Items not Covered under GST

Items not covered under GST are limited in number. These items are effectively those classified or notified under Schedule III of the CGST Act. These items are different from exempt or non-GST supplies under GST. in this article, we will give you a complete understanding of the list of entries in Schedule III of the CGST Act of items not covered under GST, as well as an idea about non-GST supplies.

What are the Items and Services not Covered under GST?

The GST law covers almost all goods and services in India and prescribes the rates for each of these goods and services. However, there are certain goods and services that have been kept out of the purview of the GST law. These goods and services are listed under Schedule III of the Central Goods and Services Tax (CGST) Act. In the next section, we will take you through Schedule III of the CGST Act and describe the goods and services that are not covered under GST.

What is Schedule III Under GST?

The GST council prescribes the GST rates for goods and services, as well as the list of exempted goods and services under GST. On the other hand, there are certain activities that are items and services not covered as a supply under GST. These fall beyond the scope of GST, i.e., GST will not apply to them as they are neither a supply of goods nor services in the first instance. These activities are similar to the negative list under the erstwhile Service Tax regime. Such transactions are classified under Schedule III of the GST Act as “Neither goods nor services”.

Section 7 of the CGST Act that defines ‘Supply’ under GST has a sub-section (3) where the Schedule III reference is given. The excerpt is as follows:

3) Notwithstanding anything contained in subsection (1),
(a) activities or transactions in Schedule III; or
(b) such activities or transactions by the Central Government, a State Government or any local authority, engaged as public authorities, as notified by the Government on GST Council’s recommendations, 

will be treated neither as a supply of goods nor a supply of services.

Before we take you through the list of supplies mentioned under Schedule III, it is important to know the difference between exempt supplies, zero-rated supplies, nil-rated supplies, non-GST supplies, and Schedule III supplies.

Difference Between Exempt Supplies, Zero-rated Supplies, Non-GST Supplies, Nil-rated Supplies and Schedule III Supplies

List of Entries in Schedule III of the CGST Act

Schedule III of the CGST Act covers those activities or transactions which can neither be treated as the supply of goods nor treated as the rendering of services. There are at present ten entries in Schedule III of the CGST Act, as follows:

1. Employee Services Under an Employment Agreement

“Services by an employee to the employer, in the course of or in relation to his employment”, is the first entry. 

However, related parties under the GST law include employer-employee relationships, which raised many concerns about whether employment services would be attracted under the GST law. Hence, if an employer provides any service to the employees, it shall be considered as a taxable service. This is covered by Schedule I, under Entry 2 in reading with the GST Valuation Rules, except for gifts up to a value of Rs.50,000. For instance, cafeteria, recreation and sports facilities to employees will attract GST. 

On this note, the CGST Circular No: 140/10/2020 – GST also explained that the remuneration to independent directors or other non-executive directors, not being employees of the company, is taxable under GST in the hands of the company under the reverse charge mechanism. 

2. Services by a Court or Tribunal

The second entry lists “Services by any court or tribunal established under any law for the time being in force”.

Hence, court/tribunal services including by district courts, high courts and the Supreme Court are not covered under GST. These courts will not charge GST to pass judgement. However, it should be noted that services by the arbitral tribunal to any business entity are subject to tax on a reverse charge basis.

3. Services Provided by an MP or Person in a Constitutional Post or Government Post 

The duties performed by the following persons in authority do not attract GST:

• The Members of Parliament, State Legislature, Panchayats, Municipalities and other local authorities
• Any person who holds a post under the provisions of the Constitution
• Chairperson/Member/Director in a body established by the state/central government or a local body and who is not an employee of the same

It is interesting to note that legal services provided by the same MPs/MLAs shall be taxable under GST if provided to a business entity and will be exempt if rendered to any other person.

4. Funeral and Related Services

The fourth entry states that “Services of funeral, burial, crematorium or mortuary including transportation of the deceased” are not covered under GST. Hence, GST does not apply on funeral services for any religion.

5. Sale of Land and/or a Completed Building 

The fifth entry lists “Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.” 
Hence, the proceeds from the sale of land in any form or used for any purpose, as well as the sale of a completed building of any nature, but subject to Para 5(b) of Schedule II, do not attract GST. 

In other words, the construction services of a new building are subject to GST (being works contract). It also means that if a sale agreement is executed before the issue of the completion certificate, the entire sale consideration is taxable under GST as a service as per Schedule II.

However, any developed land may still be treated as a supply for the developmental charges collected.

6. Actionable Claims Apart from the Lottery, Etc. 

Actionable claims are those claims that can be enforced by legal action or a suit. For example, a book debt even if unsecured, a bill of exchange, a promissory note, beneficial interest in movable property not in possession of claimant, etc.

A book debt (the debtor) is not goods because it can be transferred as per the Transfer of Property Act but cannot be sold. A bill of exchange and a promissory note can be transferred under the Negotiable Instruments Act by delivery or endorsement but cannot be sold.  

The definition of ‘Goods’ under GST includes actionable claims other than money. However, due to this exclusion as per Schedule III, the actionable claims are neither a supply of goods nor services. They can be considered as something in substitution of money. Hence, GST will not apply to these activities. However, as exceptions in actionable claims, lottery, betting and gambling attract a higher GST rate.

While the lottery comes under goods, gambling and betting is a supply of services.

7. Sales From and to Non-taxable Territories

The entry lists that “Supply of goods from a place in the non-taxable territory to another place in the non-taxable territory without such goods entering into India” is out of the scope of supply under GST.* These are also known as third–country exports. 

Accordingly, GST gets attracted only if the condition of goods “entering India” is fulfilled for a supply from a non-taxable territory. Out and out supplies (i.e. merchant trading), sales of goods in customs bonded warehouses, and high-sea sales are not considered supplies under the GST Act, and hence GST is not attracted.

8. Transactions in Customs Ports

Supply in a customs port before home consumption* as follows:
(a) Supply of warehoused goods to any person before clearance for home consumption. 
(b) Supply of goods by the consignee to any other person, by an endorsement of documents of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption.

*In Budget 2023, it was proposed that these entries will take retrospective effect from 1st July 2017. However, no refund will be made of any tax that has been collected between 1st July 2017 and 31st January 2019 (date of insertion into the Act). Further, Section 17(3) of the CGST Act has also been amended in this regard restricting ITC on the “Supply of warehoused goods to any person before clearance for home consumption”, by including the value of such transactions under exempt supplies.  

9. Activity of Apportionment of Co-insurance Premium
This entry explains that the activity of apportionment of co-insurance premium by the lead insurer to the co-insurer when the insurance services are jointly supplied by both the lead insurer and the co-insurer to the insured in co-insurance agreements, will not be treated as a supply under GST. However, this is subject to the condition that the lead insurer pays the CGST, SGST, UTGST or IGST, as applicable, on the entire amount of premium paid by the insured.

10. Services by Insurer to Reinsurer
Services provided by an insurer to the reinsurer for which a ceding commission or a reinsurance commission is deducted from reinsurance premium paid by the insurer to the reinsurer will not be treated as a supply under GST. However, this is subject to the condition that the CGST, SGST, UTGST or IGST is paid by the reinsurer on the gross reinsurance premium payable by the insurer to the reinsurer, which is inclusive of the said ceding commission or the reinsurance commission.

Non-GST Items

Having understood the meaning and items that are not covered under GST, let us understand what non-GST supplies mean. Non-GST supplies refer to those supplies that do not find any mention in the GST law as they are constitutionally kept out of the purview of GST. Hence, they do not come under the scope of GST, are not liable to GST, and of course, no input tax credit is available on them as GST is not charged on such items.

Some examples of non-GST items include:

For further information on taxability, read a host of articles by ClearTax:

• What is Supply under GST and its Importance
• Schedule I: Transactions falling under GST even without consideration
• Schedule II under GST: Defined Supply of goods or services