Concept of EXEMPTIONS in Goods and Service Tax 1. Introduction I happened to meet quite a few businessmen in last few weeks and who were unable to appreciate the importance of Zero rating of goods. I made them understand the benefits of proposed scheme of a zero ratingâover current scheme of exemptions. This made them change their status from Anti-GST to Appreciating GST. Seeing this I bring before you a complete guide to Zero rating vs. Exemptions vs. No tax Economy.

2 Zero Rating Vs Exemption

Suppliers of goods and services are either taxable or tax exempt. Theoretically exemptions are provided in order to relieve the tax payer from extra burden of taxes and make the commodity cheaper. Exemptions relieve the exempt traders value added from the tax, but all his purchases (including capital goods) are taxed, thereby flouting the credit chain. In other words exemption actually increases the amount of tax finally paid on goods which is the opposite effect that the exemption sought to provide. However if a commodity is exempt only at the retail level, then only the retail level is freed of GST and prices would fall marginally, although a portion of GST element would have already been charged and included in price of commodity.

If a commodity or service is zero rated, the zero rated traders value added is not taxed and the trader receives a credit for the tax paid on the purchase of materials and other inputs used. Zero rating, is the only way to ensure that a product is truly free of GST, since any tax paid would be credited on the last sale.

                                                                       

Zero Rating	Exemption
Actual Benefit is given	Theoretical benefit
Tax relief at all levels	Tax relief only at one level
Credit chain continues	Credit chain is broken
No tax on value added at all.	Tax on value added of a particular dealer is foregone/exempted

 

Let us now examine the effect of 4 possible economies with the help of an example:

a)      No tax Economy

b)      Full Tax Economy

c)      Exempted Economy

d)      Zero Rating Economy

Illustration

John purchased goods worth Rs.2000. He paid Rs.500 as expenses to labour. Also, profit of Rs.250 is added to these goods, He ultimately sold these goods to David. Assuming the GST rate as 10% on input and output, Calculate GST payable in respect of the following:

Case 1.           No tax Economy - GST not applicable.

Case 2.           Full Tax Economy - No Exemptions.

Case 3.           Exempted Economy - Exemption to David.

Case 4.           Zero Rating Economy - Zero Rating to David.

Solution

Case 1: No tax Economy - GST not applicable

Mr. John

Particulars	Amount (Rs.)	Input GST (Rs.)	Net Payable (Rs.)
Cost of goods purchased	2000	0
Add: Labor	500
Add: Profit	250
Value of goods sold (without GST)	2750
Add: GST @ 10%	0	0	0
Total Selling Price	2750

 

Mr. David

Particulars	Amount (Rs.)	Input GST (Rs.)	Net Payable (Rs.)
Cost of goods purchased	2750	0
Add: Labor	500
Add: Profit	250
Value of goods sold (without GST)	3500
Add: GST @ 10%	0	0	0
Total Selling Price	3500

Case 2: Full Tax Economy - No Exemptions.

Mr. John

Particulars	Amount (Rs.)	Input GST (Rs.)	Net Payable (Rs.)
Cost of goods purchased	2000	200[1]
Add: Labor	500
Add: Profit	250

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