Taxation - GST Ch 05: Exemptions - Test 3: answer key

Question 1 · 2 marks · Taxation - GST Ch 05: Exemptions · medium

Scenario. Sahyog Seva Trust is a charitable trust registered under Section 12AB of the Income-tax Act, 1961, operating in Pune. The trust is also registered under GST. During October 2026, the trust undertook the following activities: (i) Provided care and counseling services to terminally ill patients, collecting ₹5,00,000. (ii) Organized a yoga camp for the general public, charging a participation fee of ₹1,00,000. (iii) Let out a residential house owned by the trust to Mr. Arvind, a registered proprietor, who uses it exclusively as his own residence. The monthly rent is ₹25,000. (iv) Let out another residential house to Nandini Real Estates Pvt. Ltd., a registered company, for use as a guest house for its employees. The monthly rent is ₹40,000. (v) Runs a school exclusively for abandoned and orphaned children, collecting tuition fees of ₹2,00,000. (vi) Provides hostel accommodation to the students of the above school, charging ₹3,00,000. (vii) A donor contributes ₹50,000 with a specific instruction to display his company's advertisement on the trust's premises. (viii) Operates a separate commercial complex, renting out shops for ₹1,50,000. All amounts are exclusive of GST, wherever applicable.

What is the GST implication on the care and counseling services for terminally ill patients and the yoga camp organized by Sahyog Seva Trust?

1. Care and counseling is taxable, while the yoga camp is exempt.
2. Both services are exempt as they qualify as charitable activities. (correct answer)
3. Care and counseling is exempt, while the yoga camp is taxable.
4. Both services are taxable as they generate revenue for the trust.

Answer: B — Both services are exempt as they qualify as charitable activities.

Explanation. Entry 1 exempts services by an entity registered under Section 12AB of the Income-tax Act by way of charitable activities. The definition of charitable activities includes public health by way of care or counseling of terminally ill persons, and advancement of religion, spirituality or yoga. Since the trust is registered u/s 12AB and both services fall within this definition, the entire amount of ₹5,00,000 and ₹1,00,000 is exempt from GST.

Where it goes wrong. Students may incorrectly assume that charging a fee for yoga or medical care makes it a commercial activity, ignoring the specific inclusions in the definition of charitable activities.

Authority. Entry 1 of Notification No. 12/2017-Central Tax (Rate)

Question 2 · 2 marks · Taxation - GST Ch 05: Exemptions · hard

What is the GST treatment for the residential houses let out to Mr. Arvind and Nandini Real Estates Pvt. Ltd.?

1. Both are taxable as renting is a commercial activity.
2. Rent from Mr. Arvind is exempt; rent from Nandini Real Estates is taxable. (correct answer)
3. Rent from Mr. Arvind is taxable; rent from Nandini Real Estates is exempt.
4. Both are exempt as they are residential properties.

Answer: B — Rent from Mr. Arvind is exempt; rent from Nandini Real Estates is taxable.

Explanation. Entry 12 exempts renting of a residential dwelling for use as a residence, except where it is rented to a registered person. However, Explanation 1 clarifies that the exemption remains available if the registered person is a proprietor renting in his personal capacity for his own residence. Mr. Arvind is a proprietor using it for his own residence, so his rent is exempt. Nandini Real Estates is a registered company using it as a guest house, so its rent is taxable.

Where it goes wrong. Students may either tax both because one tenant is registered, or exempt both because they are residential properties. The personal capacity exception for proprietors is the key.

Authority. Entry 12 of Notification No. 12/2017-Central Tax (Rate)

Question 3 · 2 marks · Taxation - GST Ch 05: Exemptions · hard

What is the GST implication on the tuition fees collected from the school for abandoned children and the hostel accommodation provided to them?

1. Both tuition fees and hostel accommodation are exempt.
2. Both tuition fees and hostel accommodation are taxable.
3. Tuition fees are taxable; hostel accommodation is exempt.
4. Tuition fees are exempt; hostel accommodation is taxable. (correct answer)

Answer: D — Tuition fees are exempt; hostel accommodation is taxable.

Explanation. Advancement of educational programmes relating to abandoned, orphaned or homeless children is a charitable activity under Entry 1, making the tuition fees of ₹2,00,000 exempt. However, hostel accommodation services provided by trusts to students do not fall within the ambit of charitable activities as defined. Therefore, the hostel charges of ₹3,00,000 are taxable, even though the students are from the charitable school.

Where it goes wrong. Students often assume that if the education is exempt, all associated facilities like hostels are also exempt. Hostel accommodation by trusts is specifically excluded from the definition of charitable activities.

Authority. Entry 1 of Notification No. 12/2017-Central Tax (Rate)

Question 4 · 2 marks · Taxation - GST Ch 05: Exemptions · medium

What is the GST treatment for the donation received for displaying an advertisement and the rent received from the commercial complex?

1. Advertisement donation is exempt; commercial rent is taxable.
2. Advertisement donation is taxable; commercial rent is exempt.
3. Both are exempt as they are received by a charitable trust.
4. Both are taxable as they are commercial considerations. (correct answer)

Answer: D — Both are taxable as they are commercial considerations.

Explanation. When a donation is received with specific instructions or a mutual understanding that the trust will host an advertisement promoting the donor's business, it is considered a consideration for a taxable supply of service. Therefore, the ₹50,000 is taxable. Renting out a commercial complex is a commercial activity and does not fall under charitable activities, making the ₹1,50,000 taxable. Both are subject to GST.

Where it goes wrong. Students may classify the advertisement donation as a voluntary contribution exempt from tax, or assume all income of a charitable trust is exempt.

Authority. CBIC GST Flyer on Charitable Trusts; Entry 1 of Notification No. 12/2017-Central Tax (Rate)

Question 5 · 2 marks · Taxation - GST Ch 05: Exemptions · hard

Scenario. Rashtriya Nirman Nigam Ltd. (RNNL) is a Government Entity with 90% equity participation by the State Government. It is registered under GST and provides various services in Karnataka. During November 2026, RNNL entered into the following transactions: (i) Provided pure services of maintenance of public parks to the local Municipality, charging ₹15,00,000. (ii) Supplied a composite service of construction of a societal welfare hall to the Municipality. The value of goods (bricks, cement) was ₹4,00,000 and services (labour) was ₹16,00,000, totaling ₹20,00,000. (iii) Supplied a composite service of construction of a shopping complex to the Municipality, where the value of goods was ₹9,00,000 and services was ₹21,00,000, totaling ₹30,00,000. (iv) Provided security services to Aryan Steels Ltd. (turnover > ₹20 lakhs in the preceding FY) for ₹5,00,000. (v) Operated a toll bridge, collecting toll charges of ₹12,00,000. (vi) Received liquidated damages of ₹2,00,000 from a contractor for delay in project execution. (vii) Provided services of issuing birth certificates to citizens, collecting fees of ₹50,000. (viii) Rented a government-owned building to a business entity for ₹1,00,000 per month. All amounts are exclusive of GST, wherever applicable.

What is the GST liability on the pure services and the composite supply of ₹20,00,000 provided to the Municipality?

1. Both are taxable as they are provided by a Government Entity.
2. Pure services are exempt; composite supply is taxable.
3. Pure services are taxable; composite supply is exempt.
4. Both are exempt under the Government services exemption. (correct answer)

Answer: D — Both are exempt under the Government services exemption.

Explanation. Entry 3 exempts pure services provided to the Government by way of any activity in relation to a function entrusted to a Municipality. Entry 3A exempts composite supplies of goods and services to the Government where the value of goods does not exceed 25% of the total value. For the societal welfare hall, goods value is ₹4,00,000 out of ₹20,00,000, which is 20%. Since 20% ≤ 25%, the composite supply is also exempt.

Where it goes wrong. Students may wrongly tax the composite supply without calculating the 25% threshold, or assume Government Entities cannot avail exemptions.

Authority. Entry 3 and Entry 3A of Notification No. 12/2017-Central Tax (Rate)

Question 6 · 2 marks · Taxation - GST Ch 05: Exemptions · hard

What is the GST implication on the composite supply of ₹30,00,000 to the Municipality and the security services to Aryan Steels Ltd.?

1. Both are exempt as one is to the Government and the other is security.
2. Both are taxable under the respective exclusion clauses. (correct answer)
3. Composite supply is exempt; security services are taxable.
4. Composite supply is taxable; security services are exempt.

Answer: B — Both are taxable under the respective exclusion clauses.

Explanation. For the shopping complex, goods value is ₹9,00,000 out of ₹30,00,000, which is 30%. Since the value of goods exceeds 25% of the composite supply, Entry 3A does not apply, and the supply is taxable. Security services provided to a business entity are excluded from the general exemption for Government services under Entry 6(d) and are taxable. Both supplies attract GST.

Where it goes wrong. Students may blindly apply the 25% threshold or forget that services to business entities are carved out of the Government exemption.

Authority. Entry 3A and Entry 6 of Notification No. 12/2017-Central Tax (Rate)

Question 7 · 2 marks · Taxation - GST Ch 05: Exemptions · medium

What is the GST treatment for the toll charges collected and the liquidated damages received by RNNL?

1. Toll charges are taxable; liquidated damages are exempt.
2. Toll charges are exempt; liquidated damages are taxable.
3. Both toll charges and liquidated damages are exempt. (correct answer)
4. Both toll charges and liquidated damages are taxable.

Answer: C — Both toll charges and liquidated damages are exempt.

Explanation. Entry 23 exempts service by way of access to a road or a bridge on payment of toll charges. Therefore, the ₹12,00,000 toll is exempt. Entry 62 exempts services provided by the Government by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable. The ₹2,00,000 received is exempt.

Where it goes wrong. Students might assume that liquidated damages are always taxable as a separate service under Schedule II, forgetting the specific Government exemption.

Authority. Entry 23 and Entry 62 of Notification No. 12/2017-Central Tax (Rate)

Question 8 · 2 marks · Taxation - GST Ch 05: Exemptions · medium

What is the GST treatment for the fees collected for issuing birth certificates and the rent received from the business entity?

1. Both are exempt as they are activities of the Government.
2. Both are taxable as they are commercial activities.
3. Birth certificate fees are taxable; rent is exempt.
4. Birth certificate fees are exempt; rent is taxable. (correct answer)

Answer: D — Birth certificate fees are exempt; rent is taxable.

Explanation. Entry 61 exempts services provided by the Central/State Government or local authority by way of issuance of a birth certificate. Thus, the ₹50,000 is exempt. However, Entry 6 excludes services provided to business entities from the general Government exemption. Renting of immovable property to a business entity is specifically excluded from the exemption and is taxable. Therefore, the ₹1,00,000 rent is taxable.

Where it goes wrong. Students may exempt the rent thinking it is a Government activity, or tax the birth certificate fee as a commercial service.

Authority. Entry 61 and Entry 6 of Notification No. 12/2017-Central Tax (Rate)

Question 9 · 2 marks · Taxation - GST Ch 05: Exemptions · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A trust registered under Section 12AB operates a healthcare facility. It provides palliative care to terminally ill patients for a fee of ₹5,00,000. It also organizes a public awareness campaign on preventive health, for which it receives a grant of ₹2,00,000. Determine the GST liability.

1. Both the palliative care and the awareness campaign are exempt. (correct answer)
2. Palliative care is taxable; awareness campaign is exempt.
3. Palliative care is exempt; awareness campaign is taxable.
4. Both are taxable as they involve monetary consideration.

Answer: A — Both the palliative care and the awareness campaign are exempt.

Explanation. The definition of charitable activities includes public health by way of care or counseling of terminally ill persons, as well as public awareness of preventive health. Since the trust is registered u/s 12AB and is engaged in these activities, both the palliative care (₹5,00,000) and the public awareness campaign (₹2,00,000) are exempt from GST. The receipt of a grant does not change the nature of the exempt service.

Where it goes wrong. Students might mistakenly tax the palliative care as it is a medical service, or tax the grant as a commercial receipt.

Authority. Entry 1 of Notification No. 12/2017-Central Tax (Rate)

Question 10 · 2 marks · Taxation - GST Ch 05: Exemptions · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Bhanu, an unregistered individual, takes a residential house on rent from a trust for his own residence. The monthly rent is ₹30,000. Is the trust liable to pay GST on this rent?

1. Yes, as the rent exceeds the exemption threshold.
2. No, as renting a residential dwelling to an unregistered person for residence is exempt. (correct answer)
3. Yes, because a trust cannot claim residential exemptions.
4. No, only if the rent is below ₹20,000 per month.

Answer: B — No, as renting a residential dwelling to an unregistered person for residence is exempt.

Explanation. Entry 12 exempts services by way of renting of a residential dwelling for use as a residence, except where the residential dwelling is rented to a registered person. Since Mr. Bhanu is an unregistered individual and uses the property for his own residence, the service is exempt. The amount of rent (₹30,000) does not affect this exemption.

Where it goes wrong. Students may assume a threshold limit for residential rent or apply commercial rental rules.

Authority. Entry 12 of Notification No. 12/2017-Central Tax (Rate)

Question 11 · 2 marks · Taxation - GST Ch 05: Exemptions · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Ms. Kiran, a registered proprietor of a boutique, rents a residential house for her own personal residence, not for her business. The landlord is an unregistered individual. The monthly rent is ₹50,000. What is the GST implication?

1. Taxable, as the tenant is registered under GST.
2. Exempt, as the landlord is unregistered.
3. Exempt, as the tenant is a proprietor using it for personal residence. (correct answer)
4. Taxable, as the rent exceeds ₹20,000.

Answer: C — Exempt, as the tenant is a proprietor using it for personal residence.

Explanation. Entry 12 exempts renting of residential dwelling for use as a residence, except to a registered person. However, Explanation 1 clarifies that this exemption applies even if the registered person is a proprietor, provided the dwelling is rented in his personal capacity for use as his own residence and not for the business. Since Ms. Kiran is using it for her personal residence, the service is exempt.

Where it goes wrong. Students often stop at 'rented to a registered person' and immediately tax it, missing the crucial exception for proprietors renting in their personal capacity.

Authority. Entry 12 of Notification No. 12/2017-Central Tax (Rate)

Question 12 · 2 marks · Taxation - GST Ch 05: Exemptions · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A charitable trust registered under Section 12AB runs an educational institution for homeless children. It provides hostel accommodation to these children, charging a nominal fee to cover food and maintenance. Is the hostel accommodation exempt from GST?

1. No, as hostel accommodation by trusts is not a charitable activity. (correct answer)
2. Yes, as it is provided to homeless children.
3. Yes, if the fee is below ₹1,000 per month.
4. No, unless the trust is also registered under GST.

Answer: A — No, as hostel accommodation by trusts is not a charitable activity.

Explanation. While the educational activities of the trust for homeless children are exempt as charitable activities, hostel accommodation services provided by trusts to students do not fall within the ambit of charitable activities. Therefore, even if provided to homeless children, the hostel accommodation is not exempt under Entry 1. It would be taxable, unless covered by a specific exemption like providing rooms at less than ₹1,000 per day (which is different from monthly hostel fees).

Where it goes wrong. Students often assume that all facilities provided to charitable beneficiaries are exempt. Hostel services by trusts are specifically excluded from the charitable activities definition.

Authority. CBIC GST Flyer on Charitable Trusts; Entry 1 of Notification No. 12/2017-Central Tax (Rate)

Question 13 · 2 marks · Taxation - GST Ch 05: Exemptions · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

Mr. Rajat wants to go on a religious pilgrimage to Kailash Mansarovar. He books a package with KMVN (Kumaon Mandal Vikas Nigam) for ₹1,50,000. He also books a pilgrimage to the same destination with a private tour operator for ₹1,20,000. What is the GST implication on these packages?

1. Both packages are exempt as they are for a religious pilgrimage.
2. KMVN package is taxable; private operator is exempt.
3. KMVN package is exempt; private operator is taxable. (correct answer)
4. Both packages are taxable as they involve commercial considerations.

Answer: C — KMVN package is exempt; private operator is taxable.

Explanation. Entry 60 exempts services provided by a specified organization in respect of a religious pilgrimage facilitated by the Government of India under a bilateral arrangement. KMVN is a specified organization, so its package is exempt. A private tour operator is not a specified organization, so the package booked through the private operator is taxable. The purpose of the trip does not grant a blanket exemption.

Where it goes wrong. Students may assume all religious pilgrimages are exempt, ignoring the specific requirement that the service must be provided by specified organizations like KMVN or the Haj Committee.

Authority. Entry 60 of Notification No. 12/2017-Central Tax (Rate)

Question 14 · 2 marks · Taxation - GST Ch 05: Exemptions · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

The Department of Posts provides the following services: (i) Sale of post cards and ordinary envelopes, earning ₹10,000. (ii) Speed post services, earning ₹50,000. What is the GST treatment?

1. Both are exempt as they are postal services.
2. Post cards and ordinary envelopes are exempt; speed post is taxable. (correct answer)
3. Post cards and ordinary envelopes are taxable; speed post is exempt.
4. Both are taxable as the Department of Posts is not exempt.

Answer: B — Post cards and ordinary envelopes are exempt; speed post is taxable.

Explanation. Entry 24C exempts services provided by the Department of Posts by way of post card, inland letter, book post and ordinary post (envelopes weighing less than 10 grams). Therefore, the sale of post cards and ordinary envelopes is exempt. Speed post is a premium service not covered under this entry and is taxable.

Where it goes wrong. Students may assume all services of the Department of Posts are exempt, missing the specific list of basic services covered under Entry 24C.

Authority. Entry 24C of Notification No. 12/2017-Central Tax (Rate)

Question 15 · 2 marks · Taxation - GST Ch 05: Exemptions · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A religious trust registered under Section 12AB rents out rooms in its temple complex to the general public. The room charges are ₹1,200 per day. It also rents out a societal welfare hall within the premises for a wedding, charging ₹15,000 per day. What is the GST implication?

1. Both the room rent and societal welfare hall rent are exempt.
2. Room rent is exempt; societal welfare hall rent is taxable.
3. Both are taxable as the charges exceed the specified limits. (correct answer)
4. Room rent is taxable; societal welfare hall rent is exempt.

Answer: C — Both are taxable as the charges exceed the specified limits.

Explanation. Entry 13(b) exempts renting of precincts of a religious place meant for the general public, owned by a trust registered u/s 12AB, subject to ceiling limits. The exemption does not apply to renting of rooms where charges are ₹1,000 or more per day (here, ₹1,200, so taxable), nor to renting of premises/societal welfare halls where charges are ₹10,000 or more per day (here, ₹15,000, so taxable). Both services exceed the limits.

Where it goes wrong. Students might exempt the room rent as it is close to the limit, or exempt the societal welfare hall without checking the ₹10,000 per day threshold.

Authority. Entry 13(b) of Notification No. 12/2017-Central Tax (Rate)

Question 16 · 2 marks · Taxation - GST Ch 05: Exemptions · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A charitable trust registered u/s 12AB organizes a residential Yoga and Meditation camp. The camp includes lodging and boarding along with yoga sessions. The trust charges a consolidated fee of ₹20,000 per participant. What is the GST treatment?

1. The entire fee is exempt as the primary activity is advancement of yoga. (correct answer)
2. The entire fee is taxable as it includes lodging and boarding.
3. Only the yoga session portion is exempt; lodging is taxable.
4. The fee is taxable if it exceeds ₹10,000 per participant.

Answer: A — The entire fee is exempt as the primary activity is advancement of yoga.

Explanation. The activity of advancement of yoga is a charitable activity. Residential programmes or camps where the fee charged includes the cost of lodging and boarding are also exempt, as long as the primary and predominant activity, objective, and purpose of such residential programmes or camps is advancement of religion, spirituality, or yoga. Since the primary purpose is yoga, the entire consolidated fee is exempt.

Where it goes wrong. Students often assume that the inclusion of lodging and boarding makes the camp a commercial activity, missing the specific clarification that such composite fees are exempt if the primary purpose is yoga.

Authority. CBIC GST Flyer on Charitable Trusts

Question 17 · 2 marks · Taxation - GST Ch 05: Exemptions · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A private company provides pure services to a local municipality for the maintenance of streetlights. It also provides a composite supply of goods and services to another municipality for the construction of a public toilet, where the value of goods is 20% of the total supply value. What is the GST liability?

1. Both are exempt as they are provided to a municipality. (correct answer)
2. Pure services are exempt; the composite supply is exempt only if the value of goods is up to 25%.
3. Pure services are taxable; the composite supply is exempt.
4. Both are taxable as the supplier is a private company.

Answer: A — Both are exempt as they are provided to a municipality.

Explanation. Entry 3 exempts pure services provided to the Government (including a municipality) by way of any activity in relation to a function entrusted to a municipality. Entry 3A exempts composite supplies to the Government where the value of goods does not exceed 25%. Here, the pure services are exempt, and the composite supply has 20% goods value (≤ 25%), so it is also exempt. The nature of the supplier (private company) is immaterial.

Where it goes wrong. Students may think that only Government entities can provide exempt services to the Government, or may fail to check the 25% threshold for the composite supply.

Authority. Entry 3 and Entry 3A of Notification No. 12/2017-Central Tax (Rate)

Question 18 · 2 marks · Taxation - GST Ch 05: Exemptions · medium

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A State Government runs a bus service for the general public. It also provides transport services for a private company's employees. What is the GST implication?

1. Both services are exempt as they are provided by the Government.
2. Passenger transport for the general public is exempt; transport for the private company is taxable.
3. Both are taxable as transport of passengers is excluded from the Government exemption. (correct answer)
4. Passenger transport for the general public is taxable; transport for the private company is exempt.

Answer: C — Both are taxable as transport of passengers is excluded from the Government exemption.

Explanation. Entry 6 exempts services provided by the Central/State Government or local authority, but specifically excludes 'transport of goods or passengers' from this general exemption. Therefore, both the public bus service and the private employee transport service are taxable. The general exemption for Government services does not apply to passenger transport.

Where it goes wrong. Students may assume all services provided by the Government are exempt, overlooking the specific exclusions listed in Entry 6.

Authority. Entry 6 of Notification No. 12/2017-Central Tax (Rate)

Question 19 · 2 marks · Taxation - GST Ch 05: Exemptions · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A local authority provides services to a business entity with a turnover of ₹15 lakhs in the preceding financial year. The service is not a 'specified service' and is not renting of immovable property. Is the service exempt from GST?

1. No, as all services to business entities are taxable.
2. No, as the turnover limit for exemption is ₹10 lakhs.
3. Yes, if the service is performed within the local authority's jurisdiction.
4. Yes, as the business entity is eligible for exemption from registration. (correct answer)

Answer: D — Yes, as the business entity is eligible for exemption from registration.

Explanation. Entry 7 exempts services provided by the Central/State Government or local authority to a business entity with an aggregate turnover up to such amount in the preceding FY as makes it eligible for exemption from registration under the CGST Act. The threshold limit is ₹20 lakhs (for normal category states). Since the business entity's turnover is ₹15 lakhs, it is eligible for exemption from registration. The service is exempt under Entry 7, as it is not a specified service or renting of immovable property.

Where it goes wrong. Students may wrongly tax the service because it is provided to a business entity, missing the specific threshold-based exemption under Entry 7.

Authority. Entry 7 of Notification No. 12/2017-Central Tax (Rate)

Question 20 · 2 marks · Taxation - GST Ch 05: Exemptions · hard

Scenario. During Tax Year 2026-27, a registered taxpayer is evaluating statutory compliance, computation of taxable income, and eligible tax deductions in accordance with the provisions of the Income-tax Act, 2025 and applicable rules for the May 2027 examination.

A contractor entered into a contract with a State Government department for the construction of a bridge. The contractor delayed the project, and the department demanded liquidated damages. The contractor paid ₹5,00,000 as liquidated damages to the department. What is the GST implication on this payment?

1. The payment is exempt as it is received by the Government. (correct answer)
2. The payment is taxable as liquidated damages are a supply of service.
3. The payment is exempt only if the delay was due to a natural calamity.
4. The payment is taxable under reverse charge by the contractor.

Answer: A — The payment is exempt as it is received by the Government.

Explanation. Entry 62 exempts services provided by the Central Government, State Government, Union territory, or local authority by way of tolerating non-performance of a contract for which consideration in the form of fines or liquidated damages is payable to them. Since the department is receiving the liquidated damages for tolerating the contractor's non-performance, the receipt is exempt from GST.

Where it goes wrong. Students may tax the liquidated damages as it is a payment for tolerating an act, which is a supply under Schedule II. However, the specific exemption under Entry 62 overrides the general charge for Government receipts.

Authority. Entry 62 of Notification No. 12/2017-Central Tax (Rate)