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. They are different from the exempt or non-GST supplies under GST. The article gives a complete understanding and list of entries in the Schedule III of the CGST Act.

Latest Updates

1st February 2023
Important updates from Budget 2023* 
1. Section 16 is amended to state that buyers who fail to pay their supplier the invoice value, including the GST amount, within 180 days from the date of issue of the invoice, must pay an amount equal to the ITC claimed along with interest under Section 50.
2. Sections 37, 39, 44, and 52 are amended to restrict taxpayers from filing their GSTR-1, GSTR-3B, GSTR-9 and GSTR-8 for a tax period after the expiry of three years from the due date. 
3. Section 17(5) is revised to include another item under ineligible ITC being expenditure on CSR initiatives for corporates.
4. High sea sales and similar transactions that are neither supply of goods or services are considered exempt and hence ITC proportional to such sales cannot be claimed as per revised Section 17(3).
5. Schedule III has been amended to provide for paras (7) and (8) and explanation (2) to take retrospective effect from 1st July 2017.
6. Section 10 of the CGST Act has been amended to allow businesses that supply goods through an e-commerce operator to opt into the composition scheme.
*These amendments will come into force once notified by the CBIC.

What is Schedule III under GST?

GST council announced the GST rates for goods & services which also contained the list of exempted goods and services. On the other hand, there are certain activities that are items not covered as supply under GST. They are beyond the scope of GST, i.e., GST will not apply to them as they are neither supply of goods nor services in the first instance. These activities are also similar to the negative list under the erstwhile Service Tax regime. The transactions are classified under the 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 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.

Difference between exempt 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 be neither treated as the supply of goods nor treated as the rendering of services. There are at present 8 entries in the Schedule III of the CGST Act, given in the same order as the GST law along with further details:

Employee Services under Employment Agreement

Services by an employee to the employer, in relation to his employment, is the first entry. Related parties include employer-employee which raised many concerns about whether employment services would be attracted under the GST law.  A clarification is obtained on this matter with the GST not applicable on employment services by adding it under this list. 

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

Further, if an employer provides any service to the employees, it shall be considered as a taxable service. This will be 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, sports facilities to employees will attract GST. There are contentions that notice period pay attracts GST. Get a complete overview of this aspect from our article on “Impact of GST on Notice Pay Recovery”.

However, an employee will still need to pay income tax on the salary earned.

Services by Court or Tribunal

Court/Tribunal Services including District Court, High Court and Supreme Court. Courts will not charge GST to pass judgement. It must be noted that services by the arbitral tribunal to any business entity are subject to tax on a reverse charge basis.

MP or Person in a constitutional post or government post 

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 government or a local body and who is not an employee of the same

It is interesting to note that legal services 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.

Funeral and related services

Services of a funeral, burial, crematorium or mortuary together with the charges for transportation of the deceased do not attract GST. There are no taxes on funeral services for any religion.

Sale of land and/or completed building 

Proceeds from the sale of land in any form or used for any purpose as well as the sale of the 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 means that if a sale agreement is executed before the issue of the completion certificate, the entire sale consideration is taxable under GST as service as per Schedule II.

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

Actionable claims apart from the lottery, etc 

Actionable claims means those claims which can be enforced only by legal action or a suit. For example, a book debt even if unsecured, bill of exchange, 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. 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 except for money. However, due to this exclusion as per Schedule III, the actionable claims are neither supply of goods nor services. They can be considered as something in substitution of money. So, 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 is goods, gambling and betting is the supply of services.

Sale from and to Non-taxable territories

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 are out of scope of supply under GST.* These are also known as Third–Country Export. 

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, so GST is not attracted.

Transactions in Customs Port

Supply in 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 all the 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.  

These changes will come into force once notified by the CBIC.

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

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