Requirement for GST registration for persons exclusively engaged in exempt supplies

1.Introduction

We all know that as per Section 22(1) of the CGST Act, 2017, if aggregate turnover of a supplier in a financial year exceeds Rs 40 lakh / Rs 20 lakh / Rs 10 lakh as may be applicable, such a supplier is liable to take registration in the State / Union territory from where he makes a taxable supply of goods or services or both.

The expression “Aggregate Turnover” has been defined under Section 2(6) of the CGST Act,2017 as under:

“aggregate turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax and cess;

The provisions of Section 22(1) are in a way contradicting the definition of the aggregate turnover in view of fact that it mandates that a supplier is liable to take registration from where he makes taxable supply of goods or service or both , thus the thrust is on taxable supplies. On the other the threshold limit of exemption in said Section is linked to the ‘aggregate turnover’ whose definition as stated above includes exempt supplies.

2. Is a person engaged exclusively in exempt supplies required to obtain GST registration

In view of discussion made supra, a direct question arises as to whether a person exclusively engaged in exempt supplies and whose aggregate turnover is in excess of the limit prescribed under Section 22(1) is required to obtain GST registration or not.

In this regard Section 23(1) of the CGST Act, 2017 comes to rescue of the persons exclusively engaged in exempt supplies. The said section is reproduced below for ready reference:

23. (1) The following persons shall not be liable to registration, namely:––

(a) any person engaged exclusively in the business of supplying goods or services or both that are not liable to tax or wholly exempt from tax under this Act or under the Integrated Goods and Services Tax Act;

(b) an agriculturist, to the extent of supply of produce out of cultivation of land.

In view of clause (a) of Section 23(1) of the CGST Act,2017, the persons exclusively engaged in exempt supplies of goods or services or both is not required to obtain GST registration even if its aggregate turnover exceeds the limit prescribed under Section 22(1).

However it is amusing to note that specific mention that Section 23 overrides Section 22 has not been made by the legislature in Section 23. Anyways in view of specific Section 23 it would definitely override Section 22 and there is no cause of any worry for persons exclusively engaged in exempt supplies and they have been absolved from taking GST registration. The raison d’être for this is that when all the outward supplies of a person are exempt and no tax is payable by him nor he can avail any input tax credit, there is no logic for his obtaining GST registration.

3. Is supplier engaged exclusively in exempt supplies required to obtain GST registration for discharging reverse charge obligations

In preceding para we have deliberated that a supplier exclusively dealing in exempt goods / services is not required to obtain GST registration in view of specific relaxation provided to them under Section 23(1)(a) of the CGST Act, 2017. Now let’s take this discussion ahead and discuss whether such supplier would be required to obtain GST registration in case it receives any good or services which is subject to payment under reverse charge mechanism wherein the tax is to be paid by recipient of supply.

In this regard provisions of Section 24 of the CGST Act, 2017 are relevant. For ready reference said Section is reproduced below:

24. Notwithstanding anything contained in sub-section (1) of section 22, the following categories of persons shall be required to be registered under this Act,––

(i) persons making any inter-State taxable supply;

(ii) casual taxable persons making taxable supply;

(iii) persons who are required to pay tax under reverse charge;

(iv) person who are required to pay tax under sub-section (5) of section 9;

(v) non-resident taxable persons making taxable supply;

(vi) persons who are required to deduct tax under section 51, whether or not separately registered under this Act;

(vii) persons who make taxable supply of goods or services or both on behalf of other taxable persons whether as an agent or otherwise;

(viii) Input Service Distributor, whether or not separately registered under this Act;

(ix) persons who supply goods or services or both, other than supplies specified under sub-section (5) of section 9, through such electronic commerce operator who is required to collect tax at source under section 52;

(x) every electronic commerce operator;

(xi) every person supplying online information and database access or retrieval services from a place outside India to a person in India, other than a registered person; and

(xii) such other person or class of persons as may be notified by the Government on the recommendations of the Council.

From above Section, two important legal points emerges as under:

1. Section 24 overrides Section 22, which means that the persons specified in Sec 24 are required to obtain registration, irrespective of their aggregate turnover.
2. Persons who are required to pay tax under reverse charge are required to be obtain GST registration as per Sec 24(iii).

Now coming to our moot question whether a supplier exclusively engaged in exempt supplies would be required to obtain GST registration, in case it receives any supply of goods or services which are subject to payment under reverse charge mechanism.

This question seems to be clash of Section 23 and Section 24 of the CGST Act, 2017, in a way that Section 23 mandates no registration for 100% exempt suppliers whereas Section 24 prescribes mandatory registration for person liable to pay tax under reverse charge.

The issue becomes more interesting when we note that Section 24 only overrides Section 22, which may mean that benefit of not taking registration granted to 100% exempt suppliers cannot be taken away by Section 24 if such supplier receives supplies subject to payment of tax under reverse charge.

On the other hand, another view on the issue can be that Section 23 and 24 are independent Sections and operate in different aspects, thus 100% exempt suppliers would be required to obtain registration, if they receive any supplies subject to reverse charge. Thus there can be two views on the issue before us.

3.1 Person exclusively engaged in exempt supplies need to obtain registration if it is liable to pay tax under reverse charge – Ruling of Maharashtra AAR

In view of the two views on the issue as discussed in the preceding para, M/s Jalaram Seeds applied for an advance ruling from Maharashtra AAR, on the question whether the firm exclusively engaged in exempt supplies receiving GTA services (subject to reverse charge) is liable to take registration under section 24 or is exempted from registration under section 24.

The Maharashtra AAR vide order dated 10.04.2019 adjudged that the applicant is liable to take registration in view of provisions of section 24 of the CGST Act, 2017.

The highlights of the order are as under:-

• Without referring to section 23 of the CGST Act, we can say that a person, whose aggregate turnover of all supplies is other than taxable supply, is not liable for registration.

• Section 23 providing exemption inter alia to person engaged exclusively in the business of exempt supplies  is not contrary to section 22 but is clear expression of the intent of section 23.

• There is no force in the contention of the applicant that section 23 is a specified section and independent and not over ruled by section 24.

• The argument that section 23 is stand alone section and the provisions of section 24 pertaining to compulsory registration are applicable to a person liable for registration under section 22(1), makes the section 24 redundant.

• It is a well settled principle of law that the law should not be interpreted in such a way to make any part of the statute redundant.

• By application of rule of harmonious construction and the rule against redundancy, the applicant would go out of the scope of section 23 because he is making certain quantity of taxable supply of GTA service by way of reverse charge mechanism and would fall within the scope of section 24 for purpose of registration and hence he would be required to obtain registration in order to discharge his liability under reverse charge.

For ready reference of the readers the above order of Maharashtra AAR is given below:

*The author is the Member, Indirect Taxes Committee of PHD Chamber of Commerce and Industry and is author of three successful books on GST published by Taxmann Publication.

***

A BIG THANKS to you for visiting our site and reading this article. Kindly provide your feedback on the above article in comment section below. Also please intimate about other GST issues on which you would require our team to pen down articles.

Doubts on GST may be lodged on ‘Ask GST query tab‘ under ‘Your GST queries’ tab on home page. National level GST experts will provide their reply on the matter raised at the earliest and same can be seen under ‘GST query resolved’ tab under ‘Your GST queries’ tab.

You can also subscribe to our free newsletter to always be updated on GST Law by filling the subscription form at home page.

CA. Mohammad Salim

CA. Mohammad Salim is an ICAI award winning Chartered Accountant having rich experience of more than 20 years in the field of indirect taxes. He is the Member, Indirect Taxes Committee of PHD Chamber of Commerce and Industry. He is author of four successful books on GST published by Taxmann Publication and is also GST expert on taxmann portal.