Section 23 of CGST Act-Exemption from GST Registration

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Section 23 of CGST Act

(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.

(2) The Government may, on the recommendations of the Council, by notification, specify the category of persons who may be exempted from obtaining registration under this Act.

Analysis of Provision

Section 23 of CGST Act provides relaxation from the requirement of obtaining registration to two categories of persons:

(a) Agriculturist;
(b) Persons engaged exclusively in the supply of exempted goods or services or both.

Thus, the aforementioned persons would not be required to obtain registration even if their turnover exceeds Rs. 20 Lakhs. To this extent, section 23 overrides the provisions of section 22.

Agriculturist

As per section 2(7), agriculturist means an individual or HUF who undertakes cultivation of land:
(a) By own labour, or
(b) By the labour of family, or
(c) By servants on wages payable in cash or kind or by hired labour under personal
supervision or the personal supervision of any member of the family.

Thus, an agriculturist is not liable for registration only to the extent of supply of produce out of cultivation of land.

If an agriculturist undertakes supplies which are not linked to the cultivation of land, he will fall within the provisions of sections 22 and may have to take registration in respect of such supplies.

It is important to consider the nature of activities undertaken by the agriculturist. If the process deviates from ‘cultivation’ it will travel outside the scope of this exclusion from registration. The exclusion states – to the extent of supply of ‘produce out of cultivation’ of land – any further processing of the primary produce from cultivation will continue not to avail this exclusion.

Cultivation of land does not include pisciculture on inland water body or cattle rearing that graze the produce of land. The produce that emerges from land is ‘cultivation of land’. For example, harvesting paddy is cultivation but production of rice is not.

Please note that the exclusion from the requirement to be registered does not result in non collection of tax on agricultural produce. Section 9(3) of the CGST Act and sections 5(3) of the IGST Act notifies certain commodities (like cashew nuts) on which tax is required to be discharged under reverse charge basis by the recipient of goods when such commodities are purchased from an agriculturist.

Thus, the exemption from registration is dependent on status of the supplier and not based on the commodity involved. Needless to say, if the supplier of goods is not an agriculturist, then he will have to obtain registration under the regular provisions i.e. section 22 if his aggregate turnover exceeds ‘exemption threshold’ and its variations (discussed earlier).

Also, refer discussion under section 2(7) on the various facets of ‘agriculturist’ and the scope of inapplicability to exemption from registration under section 23(1)(b).

Exclusively engaged in Exempt Supplies

The term exclusive indicates engaging in only those supplies which are exempted. Therefore, if a supplier is supplying both exempted and taxable goods and/or services, then this provision is not applicable, and he is required to obtain registration under section 22.

It essentially permits any person whose ‘entire’ supply consists of ‘exempt supplies’, to be excluded from obtaining registration. Care should be taken to validate the premise of (a) entire supply and (b) it being exempt. Even if small value of supplies is taxable, then exempt supplies will be included to determine if aggregate turnover has exceeded the exemption threshold under section 22 for attracting registration.

Now, a question may arise as to whether registration is required in case a person is engaged exclusively in supplying exempted goods or services and also incurs certain expenses which are listed in section 9(3) for payment of tax on reverse charge basis.

Care must be taken to look through notifications issued under section 7(2) where Government will notify persons who are specifically granted exemption from registration, namely:

  • Persons engaged in rendering taxable services which are liable to GST under reverse charges are not required to take registration.(Notification No. 5/2017–Central Tax, dated 19.06.2017)

  • Job-workers engaged in making inter-State supply of services to a registered person except those who are liable to be registered under section 22(1) of the CGST Act, 2017 or persons opting for voluntary registration or persons engaged in making supply of services in relation to jewellery, goldsmiths’ and silversmiths’ wares and other articles (w.e.f. 14.09.2017) – Notification No. 7/2017–Integrated Tax, dated 14.09.2017 as amended vide Notification No. 2/2019-Integrated Tax, dated 29-Jan-2019, w.e.f. 1-Feb2019.

  • Persons effecting inter-State supplies of taxable services – where the aggregate value of supplies on PAN-India basis does not exceed 20 Lakhs in a year(10 Lakhs for special category States- Manipur, Mizoram, Nagaland and Tripura) (w.e.f. 13.10.2017) – Notification No. 10/2017–Integrated Tax, dated 13.10.2017 as amended vide Notification No. 3/2019-Integrated Tax, dated 29-Jan-2019, w.e.f. 1-Feb-2019.

  • Categories of persons effecting inter-State taxable supplies of handicraft goods – where the aggregate value of supplies on PAN-India basis does not exceed 20 Lakhs in a year(10 Lakhs for special category States- Manipur, Mizoram, Nagaland and Tripura) (w.e.f. 22.10.2018) – Notification No. 3/2018–Integrated Tax dated 22.10.2018. This notification has superseded Notification No. 8/ 2017-Integrated Tax, dated 14.09.2017.

  • Persons providing services through an e-commerce who is required to collect tax at source, provided their aggregate turnover does not exceed 20 Lakhs in a year (10 lakh in special category States-Manipur, Mizoram, Nagaland and Tripura) (w.e.f. 15.11.2017). Notification No. 65/2017–Central Tax, dated 15.11.2017 as amended vide Notification No. 6/2019-Central Tax, dated 29-Jan-2019, w.e.f. 1-Feb-2019.

  • Categories of casual taxable persons making taxable supplies of handicraft goods where the aggregate value of supplies on PAN-India basis does not exceed 20 Lakhs in a year (10 Lakhs for special category States-Manipur, Mizoram, Nagaland and Tripura) – (w.e.f. 23.10.2018) – Notification No. 56/2018-Central Tax, dated 23.10.2018.This notification has superseded Notification No. 32/ 2017-Central Tax, dated 15.09.2017.

  • W.e.f. 01.04.2019:-the basic limit beyond which obtaining registration becomes mandatory is increased from Rs. 20 lakhs to Rs. 40 lakhs for certain categories of persons vide notification No. 10/2019-Central Tax, dated 07.03.2019.

As per the said notification, any person, who is engaged in exclusive supply of goods and whose aggregate turnover in the financial year does not exceed Rs. 40 Lakhs, except, –

(a) persons required to take compulsory registration under section 24 of the said Act;

(b) persons engaged in making supplies of the following goods,

Tariff item, sub heading, heading or ChapterDescription
2105 00 00Ice cream and other edible ice, whether or not containing cocoa
2106 90 20Pan masala
24All goods, i.e. Tobacco and manufactured
tobacco substitutes

(c) persons engaged in making intra-State supplies in the States of Arunachal
Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, Puducherry, Sikkim,
Telangana, Tripura, Uttarakhand; and

(d) persons exercising option under the provisions of sub-section (3) of section 25
[voluntary registration], or such registered persons who intend to continue with
their registration under the said Act.

Issues/ Concerns

(a) The new ‘extended exemption threshold’ for registration (from 1 Apr 2019) to Rs. 40 Lakhs is applicable only for those taxable persons, who are engaged in exclusive supply of goods.

Therefore, in case a person in supplying goods but also earns a nominal amount of service income (whether taxable or not) such as commission income, or interest income say from bank (which is exempt), then he shall be liable to obtain registration on cross the exemption threshold of Rs.20 lakhs and not Rs.40 lakhs.

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(b) Exemption to Charitable Organizations:

Pursuant to Notification No. 12/2017-CT(R), dated 28 Jun 2017, Government has exempted services by way of charitable activities, provided by charitable organisations from the levy of GST. Thus, charitable organizations engaged exclusively in charitable activities are exempted from obtaining registration.

However, charitable organisations are compelled to register where they have receipts on account of ancillary activities like providing a premises on rent to operate ATM or a shop to supplement their income sources, charitable hospitals collecting fixed rent or revenue share from pharmacy operator inside premises or from sale of medicines in self-run pharmacy as these are not exempt activities and along with healthcare income, may be well over the exemption threshold and be liable for registration.

(c) Separate Registration for ISD to discharge tax on RCM basis:

Under the erstwhile Service Tax laws, an ISD was allowed to discharge tax liability under reverse charge mechanism without seeking a separate registration.

However, under GST regime, the ISD is required to obtain a separate GSTIN other than the ISD registration for discharging such taxes. But, an ISD is not one who will have any taxable outward supplies except distribution of credit. When an ISD attracts RCM or other liability of its own, then it is more likely that the ISD will become a regular taxable person because of these taxable inward supplies cannot be received without creating an ‘outward supply event’. This is adding to the multiplicity of registrations and complexity in documentation and compliance and impacting the matrix of ‘ease of doing business’.

Co-existence of ISD along with regular registration in the same State may soon fall into disuse once trade comes to understand the dissimilarity between ISD (in service tax) and ISD (in GST). Experts hold the view that ISD (GST) can rightfully exist when the person (legal entity) DOES NOT have a regular registration at any place in the same State. There are some voices to the contrary but the two may come into harmony once the benefits of ISD registration in GST are discovered to be easily available via the regular registration (already obtained in the same State).

(d) Inclusion of non-operational income for threshold limit:

The inclusion of non-operational income like interest income as ‘exempt supplies’ for the purpose of determining the aggregate turnover for registration would bring into the focus large number of persons who are otherwise undertaking only a minimal amount of supply.

In case a person is earning interest income from Fixed Deposit Receipts (FDR) of Rs. 15 Lakhs and a rental income from renting of immovable property of Rs. 6 Lakhs, he would need to take registration and collect GST on such supply of rental services.

Care must be taken to identify whether such non-operational income are really NOT connected with the business of the person. For eg. FD income of proprietor from funds (held in savings account) may be separate from the business of the proprietor. But FD of a firm from funds (held in current account) may be part of the business. Perfect demarcation is not possible and not required also, to leave room for examining based on trail of funds (source for deposit) and to support conclusions one way or other.

Examples

1.XYZ Ltd., Mumbai, is exclusively engaged in supplying petrol. Supply of petrol is not leviable to GST. Thus, XYZ Ltd is not liable for registration as it is engaged exclusively in supplying goods wholly exempt from tax.

2.Jyoti Trust, a charitable trust registered under section 12AA of the Income-tax Act, 1961, is exclusively engaged in supply of services by way of charitable activities. Services by an entity registered under section 12AA of the Income-tax Act, 1961 by way of charitable activities are exempt from GST. Thus, Jyoti Trust is not liable for registration as it is engaged exclusively in supplying services exempt from tax.

3. Meghdut is an agriculturist engaged in cultivation of wheat in his field in the State of Maharashtra. He was exclusively engaged in supply of wheat cultivated in his field in the previous year. Thus, he was not liable to registration as he was exclusively engaged in supply of produce out of cultivation of land.

In the current year, he decides to start trading in rice apart from supplying his wheat produce. His turnover in the current year is Rs. 32 lakh from supply of wheat produced and Rs. 9 lakh from trading of rice.

Since he is engaged in trading of rice also, he is not covered under section 23 above. The threshold limit for registration applicable to a person exclusively engaged in supply of goods in the State of Maharashtra is Rs. 40 lakh. The aggregate turnover of Meghdut in the current year is Rs. 41 lakh [Rs. 32 lakh + Rs. 9 lakh] which exceeds the threshold limit. Thus, he will be liable to registration.

Liability to register in respect of services provided by the commission agent for sale/ purchase of agricultural produce

Circular No. 57/31/2018 GST dated 04.09.2018, inter alia, clarifies as follows:

Mr. A sells agricultural produce by utilizing the services of Mr. B who is a commission agent as per the Agricultural Produce Marketing Committee Act (APMC Act) of the State. Mr. B identifies the buyers and sells the agricultural produce on behalf of Mr. A for which he charges a commission from Mr. A.

In cases where the invoice is issued by Mr. B to the buyer, Mr. B is an agent as covered under Para 3 of Schedule I. Hence, services supplied by commission agent Mr. B on behalf of the principal without consideration shall be deemed to be a supply.

The registration requirements of the commission agents in such cases have been clarified as follows:

(i) Since the services provided by the commission agent for sale or purchase of agricultural produce are exempt from GST vide Notification No. 12/2017 CT (R) dated 28.06.2017, such commission agents (even when they qualify as agent under Schedule I) are not liable to be registered in accordance with provisions of section 23(1)(a).

(ii) As we have already seen, a person is liable for mandatory registration if he makes taxable supply of goods or services or both on behalf of other taxable persons.

Accordingly, a commission agent will be liable to get mandatorily registered under this provision only when both the following conditions are satisfied:

  • the principal should be a taxable person; and
  • the supplies made by the commission agent should be taxable.

However, generally, a commission agent under APMC Act makes supplies on behalf of an agriculturist who is not a taxable person if he supplies produce out of cultivation of land [as seen above]. Thus, a commission agent, who is making supplies on behalf of non-taxable person [viz. agriculturist], is not liable for compulsory registration under this provision.

(iii) However, where a commission agent is liable to pay tax under reverse charge, such an agent will be required to get registered compulsorily.

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