The prevalent indirect tax structure in India has a number of exemptions. At central level, 330 exemptions are allowed under CENVAT. These exemptions to service providers and manufacturers depend on the fulfillment of various conditions which are specific to each exemption. Around 99 items are presently exempted under VAT. Individual states can expand this list even for the goods of local importance. It is not possible for the provider of exempt services or manufacturers of exempt goods to avail the benefit of input tax credits. This hampers the free flow of credits down the supply chain and increases the cascading effect. Ultimately whole burden comes on the consumer in the form of an additional cost in the final price of goods and services.

The 13th Finance commissionís Task Force is of the view that there should not be any exemption from CGST and SGST. However, if for some reason, it is considered necessary to provide exemption, the centre and states should draw up a common exemption list which should be restricted to the following:

a) All public services of Government (Central, state and municipal / panchayati raj) including civil administration, health services and formal education services provided by Govt. schools and colleges, Defence, Para-military, Police, Intelligence and Govt. departments.

Public services will not include:

i) Railways

ii) Post and Telegraph

iii) Other commercial departments

iv) Public sector enterprises

v) Banks and Insurance

vi) Health and Education services

b) Any service transactions between an employer and employee either as a service provider, recipient or vice-versa.

c) Any unprocessed food article which is covered under the public distribution system should be exempt regardless of the outlet through which it is sold.

d) Education services provided by non-governmental schools and colleges.

e) Health services provided by non-governmental agencies.

The exemption list proposed by the Task Force leaves a corner for debate as it consists of services which are rendered by the government in the course of the discharge of the sovereign functions of the state. Sovereign functions are maintenance of law and order, collection of taxes, maintenance of military, and international relations. They are not taxable at all and so there is no question of exempting them. The CESTAT, in a recent judgement in the case of Dy Director of Mines and Geological Department vs. CCE & C, Belgaum , has ruled that service tax is not leviable on the sovereign functions performed by the government. This judgement was in the context of service tax demanded from the Department of Mines and Geology of Government of Karnataka. The real distinction is whether it is a service rendered in exercise of sovereign function or whether it is other than sovereign function. If it is a sovereign function no service tax is leviable. If it is not sovereign function, service tax is leviable provided there is a sale of the service on the basis of an invoice or a bill or voucher. Even if it is a statutory function and only a fee is charged, it is still conceptually a commercial sale. And the tax is leviable. The Report of Task Force should have said that these functions are not taxable.

Department of Revenue (DOR) in its comment on the first discussion paper on GST favoured for a common list of exemptions for CGST and SGST. Efforts will be made by centre to substantially reduce the number of items presently exempted under CENVAT regime. Around 99 items presently exempted under VAT may continue to remain exempted in GST regime. There should be no scope, with individual states, for expansion of this list even for goods of local importance. 


The proposal of reducing a majority of the exemptions is a positive step. It will facilitate the free flow of input tax credit. But in our country reducing exemptions requires political will to withstand pressures from lobbies at both the central and state levels. And, itís a tough task. More likely, we will see a gradual reduction in the number of exemptions.