GST Exemption: A Complete Guide to Tax-Free Goods and Services

Goods and Services Tax (GST) exemptions are provisions where certain goods and services are not subject to GST. Understanding the concept of GST exemptions, how they apply, and what qualifies as tax-free is essential. Goods and services exempt from GST provide monetary relief to consumers and suppliers by reducing the tax burden on essential products.

It is important for businesses and consumers to understand the difference between GST-exempt and zero-rated goods. While no GST is charged on the final product or service in both categories, the implications for businesses differ.

• GST-exempted Goods

These goods and services are completely exempt from GST, meaning no tax is charged on their supply. Businesses offering exempt goods and services cannot claim Input Tax Credit (ITC) on the goods they produce or sell. This could increase overall costs for businesses, as they are unable to recover any GST paid on their inputs.

• Zero-rated Goods

These goods are taxable but at a 0% GST rate. While customers are not charged any GST, businesses selling zero-rated goods can claim ITC on the GST they have paid on their inputs. This mechanism allows businesses to recover the GST paid on the goods and services used in the production or supply of zero-rated goods, reducing their tax burden.

GST exemptions are designed to reduce the overall tax burden for businesses and consumers. However, exemptions may also limit input tax credit claims. This limitation can impact overall profitability, as businesses cannot recover GST on exempt goods. Therefore, GST exemptions can affect both total tax liability and cash flow management.

Several essential goods exempted from GST have been identified to ensure they remain affordable and to support certain sectors by reducing the financial burden. This GST exemption list includes categories such as basic necessities, agricultural products, and healthcare items. Here's a breakdown of goods that fall under these exemptions:

Similar to goods, there is a list of GST exempted services designed to ensure affordability for the general population. Additionally, GST exempted services help reduce the tax burden on individuals from weaker sections of society. These services include agricultural, educational, and healthcare-related activities. Below is a breakdown of such services:

GST exemptions are designed to reduce the taxation burden for businesses and individuals, primarily benefiting small businesses and organisations involved in charitable activities. Below is a detailed explanation of the GST threshold and criteria for small businesses, as well as special exemptions for charitable organisations and NGOs.

What is the GST Threshold for Small Businesses?

The GST exemption limit for small businesses is determined based on the annual turnover of the business. As per the latest regulations, for businesses dealing in goods, the exemption of GST applies if their annual turnover does not exceed ₹40 Lakhs. For businesses providing services, the exemption threshold is set at ₹20 Lakhs.

 

For businesses operating in the north-eastern region and hilly states, the threshold is lower—businesses dealing in goods with a turnover of ₹10 Lakhs or less can claim GST exemption.

 

Although a small business may be exempt from GST registration, they can voluntarily opt to register if they wish to claim Input Tax Credit (ITC). This allows businesses to deduct the taxes paid on inputs from their output tax liabilities. Voluntary registration can also make it easier for a business to work with GST-registered clients, as most prefer to conduct business with those that issue GST-compliant invoices.

What is the Turnover Limit for GST Exemption in India?

The turnover limit for GST exemption in India varies based on the nature of the business:

• The turnover limit for a business involved in the supply of goods is ₹40 Lakhs

• The turnover limit for a business involved in the supply of services is ₹20 Lakhs

 

Some businesses are required to register for GST regardless of their turnover. This applies to businesses engaging in interstate trade, e-commerce, or specific notified categories, such as agents supplying goods on behalf of others. Additionally, a business that provides both goods and services must assess their total turnover to determine whether GST registration is mandatory.

 

The turnover limit is part of the government’s effort to simplify tax compliance for micro, small, and medium-sized enterprises (MSMEs), allowing them to operate without the need for GST registration if their turnover is below the specified thresholds.

What Are the Special GST Exemptions for Charitable Organisations and NGOs?

Charitable organisations and Non-governmental Organisations (NGOs) involved in healthcare, education, and other services are often granted special GST exemptions. This ensures that their efforts towards public welfare services remain affordable and accessible.

 

NGOs and charitable organisations must fulfil certain eligibility criteria to qualify for these exemptions:

• They must be registered under the Societies Registration Act, 1860, or Section 12AA of the Income Tax Act, 1961

• The services rendered must align with activities considered charitable by law, such as education, public healthcare, or public religious services

• All income generated must be used for charitable purposes only and not for personal gain

 

Key activities that are typically exempt from GST for charitable organisations include:

• Educational services provided by institutions, including pre-school education, higher education, and services offered by institutions offering qualifications recognised by law

• Healthcare services, such as medical treatment provided by authorised diagnostic centres and services offered by veterinary clinics

• Religious services, such as activities related to the promotion of spirituality or public religious gatherings

 

The government’s initiative to grant GST exemptions to NGOs and charitable organisations helps reduce their operational costs and allows them to allocate more resources towards public service and welfare.

 

How to Apply for GST Exemption for Your Business

 

A business eligible for GST exemption is not required to apply for an exemption status. If their annual turnover remains below the set limit, they are automatically exempt from registering for GST. To avail the exemption status, businesses must ensure their turnover does not exceed the prescribed limit.

 

If a business has already registered for GST but their turnover is below the exemption limit, they can choose to cancel their GST registration. They simply need to raise a cancellation request on the GST portal and provide a valid reason. Once reviewed, the relevant authorities will cancel the registration, and the business will no longer need to comply with GST filing requirements.

 

What is the impact of GST exemptions on Input Tax Credit (ITC)

 

One significant impact of GST exemption is on Input Tax Credit (ITC). A business eligible for GST exemption cannot claim ITC on goods and services used as inputs. This means they cannot reduce their overall tax liability by deducting the GST paid on purchases from the GST collected on sales.

 

For example, if a business pays ₹1,000 in GST on the purchase of raw materials but collects ₹1,500 in GST from customers for the sale of these materials. They would normally subtract the ₹1,000 paid from the ₹1,500 collected and only pay ₹500 to the government. However, exempt businesses cannot claim this credit, so the GST paid on inputs becomes a cost that cannot be recovered.

 

For exempt businesses, while the initial benefit is reduced compliance and tax obligations, they may face higher operational costs due to the inability to claim ITC.

 

On the other hand, a business that voluntarily registers for GST, despite being eligible for exemption, is allowed to claim ITC, which helps reduce their overall tax burden. This permits them to be more competitive in terms of pricing. Businesses dealing regularly with GST-registered suppliers and customers must evaluate whether opting for voluntary registration or remaining exempt will be more beneficial in the long run.

In India, the GST framework categorises the supply of goods and services into four main groups, each subject to unique tax treatments: Exempt, Zero Rated, Nil Rated and Non-GST. These classifications have varying implications for how GST is applied. Here’s a breakdown of the key differences between them

Exempt Supplies

Exempt supplies are not liable for GST, meaning no GST is charged, and the supplier cannot claim Input Tax Credit (ITC) for the GST paid on inputs and services used in providing the exempted supply.

 

Goods exempted from GST include those considered essential, such as fresh fruits, vegetables, healthcare services provided by clinics, and educational services.

Nil Rated Supplies

Goods and services under the Nil rated category are not subject to GST, being taxed at a 0% GST rate. Suppliers of Nil rated goods or services are not liable to pay GST but can claim ITC for the GST paid on inputs and services used.

 

Examples include pharmaceutical products for export and certain agricultural products.

Zero Rated Supplies

Zero rated supplies are also exempt from paying GST and are taxed at a 0% GST rate. However, this category specifically refers to the export of goods and services. Suppliers providing zero-rated supplies can claim ITC for the GST paid on inputs and services.

 

Exports of goods and services to foreign countries fall under zero-rated supplies.

Non-GST Supplies

These are goods and services that are outside the purview of GST entirely. Non-GST supplies neither collect nor deduct GST, and no ITC can be claimed.

 

Examples of non-GST items include petroleum products (subject to separate state taxes), alcohol for human consumption, stamps, and currencies.