Beyond the GST Net: The Big Exclusions-and What They Mean for States and You
Eight years into India’s Goods and Services Tax (GST), the promise of "one nation, one tax" is real-but not absolute. Some heavy-hitters in daily life and public finance still sit outside the GST tent. Petrol and diesel fill our tanks without entering the input-tax-credit (ITC) chain; a Friday evening glass of wine is taxed by states, not under GST; and your electricity bill carries state levies, while the power you consume is either outside GST or treated as nil-rated/exempt depending on the component. Understanding what is truly outside GST (as distinct from "exempt") is vital for businesses, consumers, and state coffers.
This explainer maps the exclusions, the legal scaffolding that keeps them out, and the implications for prices, compliance, and state finances.
"Exempt", "Non-taxable", "Outside", "Zero-rated": the vocabulary that matters
Before diving into the items, a quick decoder:
Non-taxable supply / Outside GST: The law doesn’t levy GST at all-for example, alcoholic liquor for human consumption; specified petroleum fuels (until notified); money and securities; sale of land and completed buildings; employee services to employer, courts/tribunals, etc. ("Non-taxable supply" is defined in section 2(78) CGST.)
Exempt supply / Nil-rated: The supply is within GST’s ambit but charged at 0% under notifications (e.g., certain foods, health and education services, or electrical energy under HSN 2716). You’re in GST, but rate = 0; ITC consequences apply.
Zero-rated: Exports and certain SEZ supplies-0% output tax, but ITC/refund mechanisms remain.
This difference matters: outside GST means no GST liability and generally no ITC duty reversals because there’s no GST event; exempt/nil-rated is inside GST with specific rate relief and potential ITC restrictions.
What goods and services are left out of GST?
1) Alcoholic liquor for human consumption
The Constitution ring-fences it: Article 366(12A) defines GST excluding "taxes on the supply of alcoholic liquor for human consumption." States retain full taxing powers via the State List (excise on manufacture/sale). Practically, that’s why a pint is subject to state excise and state VAT/fees instead of GST.
Why it matters: Alcohol excise is the third-largest source of states’ own tax revenue after SGST and sales tax/VAT on non-GST items (chiefly petroleum). Many states depend heavily on it; prohibition states show the fiscal shock when this base is absent.
Will it come under GST soon? Unlikely. The debate is intensely political and fiscal; despite periodic chatter, there is no concrete move to fold potable alcohol into GST. (Do note: ENA for industrial use is a different animal and has seen litigation and policy churn.)
2) Petroleum basket-five fuels kept out (for now)
By design, section 9(2) of the CGST Act postpones GST on petroleum crude, high-speed diesel (HSD), motor spirit (petrol), natural gas, and aviation turbine fuel (ATF) until a notified date on the GST Council’s recommendation. That date hasn’t been notified; supplies continue under excise/VAT outside GST.
Reality check on current policy:
ATF and natural gas are frequent candidates for phased inclusion to cut cascading and unify rates. But as recently as late-2024, states rejected ATF’s inclusion; the Council did not move forward. Ministers have indicated "growing consensus" for natural gas, but no timeline has been set.
Meanwhile, states have tweaked VAT on ATF individually (e.g., Bihar cut VAT to 4%), underscoring how fuels outside GST create inter-state differentials.
Why it matters:
For consumers: Taxes stack on fuels, and because there’s no GST ITC chain, businesses can’t credit petrol/diesel taxes against output GST. That cost flows into freight, tickets, and delivered prices.
For states: VAT on POL (petroleum, oil, lubricants) is a pillar of revenue. For FYs across the decade, state VAT on POL is massive; PPAC’s dashboards show state VAT collections on POL running into Rs. 2–3 lakh crore annually at the all-India level. That’s a big reason states guard this base.
What would change inside GST? Inclusion (even at, say, 28% + cess) would restore ITC, reduce tax-on-tax, and likely narrow inter-state price gaps-but would also demand a compensation formula to protect state revenues, which is the political nut yet to crack.
3) Electricity and related charges
Electricity sits in a special place:
The commodity "electrical energy" (HSN 2716) is nil-rated under Notification 2/2017-so in practice, your sale of electricity is treated at NIL under GST schedules.
Transmission and distribution services by utilities are exempt under Notification 12/2017. Ancillary vendor services to DISCOMs may be taxable; the exemption is for the utility’s own transmission/distribution.
States continue to levy Electricity Duty under the State List-so a chunk of your bill is a state levy outside GST. (The duty structure varies by state; sector data from CEA/PFC and regulatory reports track recovery gaps, cross-subsidies, and duty add-ons.)
Implications:
For businesses and households: Electricity as nil/exempt means no ITC on inputs used exclusively for electricity (Rule 42/43 implications), raising effective costs for power-intensive sectors; disputes arise over pass-through of charges (e.g., landlords recovering electricity-treatment depends on structure and notifications).
For states: Electricity Duty remains a meaningful, policy-driven lever separate from GST. As distribution reforms proceed, duties and regulatory surcharges (FPPCA/FPPAS) continue outside GST.
4) Land and completed buildings
Sale of land, and sale of building after completion certificate are neither goods nor services under Schedule III of the CGST Act. Under-construction realty is taxed (as a service) under GST; stamp duty on property transfers continues separately.
Why it matters:
Buyers: You pay stamp duty (a state levy) outside GST on completed property purchases; there’s no GST ITC linkage on that.
Developers: Under-construction supplies are in GST (with special rates/abatements), but the moment the building is complete and sold thereafter, it exits GST via Schedule III.
5) Money, securities, employment services, courts, and other Schedule III items
Some activities are carved out by definitions and Schedule III:
Money and securities: Excluded by definition from "goods" and "services"; transactions in securities are not a GST supply. (Brokerage/DP services remain taxable.) The position has been repeatedly clarified by CBIC circulars.
Employee services to employer (salaries): Outside GST via Schedule III.
Services by courts/tribunals; funeral services; constitutional posts; sale of land/ready buildings; actionable claims other than specified actionable claims: All neither goods nor services per Schedule III. Note, since Oct 2023, "specified actionable claims" (betting, casinos, gambling, horse racing, lottery, online money gaming) are taxable; the rest remain outside.
The exclusions in practice: price tags, compliance, and competitiveness
A. Consumers see price dispersion and cascading
Fuels: Because petrol and diesel aren’t in GST, they suffer tax-on-tax (e.g., VAT on a base that includes central duties). There’s no ITC, so transporters and manufacturers embed unrecoverable tax costs into freight and MRPs. Inter-state VAT differences also create price dispersion at the pump and at airports (ATF), leading to tankering and route planning quirks.
Electricity: Nil/exempt treatment blocks ITC on electricity inputs; power surcharges and state Electricity Duty sit outside GST, so they cannot be offset against output GST, raising costs for power-heavy sectors (metals, chemicals, data centres).
B. Businesses face ITC breaks and structuring headaches
No ITC on fuels used for movement of goods/people (with narrow exceptions), so logistics costs climb-something especially acute for airlines (ATF outside GST). Multiple sectors have lobbied to bring natural gas and ATF under GST to reduce cascading; yet Council decisions have deferred action.
Real estate splits: Taxability flips on completion status. Under-construction supplies are GST-taxable; post-completion sales are outside GST (but stamp duty applies), creating mixed-regime compliance and pricing complexity for developers and buyers.
Financial markets: While trading the security itself is outside GST, ancillary services (brokerage, PMS, custody) are taxable. CBIC has clarified repeatedly that facilitating/arranging in securities is a service and taxable; the security itself is not. Businesses must bifurcate clearly to avoid disputes.
C. States safeguard fiscal autonomy-and rely on "outside GST" bases
VAT on POL and State Excise on alcohol are workhorses of state budgets. PRS/NIPFP analyses consistently show SGST, sales tax/VAT (chiefly petrol/diesel), and state excise (alcohol) as the top three own-tax streams. Moving fuels into GST would require iron-clad revenue protection; otherwise, states lose a flexible, buoyant base.
Electricity Duty gives states policy control over tariffs and cross-subsidies, independent of GST Council processes. That lever is hard to yield, especially when the sector navigates losses, reforms, and transition costs.
Would bringing fuels and electricity into GST solve everything?
Not overnight. Here’s the trade-off matrix policymakers juggle:
Efficiency & competitiveness: Inclusion of natural gas (first) and ATF would unblock ITC, reduce cascading, and help aviation, CGD, fertilizers, city gas, ceramics, and chemicals. That’s the industry case-and it’s strong. But the fiscal gap for states is real and recurring.
Price impacts: A GST rate (say 18% or 28% + cess) could cut pump prices in some states but raise them in others, depending on existing VAT. Calibrating cess and compensation would be critical to smooth volatility and preserve state shares.
Administrative clarity: Inclusion simplifies classification and reduces litigation (e.g., whether a charge is part of exempt transmission/distribution versus a taxable ancillary service). For electricity, however, moving state duties into a GST framework would require constitutional changes and deep federal consensus-no small feat.
Quick reference: what’s outside vs exempt (today)
Outside / Non-taxable (no GST levy):
Alcoholic liquor for human consumption (Constitution).
Petroleum crude, HSD, petrol, natural gas, ATF-until notified (CGST s.9(2)).
Sale of land and completed building (Schedule III).
Money and securities (by definition)-transactions in securities not a supply; facilitation services taxable.
Employee services to employer; courts/tribunals; various constitutional functions (Schedule III).
Actionable claims (other than specified) remain outside; the specified ones (lottery, betting, gambling, horse racing, online money gaming, casinos) are taxable since 2023 amendments.
Exempt / Nil-rated (inside GST, rate = 0):
Practical takeaways-for businesses and consumers
1. Budgeting & pricing: If fuels stay outside GST, treat fuel taxes as cost, not creditable-and model their pass-through on logistics and ticket pricing. Airlines and energy-intensive sectors should continue scenario-planning for possible inclusion of natural gas/ATF, but not bank on it until notified.
2. Contracting electricity: For commercial leases, separate metered electricity recoveries from rent/services and align with current exemption/nil-rate positions; structure invoices to reflect utility exemption vs taxable ancillary charges. Use care with ITC reversals when electricity is an exempt input.
3. Real estate decisions: Under-construction purchases attract GST; post-completion purchases don’t (but stamp duty applies). Time your transactions and price negotiations with this flip in mind.
4. Securities & finance: The security is outside GST; your brokerage/DP/AMC bills are not. Build GST into the cost of financial services, not into the asset itself. CBIC circulars have clarified this line.
5. State finances & policy risk: Expect state-level VAT/Excise policy moves (e.g., ATF VAT cuts to attract flights, or fuel VAT tweaks) to continue while these items stay out of GST-leading to inter-state price differentials that can affect your travel and procurement choices.
The road ahead
There is visible policy noise-and some momentum-around bringing natural gas (and perhaps ATF) into GST to reduce cascading and improve competitiveness. Ministers have flagged intent; industry continues to lobby; think tanks model revenue-neutral paths. But as the GST Council’s late-2024 decision on ATF showed, states are cautious, given the revenue stakes. Until a credible, durable compensation architecture is agreed, the status quo will likely persist.
For now, remember this shorthand:
Alcohol (potable): state-taxed, outside GST.
Petroleum five (crude, petrol, diesel, ATF, natural gas):outside GST until notified; no ITC; big for state VAT.
Electricity: commodity nil-rated/exempt; transmission/distribution by utilities exempt; Electricity Duty outside GST.
Land/ready buildings, money/securities, employee services, courts, non-specified actionable claims: outside via definitions/Schedule III.
Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.