Power to grant exemption from tax

Section 6 — Power to grant Exemption from tax

BLOCK 2 — PRE-GST COUNTERPART / PARALLEL PROVISIONS / OPERATIVE RULES

BLOCK 3 — COMMENTARY

1. Statutory Architecture

2. Historical Context

Pre-GST, exemption from central excise was governed by s. 5A of the Central Excise Act 1944, from service-tax by s. 93 of the Finance Act 1994, and from customs by s. 25 of the Customs Act 1962. Each statute had its own exemption notification regime — Notification 12/2012-CE (central excise), Notification 25/2012-ST (mega service-tax exemption), and various customs exemption notifications. The CST exemption regime under s. 8(5) of the CST Act operated at the State level.

Section 6 IGST consolidates the inter-State exemption power into a single architecture. Sub-section (1) provides for general exemption by notification — the operative form. Sub-section (2) provides for special exemption by order in exceptional cases — rarely used; the operative practice has been to issue general notifications under sub-s. (1) even for narrow categories. Sub-section (3) provides a one-year window for the Government to insert an Explanation in a notification or order, with retrospective effect as if always part of the original — a clarificatory power.

The Explanation to s. 6 clarifies an important practical rule: where exemption is absolute (full exemption from the whole tax), the supplier shall NOT collect tax in excess of the effective rate. This prevents the practice of charging tax and then claiming exemption — the supplier of absolutely-exempt goods is statutorily barred from collecting tax. This protects downstream taxpayers and consumers from being charged for tax that is exempted at source.

The operative exemption notifications under s. 6 IGST include — Notification 9/2017-IT(R) (exempt goods at NIL rate), Notification 12/2017-CT(R) read with Notification 9/2017-IT(R) (exempt services), Notification 18/2017-IT(R) (SEZ supplies exemption), Notifications for various sector-specific exemptions (transportation of agricultural produce, healthcare, educational services, charitable activities, government services, etc.). Each notification is subject to its own conditions (recipient class, supply value, supplier class, etc.).

Constitutional foundation lies in Article 246A read with Article 265 (no tax without authority of law). The exemption power is the converse of the taxing power — both flow from the same constitutional source. The Government's exemption power is conditioned on (a) Council recommendation, (b) satisfaction of public interest, (c) issuance of notification (sub-s. 1) or special order (sub-s. 2). Absence of any of these conditions makes the exemption defective.

An important jurisprudential principle is that exemption notifications must be construed strictly at the threshold (whether the case falls within the exempted category), but liberally thereafter (once within the category, the exemption is read to its full breadth). This is the Dilip Kumar Constitution Bench rule from 2018 — a clarification of the earlier Sun Export line.

3. Judicial Evolution

Exemption disputes are a substantial portion of IGST litigation. The doctrinal anchors are:

Union of India v Mohit Minerals Pvt Ltd — (2022) 10 SCC 700 [Supreme Court — 3-Judge Bench (Constitution Bench questions)]

Brief Facts: Importers of coal on CIF basis were held liable under Notification Nos. 8/2017-Integrated Tax (Rate) and 10/2017-Integrated Tax (Rate) to pay IGST on ocean freight component under reverse charge under s. 5(3)/(4) of the IGST Act. Importers challenged the levy as ultra vires the charging section and contended that IGST had already been paid on CIF value (which included freight) at the time of import under s. 3(7) of the Customs Tariff Act.

Issue: Whether IGST could be levied separately on the ocean freight component of CIF imports when the entire CIF value (inclusive of freight) had suffered IGST under s. 3(7) of the Customs Tariff Act; and whether GST Council recommendations are binding on the Union and States.

HELD: Levy struck down. The Court held that the impugned notification offended the principle of 'composite supply' under s. 8 of the CGST Act because ocean freight in CIF imports is part of the composite supply of imported goods and cannot be artificially severed. Further, the GST Council's recommendations are recommendatory, not binding, on the Union and States — both Parliament and State legislatures have simultaneous legislative power under Article 246A.

"The recommendations of the GST Council are not binding on the Union and the States. The recommendations only have a persuasive value. To regard them as binding would disrupt fiscal federalism, where both the Union and the States are conferred equal power to legislate on GST."

Relevance: Foundational authority on the IGST charging section, the limits of reverse-charge notifications under s. 5(3)/(4), and the constitutional architecture of the GST Council. Repeatedly cited in RCM, place-of-supply, and composite-supply disputes.

Skill Lotto Solutions Pvt Ltd v Union of India — (2021) 15 SCC 667 [Supreme Court — 3-Judge Bench]

Brief Facts: Petitioner, a distributor of lottery tickets, challenged the levy of GST on lottery on the ground that lottery is an 'actionable claim' which is not 'goods' for GST purposes (the actionable-claim exclusion in Schedule III) and therefore the constitutional power to tax goods is missing.

Issue: Whether lottery is 'goods' under the CGST/IGST Acts; whether the inclusion of lottery as a taxable actionable claim is constitutional; and whether the valuation under s. 15 (face value of lottery ticket) is permissible.

HELD: Levy upheld. The Court held that the definition of 'goods' under s. 2(52) of the CGST Act is wide enough to include actionable claims, and the inclusion of lottery within taxable actionable claims is a legislative policy choice within Parliament's competence. Valuation at face value is not arbitrary because the prize component is a contingent payout, not a deduction.

"The definition of 'goods' in the CGST Act, by including actionable claims, is a deliberate expansion of the historical concept and is constitutionally permissible. Lottery, being one of the three specified actionable claims rendered taxable, is liable to GST at face value."

Relevance: Constitutional anchor for the breadth of 'goods' under GST and for the legislative discretion in designing valuation rules. Foundational for actionable-claim/derivative-instrument supply disputes.

Commissioner of Income Tax v Vatika Township Pvt Ltd — (2015) 1 SCC 1 [Supreme Court — 5-Judge Constitution Bench]

Brief Facts: The Income-tax Act's surcharge provisions had been amended mid-year. Question was whether the amendment applied retrospectively to assessment years already commenced. Constitution Bench was constituted to settle conflicting two-Judge Bench rulings on the presumption of prospectivity for fiscal statutes.

Issue: Whether a fiscal statute that imposes or enhances a burden operates prospectively unless expressly or by necessary implication retrospective; and what is the standard of clarity required for retrospective imposition.

HELD: Strong presumption of prospectivity for any provision that imposes or enhances a burden. Retrospective imposition requires either an express statutory direction or a necessary implication so unmistakable that no reasonable construction can avoid it. Beneficial provisions may be construed retrospectively; burden-imposing provisions cannot.

"If a legislation confers a benefit on some persons but without inflicting a corresponding detriment on another, it could be construed to be retrospective. The same is not true of a provision imposing a tax or otherwise creating a fresh burden — there, the presumption of prospectivity is at its strongest."

Relevance: Constitutional anchor for prospective operation of GST amendments. Decisive in every dispute over the effective date of a notification, amendment, or rule change under IGST.

Mafatlal Industries Ltd v Union of India — (1997) 5 SCC 536 [Supreme Court — 9-Judge Constitution Bench]

Brief Facts: Multiple manufacturers had paid central excise duty under protest, succeeded in challenges, and sought refund. The question arose whether the doctrine of unjust enrichment applies to indirect-tax refunds, whether refund can be denied if the burden has been passed on, and whether common-law refund claims survive the statutory refund regime.

Issue: Constitutional and doctrinal scope of refund of indirect taxes — whether unjust enrichment bars refund where burden has been passed on; whether the statutory refund mechanism is exclusive.

HELD: Constitution Bench held (i) the statutory refund mechanism under the Central Excise Act is exclusive — common-law refund claims are excluded; (ii) the doctrine of unjust enrichment applies — refund will not be granted where the assessee has passed on the burden to the ultimate consumer; (iii) the burden of proof on incidence-passing is on the claimant.

"Where the duty has been passed on to the buyer, the manufacturer is not entitled to refund. To do otherwise would be to enrich the manufacturer at the expense of the consumer — a course no principle of justice can support."

Relevance: Foundational unjust-enrichment authority that animates s. 54(8)(e) and the Consumer Welfare Fund mechanism. Decisive in every IGST refund claim including zero-rated/inverted-duty/excess-balance refunds.

Maneka Gandhi v Union of India — (1978) 1 SCC 248 [Supreme Court — 7-Judge Constitution Bench]

Brief Facts: Petitioner's passport was impounded under s. 10(3)(c) of the Passport Act without a hearing. She challenged the action as violating Articles 14, 19, and 21 — particularly the right to audi alteram partem before adverse action.

Issue: Whether procedural fairness — particularly the right to be heard — is implicit in Article 21; and whether administrative action affecting a right must be preceded by a fair hearing.

HELD: Procedural fairness is implicit in Article 21. Any procedure that affects life, liberty or a valuable right must be 'right, just and fair' — not arbitrary, oppressive or fanciful. Audi alteram partem is a constitutional requirement, not merely an administrative-law refinement.

"The procedure contemplated by Article 21 must be right, just and fair, and not arbitrary, fanciful or oppressive; otherwise it would be no procedure at all and the requirement of Article 21 would not be satisfied."

Relevance: Foundational due-process authority. Cited in every GST refund / show-cause / cancellation / blocking-of-ITC case where the assessee was not heard before adverse action.

All India Federation of Tax Practitioners v Union of India — (2007) 7 SCC 527 [Supreme Court — 3-Judge Bench]

Brief Facts: The constitutional validity of the service-tax levy on chartered accountants, cost accountants, and architects was challenged on the ground that these professions had been historically regulated by State legislation and were therefore outside Union legislative competence.

Issue: Constitutional foundation of the service-tax levy — whether 'service' can be taxed by the Union under the residuary entry (Entry 97 List I) and what is the doctrinal nature of a service-tax levy.

HELD: Service-tax upheld. The Court held that service-tax is a value-added tax on the value of services rendered, traceable to Entry 97 of List I until Entry 92C was inserted by the Constitution (88th Amendment). The economic concept of value addition through services is the doctrinal basis on which service-tax — and now GST on services — rests.

"Service-tax is a value-added tax on the commercial activity of providing services. The taxable event is the rendition of service and the levy attaches to the value addition at the point of service delivery."

Relevance: Constitutional anchor for taxation of services under GST — pre-101st-Amendment doctrinal framework that informs the place-of-supply concept under s. 12 and s. 13 of the IGST Act.

4. Circulars and Notifications

Notification No. 9/2017-Integrated Tax (Rate) dated 28.06.2017 — Exempt goods schedule under s. 6(1) IGST

The principal exempt-goods notification for inter-State supplies. Includes (with periodic amendments) basic food items (cereals, pulses, fresh fruits, fresh vegetables, milk, eggs, fresh meat / fish / poultry), educational books, newspapers, prasadam, raw silk, raw cotton (when supplied by agriculturist — alternative RCM under Notif 4/2017), agricultural produce by primary producer, residential dwelling for use as residence, services by Reserve Bank of India to specified entities, etc. Each entry subject to its own conditions.

Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017 — Exempt services schedule under s. 11 CGST + s. 6(1) IGST (services)

Master exempt-services notification operative for both CGST and IGST (parallel notification under s. 6(1) IGST). Covers healthcare (clinical establishments + authorised medical practitioners + paramedics + ambulance), education (pre-school through higher secondary; education recognised by law; vocational education by Government), agricultural extension services, services to agriculturist, services by Government / local authority (with extensive exceptions), charitable activities by registered charitable institutions, religious activities, banking services to RBI / SBI / financial institutions, services by various commissions and tribunals, sports services to recognised bodies, etc. Most extensively amended IGST exemption notification.

Notification No. 18/2017-Integrated Tax (Rate) dated 05.07.2017 — Exemption for inter-State supplies to SEZ developer / unit

Exempts inter-State supplies of goods or services made by registered suppliers to SEZ developer / unit for authorised operations from IGST. Operationalises zero-rated treatment under s. 16 IGST through the exemption route. Subject to conditions: (a) recipient must be SEZ developer / unit with authorised operations endorsement; (b) supply must be for authorised operations; (c) supplier must have documentary proof. Alternative route to LUT or IGST-paid for SEZ supplies.

Notification No. 30/2018-Integrated Tax (Rate) dated 30.09.2018 — Exemption from inter-State supply for specified Public Sector exports

Exempts inter-State supplies of goods between PSUs of Government of India where one PSU supplies to another for specified purposes. Narrow but operationally important exemption for Government-to-Government inter-State supplies.

Circular No. 32/06/2018-GST dated 12.02.2018 — Clarification on exemption to services provided by Central / State Government / Local Authority

Clarifies scope of exemption for Government services under Notification 12/2017-CT(R). Specifies which Government services are exempt (passport, visa, birth-death certificate, judicial services, etc.) versus taxable (commercial services like renting of immovable property to commercial entities, telecom by Government PSUs, etc.). Critical for Government-procurement RCM applicability under Notif 13/2017-CT(R) and 10/2017-IT(R).

Circular No. 51/25/2018-GST dated 31.07.2018 — Applicability of GST on ambulance services and healthcare exemption

Clarifies scope of healthcare exemption under Notification 12/2017-CT(R). Ambulance services by clinical establishments / authorised medical practitioners are exempt; commercial ambulance services not so exempt. Cosmetic / plastic surgery (other than for restorative purposes) not exempt. Boundaries of healthcare exemption clarified — critical for hospital / nursing-home compliance.

Notification No. 47/2017-Integrated Tax (Rate) dated 14.11.2017 — Exemption from inter-State supply of services by goods transport agency to specified persons

Conditional exemption for GTA services to certain specified persons (Government, local authority, governmental authority, etc.). Operationalises threshold-and-class-based exemption — illustrates the conditional-exemption mechanism under s. 6(1).

5. Worked Examples

6. Practitioner Planning

• For every exemption claim, identify the operative notification (number, date, entry, conditions) and document compliance with each condition.
• For conditional exemptions, build a documentary trail proving each condition is satisfied — class of supplier, class of recipient, end-use, value threshold, etc.
• For SEZ supplies, choose between Notification 18/2017-IT(R) exemption route, LUT route under Rule 96A, and IGST-paid + refund route under Rule 96 based on cash-flow modelling.
• For healthcare and education exemptions, audit subordinate activities (pharmacy in hospitals, transport in schools) for taxable classification; apply Rule 42/43 reversal on common inputs.
• For Government services exemption, distinguish exempt categories (passport, judicial) from taxable categories (commercial renting, telecom by PSUs); operative under Circular 32/06/2018.
• For agricultural-produce exemptions, distinguish 'primary producer' from intermediary / aggregator; primary producer supplies typically exempt; aggregator supplies taxable.
• For Explanation insertions under s. 6(3), monitor for retrospective beneficial impacts — refund opportunities; or adverse impacts — challenge on Vatika Township grounds.
• For absolute-exemption supplies, ensure no tax is collected (Explanation to s. 6); inadvertent collection attracts statutory prohibition + recipient claim.
• For partial exemptions, ensure ITC reversal under Rule 42/43 is computed correctly — exempt turnover includes exempt + nil + non-GST supplies.
• For RCM-on-exempt-supplies disputes, recall the supplier-exempt-recipient-RCM interface; exemption may extend or may not depending on notification.
• For composite exemption (where one component is exempt and another is taxable in a composite supply), apply principal-supply test under s. 8 CGST — composite supply takes the rate of principal supply (exempt or taxable).
• For mixed supply (separate-pricing distinct supplies), individual rates apply; exempt component remains exempt.
• For e-commerce supplies through exempt platforms, audit whether s. 5(5) deemed-supplier framework intersects with exemption — supplier-side exemption may not save ECO from deemed-supply liability.
• Maintain a master log of all operative IGST exemption notifications + amendments — Notifications 9/2017, 12/2017, 18/2017, 47/2017, sector-specific amendments.
• For exemption-claim disputes in SCN, build a layered defence — strict-then-liberal Dilip Kumar rule + Vatika Township prospectivity + Bharti Airtel self-assessment finality + Mafatlal unjust-enrichment.

7. Litigation Defence

• Strict-then-liberal construction defence — Dilip Kumar rule (2018 Constitution Bench) — once a case falls within an exemption category, the exemption is read liberally.
• Vatika Township prospectivity defence — for any narrowing of an exemption notification, invoke strong-presumption-of-prospectivity; pre-amendment broader exemption applies to pre-amendment supplies.
• Explanation retrospective-effect defence — for beneficial Explanations inserted under s. 6(3) within one year, exhibit statutory retrospective effect; reclaim taxes paid in interim.
• Council-recommendation defence — for any exemption notification, verify Council recommendation was made; absence renders notification vulnerable to challenge.
• Public-interest defence — for any challenge to an exemption notification on policy grounds, exhibit the public-interest rationale; Court will typically defer to legislative discretion (Skill Lotto framework).
• Mafatlal unjust-enrichment defence — for refund of tax wrongly paid under a notification that should have been exempt, prove incidence-not-passed-on.
• Maneka Gandhi audi alteram partem — for any withdrawal of exemption claim by Department without prior hearing, invoke procedural fairness.
• Conditional-compliance defence — for conditional exemptions, maintain documentary trail of each condition; document-driven defence resists Department reclassification.
• Mohit Minerals composite-supply defence — for exemption disputes involving composite supplies, invoke principal-supply test; exemption attaches to the principal supply.
• Absolute-vs-conditional defence — for Explanation-to-s. 6 challenges, distinguish absolute from conditional exemption; only absolute exemption triggers the no-collection bar.
• AIFTP constitutional foundation defence — for any constitutional challenge to an exemption framework, invoke the symmetric taxing/exempting power under Article 246A + Article 265.
• Special-order-by-exception defence — for sub-s. (2) special orders, exhibit the 'exceptional circumstances' record; absence makes special order vulnerable.
• Filco Trade Article 142 backstop — for systemic exemption-claim failures due to GSTN architecture issues (e.g., LUT renewal failures, RFD-01 portal errors), seek equitable relief.
• BHARTI AIRTEL self-assessment defence — for retrospective reclassification of exemption claims, invoke finality of self-assessed returns.
• Notification-binding-on-revenue defence — under s. 168 CGST applied via s. 20 IGST, exemption notifications are binding on Revenue officers; benefits cannot be denied where conditions met.
• Hierarchy-of-instruments defence — Circular cannot enlarge or narrow exemption notification; only Government can amend notification.

8. Procedural Map — Exemption Claim and Defence

Step 1. Identify the operative exemption notification

Match supply against Notif 9/2017-IT(R) (goods exemption), Notif 12/2017-CT(R) (services exemption parallel for IGST), Notif 18/2017-IT(R) (SEZ), and sector-specific notifications.

Step 2. Verify Council recommendation

Council recommendation is statutory pre-condition for s. 6(1)/(2) exemption; verify from GST Council meeting minutes for novel notifications.

Step 3. Distinguish absolute from conditional exemption

Absolute exemption — Explanation to s. 6 bars tax collection above effective rate. Conditional exemption — conditions must be documented and satisfied.

Step 4. For conditional exemptions, build the conditions-trail

Class of supplier / recipient + end-use + value threshold + documentation requirements.

Step 5. Issue invoice as per exemption notification

For full exemption — 'NIL' or 'exempt' on invoice with notification reference; no IGST charged.

Step 6. Report exempt supply in returns

GSTR-1 Table 8 (exempt + nil rated + non-GST); GSTR-3B Table 3.1(c) (exempt + nil rated).

Step 7. Apply ITC reversal under s. 17(2) + Rule 42/43

Reverse common ITC on inputs/input services attributable to exempt outward supplies.

Step 8. For partial exemption (concessional rate), compute reversal proportionate

Rule 42 formula: D1 = (E ÷ F) × C2, where E = exempt turnover, F = total turnover, C2 = common ITC.

Step 9. For SEZ supplies, document authorised-operations endorsement

Recipient must provide authorised-operations endorsement from Development Commissioner; supplier retains copy.

Step 10. For healthcare / education supplies, audit subordinate-activity boundary

Pharmacy, canteen, parking, hostel — separate taxable supplies; common-input apportionment.

Step 11. For exemption-claim SCN, build defence package

Dilip Kumar strict-then-liberal + Vatika Township prospectivity + condition-compliance documentation + Mohit Minerals notification scope.

Step 12. For Explanation insertion under s. 6(3), verify one-year window

Explanation must be issued within one year of original notification; later insertions are vulnerable.

Step 13. For special-order exemption under sub-s. (2), document exceptional circumstances

Sub-s. (2) requires exceptional circumstances to be 'stated in such order'.

Step 14. For exemption withdrawal mid-supply, apply time-of-supply + Vatika Township

Time of supply pre-amendment = pre-amendment exemption applies.

Step 15. Periodic review of exemption notifications and circulars

Subscribe to CBIC notifications; exemption notifications amended multiple times annually.

CROSS-REFERENCES

• s. 1 IGST Act — Commencement; s. 6 in force 01.07.2017.
• s. 2 IGST Act — Definitions including taxable territory.
• s. 3 IGST Act — Officer appointment; officers administer exemptions.
• s. 4 IGST Act — Cross-empowerment; cross-empowered officers administer exemptions.
• s. 5 IGST Act — Charging section; exemption operates on s. 5 charge.
• s. 7 IGST Act — Inter-State supply; exemptions apply to inter-State supplies.
• s. 16 IGST Act — Zero-rated supply; SEZ supplies via Notif 18/2017-IT(R) exemption route.
• s. 20 IGST Act — Application of CGST provisions.
• s. 11 CGST Act — Parallel exemption power for CGST.
• s. 17(2) CGST Act — ITC restriction proportionate to exempt supplies (operative for exemption-cost calculation).
• s. 31 CGST Act — Tax invoice including exempt-supply mention.
• s. 39 CGST Act — Return-filing including exempt-supply reporting.
• s. 54 CGST Act — Refund of tax wrongly paid on exempt supplies.
• s. 73 / s. 74 CGST Act — SCN for wrongful exemption claim.
• s. 122 CGST Act — Penalty for wrongful exemption claim.
• s. 132 CGST Act — Prosecution for fraudulent exemption above threshold.
• s. 168 CGST Act — Notifications and circulars binding on Revenue.
• Rule 42 CGST Rules — Apportionment of common credit (operative for exempt-supply reversal).
• Rule 43 CGST Rules — Apportionment for capital-goods common credit.
• Rule 46 CGST Rules — Tax invoice with exempt-supply remark.
• Notification 9/2017-Integrated Tax (Rate) — Exempt goods schedule.
• Notification 12/2017-Central Tax (Rate) — Exempt services schedule (parallel for IGST).
• Notification 18/2017-Integrated Tax (Rate) — SEZ supply exemption.
• Notification 30/2018-Integrated Tax (Rate) — Specified PSU inter-State exemption.
• Notification 47/2017-Integrated Tax (Rate) — Conditional GTA exemption.
• Circular No. 32/06/2018-GST — Government services exemption clarifications.
• Circular No. 51/25/2018-GST — Healthcare exemption clarifications.
• Constitution Article 246A — Constitutional foundation for exemption power.
• Constitution Article 265 — No tax without authority of law (converse principle).
• SEZ Act 2005 + SEZ Rules — Authorised operations framework.
• Customs Act 1962, s. 25 — Parallel exemption power for customs (continues for BCD).
• Foreign Trade Policy 2023 — Export / SEZ exemption framework coordination.