Doing Business with Exempted and Not Exempted Categories under GST in India

The Goods and Services Tax (GST) regime in India is designed to simplify the taxation process and bring transparency to businesses across the country. However, one of the complexities that businesses often encounter is the distinction between exempted goods and services and non-exempted goods and services. This classification plays a crucial role in determining a business's GST liability, compliance requirements, and eligibility to claim Input Tax Credit (ITC).

In this blog, we will explore how businesses that deal with both exempted and non-exempted categories of goods and services must navigate the GST registration process and ensure compliance with the regulations.

What are Exempted and Non-Exempted Categories under GST?

Under the GST framework, goods and services are classified into different categories for tax purposes. Some goods and services fall under the exempt category, meaning they are not subject to GST. On the other hand, non-exempted goods and services are taxable, and businesses dealing in them are required to pay GST.

1. Exempted Goods and Services

Exempted goods and services are those that are not liable to pay GST. This can either be because the government has decided to make them exempt or because they are considered essential or public interest goods and services.

Some examples of exempted goods and services under GST include:

  • Essential Goods: Certain food items, vegetables, fruits, and grains.
  • Healthcare Services: Medical services provided by hospitals or doctors.
  • Educational Services: Services provided by educational institutions or government schools.
  • Export of Goods and Services: Export sales are generally zero-rated, meaning no GST is applied.

Businesses that only deal in exempt goods and services are not required to register for GST unless they exceed the threshold turnover limit or are required to do so under other specific provisions.

2. Non-Exempted (Taxable) Goods and Services

Non-exempted goods and services are those that attract GST. These goods and services fall under different tax slabs, such as 5%, 12%, 18%, or 28%, depending on the nature of the product or service.

Examples of non-exempted goods and services include:

  • Goods: Electronic items, automobiles, and luxury goods.
  • Services: Professional services, like consultancy or software development, and construction services.

Businesses dealing in non-exempted goods and services must register for GST if their turnover exceeds the prescribed limit (Rs. 40 lakhs for goods and Rs. 20 lakhs for services). Even if the business turnover is below the threshold limit, voluntary registration can be taken to claim Input Tax Credit (ITC).

Business Operations Involving Exempted and Non-Exempted Categories

For businesses that engage in both exempted and non-exempted goods and services, the GST registration and compliance process can be a bit more complex. Here’s how such businesses should proceed:

1. GST Registration Requirements

If your business deals with both exempt and non-exempt goods/services, you will still be required to register for GST if your aggregate turnover exceeds the prescribed threshold limits. For example:

  • If your business generates revenue from exempt goods but also deals in taxable goods that cross the threshold limit, you must register for GST.
  • Businesses engaged in both categories may have to file GST returns, ensuring compliance with the tax system.

Additionally, if the business is engaged in interstate supply (i.e., supply across different states within India), GST registration will be mandatory regardless of turnover.

2. GST on Exempted Goods

When dealing with exempted goods, the business does not charge GST on the sale of these goods to customers. However, this leads to a few important considerations:

  • Input Tax Credit (ITC): Businesses dealing in exempted goods cannot claim ITC on taxes paid for purchases related to exempt goods or services. This means that even though you may have paid GST on inputs (goods or services used in business), you cannot recover this tax if it’s related to exempted items.

  • Partial Exemption: In cases where a business deals with both exempted and taxable goods, partial exemptions might apply. The business needs to calculate how much input tax credit it can claim based on the proportion of taxable supplies versus exempt supplies.

3. GST on Taxable Goods

For non-exempted (taxable) goods, businesses are required to:

  • Charge GST: Businesses must charge GST on the sale of taxable goods and services based on the applicable GST rate (5%, 12%, 18%, or 28%).
  • Claim Input Tax Credit (ITC): Businesses can claim ITC on purchases made for taxable supplies, such as raw materials, packaging, etc., subject to compliance with GST rules.

Key Considerations for Businesses Dealing with Exempted and Non-Exempted Categories

Running a business that deals with both exempt and non-exempt goods and services brings forth several challenges. Below are the key points to consider:

1. Proper Record Keeping

Maintaining accurate records is essential for businesses dealing with both exempt and non-exempt goods and services. Businesses need to keep detailed records of:

  • Sales of both exempt and taxable goods.
  • Purchases made for taxable and exempt supplies.
  • GST paid and collected.

This helps in ensuring that the business files correct returns and claims the appropriate Input Tax Credit (ITC).

2. Apportionment of Input Tax Credit (ITC)

If the business deals in both exempt and non-exempt goods/services, there may be a need to apportion the Input Tax Credit (ITC). This means that the ITC on purchases related to taxable goods can be claimed, but the ITC on purchases related to exempt goods cannot.

The apportionment method depends on the ratio of taxable supplies to exempt supplies, and businesses must maintain the correct records to ensure compliance.

3. Filing of GST Returns

Businesses dealing with both exempt and non-exempt goods and services are required to file GST returns, such as GSTR-1 and GSTR-3B. These returns provide information about:

  • Outward supplies (sales of taxable goods/services).
  • Input tax credit claims (for taxable goods/services).
  • Output tax liability (GST payable).

Conclusion

Running a business that deals with both exempted and non-exempted categories under GST in India requires careful planning and strict adherence to GST compliance. While exempt goods and services may offer some relief from taxation, they also come with challenges, such as the inability to claim Input Tax Credit (ITC) on related purchases.

Businesses involved in both categories must ensure they register for GST if required, maintain proper records, and file accurate GST returns to stay compliant.

For businesses with mixed supplies, consulting a GST expert or tax consultant can help in determining the most efficient way to handle GST registration, filing, and claiming Input Tax Credit, thereby optimizing tax savings and avoiding penalties.

By understanding the nuances of GST on exempt and non-exempt goods and services, businesses can ensure smooth operations and long-term success under the GST framework.

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