Section 7(2)(b) and Schedule III: What Government Does That Is Not a Supply

Section 7 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

Before asking whether a government receipt is exempt, ask whether it is a supply at all. Five categories never reach the charging section — and the reasoning behind them is more useful than the list, because it settles receipts nobody has yet clarified.

Section 7(2) provides that Schedule III activities, and activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified, shall be treated as neither a supply of goods nor a supply of services. Schedule III covers services by any Court or Tribunal, the functions of MPs, MLAs and members of Panchayats, Municipalities and local authorities, duties performed by constitutional post-holders, and duties of a chairperson, member or director of a body established by Government. Under 7(2)(b), the Government has notified article 243G/243W activities and the grant of an alcoholic liquor licence.

Schedule III: the government entries

Entry 2 — "Services by any Court or Tribunal established under any law for the time being in force." The Handbook notes: "The term 'court' includes District Court, High Court and Supreme Court."

Entry 3 —

• (a) the functions performed by the Members of Parliament, Members of State Legislature, Members of Panchayats, Members of Municipalities and Members of other local authorities;
• (b) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or
• (c) the duties performed by any person as a chairperson or a member or a director in a body established by the Central Government or a State Government or local authority and who is not deemed as an employee before the commencement of this clause.

Note the limit of entry 2. It reaches a court or tribunal established under a law. An arbitral tribunal is the creature of an agreement, not of a statute, and therefore falls outside — which is why arbitration is taxable under reverse charge.

The notified non-supplies under section 7(2)(b)

"The Government has vested itself powers to notify 'activities or other transactions' which shall neither be treated as supply of goods nor a supply of services in terms of section 7(2)."

(i) Article 243G and 243W activities. "Services by way of any activity in relation to a function entrusted to Panchayat under Article 243G of the Constitution or to a Municipality under article 243W" — inserted by Notification No. 14/2017-Central Tax (Rate) dated 28.06.2017 w.e.f. 01.07.2017, read with Notification No. 16/2018-CT(R) dated 26.07.2018 w.e.f. 27.07.2018.

(ii) Alcoholic liquor licences. "Service by way of grant of alcoholic liquor licence, against consideration in the form of licence fee or application fee or by whatever name it is called" — Notification No. 25/2019-CT(R) dated 30.09.2019.

And the Handbook attaches a warning to the second, which is the important part:

"This special dispensation is applicable only to supply of service by way of grant of liquor licenses by the State Governments as an agreement between the Centre and States. Hence, this is not applicable/has no precedence value in relation to grant of other licenses and privileges for a fee in other situations, where GST is payable. It may be noted that services provided by the Government to business entities including by way of grant of privileges, licences, mining rights, natural resources such as spectrum etc. against payment of consideration in the form of fee, royalty etc. is taxable under GST" — with tax payable by the business entity under reverse charge, per Circular No. 121/40/2019-GST dated 11.10.2019.

So the liquor licence carve-out is a political settlement, not a principle. Reading it across to mining leases or spectrum is a mistake the circular expressly forecloses.

Fines and penalties: the reasoning worth remembering

Circular No. 178/10/2022-GST dated 03.08.2022 clarifies that penalties imposed for violation of laws — traffic violations, pollution norms, other laws — "are also not consideration for any supply received and are not taxable."

Same for mining penalties: fines and penalties imposed by the mining department of a Central or State Government or a local authority on discovering mining of excess mineral beyond the permissible limit, or mining in violation of the mining permit.

The reasoning is the best statement of the point in the whole subject:

"Laws are not framed for tolerating their violation. They stipulate penalty not for tolerating violation but for not tolerating, penalizing and deterring such violations. There is no agreement between the Government and the violator specifying that violation would be allowed or permitted against payment of fine or penalty. There cannot be such an agreement as violation of law is never a lawful object or consideration."

Conclusion: "fines and penalty chargeable by Government or a local authority imposed for violation of a statute, byelaws, rules or regulations are not leviable to tax."

Contrast entry 62 of the exemption notification, which exempts government receipts for tolerating non-performance of a contract where fines or liquidated damages are payable under such contract. The difference is precise: a contractual liquidated damage is a supply that is exempt; a statutory penalty is not a supply at all.

Consumer Disputes Redressal Commissions

The Handbook devotes a full analysis to this because the answer is not obvious from Schedule III's words.

Commissions are not literally tribunals — they may not have been set up directly under Article 323B. "However, they are clothed with the characteristics of a Tribunal", on five grounds the Handbook lists:

1. the Consumer Protection Bill's statement of objects records the setting up of quasi-judicial machinery at District, State and Central levels;
2. the Presidents are persons who are, or are qualified to be, District Judges, High Court Judges and Supreme Court Judges respectively;
3. the Commissions are vested with the powers of a civil court under the CPC — summons, enforcing attendance, reception of evidence, discovery and production of documents, examination of witnesses;
4. every proceeding is a judicial proceeding under sections 193/228 of the IPC, and the Commissions are deemed civil courts under the CrPC; and
5. appeals lie District → State → National → Supreme Court.

Consequently, by Circular No. 32/06/2018-GST dated 12.02.2018, "fees paid by litigants while registering complaints to said Commissions are not leviable to GST. Any penalty in cash imposed by or amount paid to these Commissions will also not attract GST."

The clause that keeps government inside "business"

One provision runs the other way and should be read alongside all of the above.

Section 2(17)(i) includes within "business": "any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities."

So public-authority activity is expressly business. It is not carved out by the business definition; it is carved out only where Schedule III or a section 7(2)(b) notification reaches it. That is why the notified list matters so much: without a notification, the activity is business, and the enquiry moves to whether it is exempt.

And that is the structure of the whole subject. As the Handbook puts it in the exemptions chapter: "the term 'person' includes central government, state government and local authorities too. Thereby, it is important to understand that all services by Government are taxable unless it is outside the scope of 'supply' or specifically exempted."

Key takeaways

• Section 7(2) puts Schedule III activities and notified public-authority activities outside supply altogether.
• Schedule III covers courts and tribunals established under a law, the functions of elected members, constitutional post-holders, and chairpersons, members and directors of government-established bodies.
• An arbitral tribunal is not "established under any law" and is therefore outside entry 2.
• Notification No. 14/2017-CT(R) (with 16/2018) notifies article 243G and 243W activities as non-supplies.
• Notification No. 25/2019-CT(R) notifies the grant of an alcoholic liquor licence — a settlement with no precedent value for other licences, privileges, mining rights or spectrum, which remain taxable under reverse charge.
• Statutory fines and penalties are not consideration — Circular No. 178/10/2022; contractual liquidated damages to Government are a supply, exempt under entry 62.
• Consumer Commission fees and penalties are outside GST — Circular No. 32/06/2018.
• Section 2(17)(i) makes public-authority activity business, so everything not notified or exempted is taxable.

Read next

• The Eleventh and Twelfth Schedule Functions, and How GST Uses Them
• Entry 6 and Its Four Exclusions: Services by Government
• Natural Resources, Royalty and the Government Exemption Entries

Disclaimer: Positions stated as on 5 September 2026, based on sections 2(17) and 7 of the CGST Act, 2017 with Schedule III, Notification Nos. 14/2017, 16/2018 and 25/2019-Central Tax (Rate), and Circulars No. 32/06/2018-GST, 121/40/2019-GST and 178/10/2022-GST, as reproduced in the ICAI Handbook on Government Supplies under GST (Including TDS Provisions), updated to 15 April 2026.