The title is rather paradoxical and does not reflect logic. Normally, when we say something is taxable, it clearly does not include what is non taxable. But in GST, the scenario is quite different.

How did this start about? Section 8 of the CGST, 2017 reads as under:

8. The tax liability on a composite or a mixed supply shall be determined in the following manner, namely:—

(a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and

(b) a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.

Now a composite supply includes two or more supplies one of which is a principal supply. Further, the definition of “composite supply” appearing in Section 2(30) has different phraseology where it talks of consisting of two or more taxable supplies and not just supply. That leads us to find out what is a taxable supply. Section 2(108) defines taxable supply to mean supply of goods or services or both which are leviable to tax under this Act. The term used is “leviable” to tax that means that the supply should be a subject matter of tax under this Act. In common terminology, it means that all supplies which are going to be taxed will be included herein.

In any taxing statute, there are three portions, being levy, assessment and recovery/payment.  Now levy defines the subject matter of the statute, assessment defines who is liable to tax and how valuation is done, while payment/recovery is how and where the liability is discharged. Therefore, the subject matter of tax, being levy, is essentially all that falls within the scope of GST legislations. The difference between levy and collection is best explained in the words of the Supreme Court in CCE vs Vazir Sultan Co.Ltd 1996 (83) ELT 3 thus:

We are of the opinion that Section 3 cannot be read as shifting the levy from the stage of manufacture or production of goods to the stage of removal. The levy is and remains upon the manufacture or production alone. Only the collection part of it is shifted to the stage of removal. Once this is so, the fact that the provisions of the Central Excise Act are applied in the matter of levy and collection of special excise duty cannot and does not mean that wherever the Central Excise duty is payable, the special excise duty is also payable automatically. That is so as an ordinary rule. But insofar as the goods manufactured or produced prior to March 1, 1978 are concerned, the said rule cannot apply for the reason that there was no levy of special excise duty on such goods at the stage and at the time of their manufacture/production. The removal of goods is not the taxable event. Taxable event is the manufacture or production of goods.

Coming back to definitions, taxable supply covers all that which is included in the GST legislations which suffer tax. They would include supplies which are liable to tax at certain rates and would also include exempt supply. That is because, exempt supply is nothing but a species of taxable supply as while it is leviable to tax, the tax however has got exempted due to public policy of the government. For example, supply of health care services is taxable service but because the government of the day does not want to collect any tax from this sector, they are exempt under a notification issued.

However, the GST legislation does not end here. It has a definition for exempt supply which reads as under:

(47) “exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply;

Now, from the above, what transpires is that exempt supply would include the following:

1. Goods or services that attract nil rate of duty
2. Goods or services that are wholly exempt
3. Non taxable supplies;

One way of looking at this would be that there being two definitions, exempt supply is not included in taxable supply. But that would cause considerable confusion as the person who is wholly exempt from tax is not taxable at all or the goods are not a subject matter of the tax. This is clearly wrong as only if they are subjected to a levy can they be exempted. If some goods are not at all in the levy, they are to be called non taxable. For example, buying and selling of shares is neither goods nor services and therefore they are non-taxable. For this reason, there is no need to exempt them at all.

However, under the GST law, the non taxable supplies are included within the terminology of exempt supply. Therefore, non taxable supply becomes a sub sect of exempt supply. Exempt supply, as we have seen, is already a sub sect of taxable supply. Therefore, sub sect of a sub sect will be a sub sect of the main sect – that is part of parts is a part of the whole. This would mean that non taxable supply becomes a part of taxable supply – a wholly untenable way of drafting laws.

The attempt shows the zeal of the draftsman to incorporate provisions related to rule 6 of the erstwhile Cenvat Credit Rules, 2004 and blindly put it in to the statute. The purpose why it was put into cenvat credit was to ensure reversal of amounts of credit when used in relation to non taxable supplies. That cannot be straight jacketed into the levy and exemption sections and would need immediate attention as it would impact registration and composite supply provisions in the least. The last thing that we want to do is to pay taxes on non taxable supply which may be combined with taxable supplies on such loose ends left in the law.