc.
Educational services	Transportation of faculty or students, examination services, mid-day meal scheme, services given by IIMs, etc.
Medical services	Services offered by ambulances, charities, veterinary doctors, medical professionals, etc. does not include hair transplant or cosmetic or plastic surgery.
Other services	Services given by GSTN to the Central or State Government or Union Territories, admission fee payable to theatres, sports events, circuses, etc. which charges an amount till ₹250

Leveraging GST Exemptions for Business Growth

For a GST-registered person, grasping the details of GST exemptions goes beyond mere compliance. Using these exemptions helps in reducing tax liabilities and strengthening the financial position of the business. Whether exemptions apply to goods or services, they create opportunities for tax savings and better cash flow management. It is crucial when you want to apply for business loans, since it gives lenders a clearer view of your company's financial health, which makes it easier to secure finance.

Why Are Certain Goods Exempted from GST?

Under India's system, certain goods, services and transactions are not subject to GST. These exemptions are granted for various reasons tied to policy objectives, socio-economic considerations and administrative ease. Below are common reasons explaining why certain goods are exempted from GST:

Social Welfare and Public Interest: Essential goods and services, such as basic food items like rice, wheat and fresh milk, as well as healthcare and education services, are exempt from GST to support societal welfare.
Exports: Goods and services meant for export are usually zero-rated under GST, meaning they are taxed at a 0% rate. This keeps exports competitive internationally without the burden of GST impacting their prices.
Small Businesses: To reduce the compliance burden on smaller businesses and promote growth, businesses with lower turnover may qualify for exemptions or lower rates. The Composition Scheme, for example, offers reduced GST rates to small enterprises within certain turnover thresholds.
Interstate Supplies: Some interstate transactions involving specified goods and services may be exempt or taxed at reduced rates to ease the flow of goods and services across state borders.
Government Services: Certain services provided by the government or local authorities are exempt to avoid double taxation and make the accounting procedures simpler.
Agriculture: Many agricultural products and services are exempt to support India’s agricultural sector, which is vital to the country's economy.
Financial Services: Some financial services, such as banking, loan interest and insurance, are either exempt from GST or subject to special provisions.
Administrative Simplicity: Exemptions for certain goods and services help streamline the tax system, reducing compliance efforts for businesses and making GST regulations easier to navigate.
Transitional Provisions: During the shift to the GST system, some exemptions or concessional rates were introduced to smooth the transition and reduce the tax burden for businesses adjusting to the new system.

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GST Exemptions for Small and Medium-Sized Businesses

Small and medium-sized businesses can benefit from GST exemptions if their total annual turnover stays within certain limits. For goods, the threshold is set at ₹40 lakhs, but it drops to ₹20 lakhs in hilly and north-eastern states. The limit for services is ₹20 lakhs, while for businesses in hilly and northeastern areas, their limit is ₹10 lakhs.

How Is ITC Treated if a Supply Is Exempt?

Under GST in India, you cannot claim Input Tax Credit (ITC) on supplies that are exempt.

How to Identify the Credit Attributable to Exempt Supplies?

The credit attributed 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

Common Credit	Total Input Tax in a Period
Less	Tax specifically related to non-business use
Less	Tax solely linked to exempt supplies
Less	Credits such as for works contracts, rental of cabs, etc. which are ineligible under Section 17(5)
Less	Tax directly associated with taxable supplies, including zero-rated supplies

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Conclusion

Understanding which are the exempted goods under GST is crucial for businesses who want to optimise their tax liabilities and manage cash flow effectively. Exempted supplies, especially for small and medium-sized enterprises, can significantly impact financial planning.

By strategically leveraging these exemptions, businesses can enhance their competitive edge while ensuring compliance with GST regulations. Additionally, recognising the conditions under which exemptions apply helps in navigating the complexities of the tax system, ultimately supporting sustainable growth and stability in the marketplace.

FAQs

What are exempted goods under GST?

Exempted goods under GST are products on which no GST is applied due to their essential or socially beneficial nature. Common examples include fresh fruits and vegetables, bread, milk, books, and healthcare supplies. Businesses selling exempted goods cannot claim Input Tax Credit (ITC) on related expenses.

Which of the following items is exempted from GST?

Essential goods like fresh produce, unprocessed food items, and specific healthcare products are commonly exempted from GST. For instance, items like rice, milk, and bread fall under GST exemptions, helping reduce costs for consumers.

What are 15 services which are exempted from GST?

Key GST-exempt services include healthcare services, public education, agricultural services, government transportation services, and services provided by the RBI. Other examples include services related to charitable activities, transportation of goods by road (below a certain threshold), mid-day meal programs, veterinary services, ambulance services, and services by senior advocates, among others.

What is the difference between nil-rated and exempted goods?

Nil-rated goods are taxed at a 0% GST rate, meaning they are under GST but with no tax applied, while exempted goods are entirely excluded from GST. Both categories result in no GST for consumers, but suppliers of exempted goods cannot claim ITC, whereas nil-rated goods are often treated similarly.

Is entertainment zero-rated or exempt?

Entertainment is generally not zero-rated or exempt under GST. Entertainment services, such as cinema tickets, usually incur GST at a specified rate, although there may be concessions for events with ticket prices below a certain amount.

Is rice exempted or nil-rated?

Unbranded rice is typically nil-rated under GST, meaning it attracts a 0% GST rate, making it affordable for consumers. Branded or pre-packaged rice, however, may incur a small GST rate.

Is petrol exempt?

Yes, petrol is exempt from GST; it is classified as a non-GST supply. However, petrol is still subject to other taxes, such as excise duty and state-level VAT, which impact its final price.