Recipient Test, Conditional Exemption Breakdown, ITC Prohibition, Audit Triggers & Penalty Exposure
Introduction — Why School Transport Is a High-Risk GST Area
GST on school transportation is not a grey area anymore — it is a structuring-sensitive compliance issue where minor commercial deviations routinely convert into tax demands, ITC reversals, and penalty proceedings.
Most disputes do not arise from ignorance of exemption, but from:
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incorrect identification of the recipient,
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casual payment flows,
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legacy practices continued without GST re-validation, and
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wrong ITC claims on exempt activity.
The GST law does not protect intent, convenience, or educational purpose.
It protects only statutory alignment.
This note distils the exact legal tests, departmental trigger points, and defensible structuring models that survive scrutiny.
Statutory Framework - The Exemption Is Conditional, Not Automatic
1 Governing Notification
Notification No. 12/2017 – Central Tax (Rate), Entry 66
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66(a) Services by an educational institution to students, faculty, staff
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66(b) Services to an educational institution by way of transportation of students, faculty, staff
Entry 66(b) is a conditional exemption.
All conditions must be satisfied simultaneously and in substance.
Failure of even one condition results in total denial of exemption.
Core Legal Test — Recipient Under the CGST Act
1 Statutory Definition
Section 2(93), CGST Act
“Recipient” means the person liable to pay the consideration and to whom the invoice is issued.
Section 2(93)(c) applies only where consideration is not ascertainable — a scenario absent in school transport contracts.
2 Non-Negotiable Legal Principle
| Concept | Legal Status |
|---|---|
| Beneficiary | Irrelevant |
| Facilitator | Irrelevant |
| Controller / Regulator | Irrelevant |
| Safety Mandate | Irrelevant |
Only two facts matter:
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Who pays the transporter
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On whom the invoice is raised
Everything else is legally inconsequential.
Interpretation of Entry 66(b) — Strict Construction Applies
Exemption notifications are interpreted strictissimi juris.
Accordingly:
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If the school does not pay the transporter, or
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If the invoice is not issued to the school,
the exemption fails in toto, regardless of:
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student benefit,
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administrative routing,
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parental convenience,
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or historical practice.
There is no doctrine of substantial compliance under GST exemptions.
Recipient Outcome Matrix — Taxability Crystallises Irrevocably
| Commercial Arrangement | GST Result |
|---|---|
| School pays; invoice on school | Exempt u/Entry 66(b) |
| Parents pay transporter directly | Taxable passenger transport |
| School reimburses parents | Taxable (recipient already fixed) |
| Transport fee bundled in school fees | Exempt |
| Students direct / staff via school | Split supply |
Recipient identity crystallises at the time of supply and payment.
Post-facto accounting adjustments cannot cure taxability.
Input Tax Credit — Absolute Prohibition Zone
1 Statutory Bar
Section 17(2), CGST Act
Where outward supply is exempt, no ITC is admissible.
Blocked credits include:
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fuel,
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maintenance,
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insurance,
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spares,
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vehicle lease costs.
Once blocked, ITC cannot be revived, even if the structure changes later.
2 Practical Enforcement Reality
Wrong ITC on exempt school transport is routinely treated as:
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wilful misstatement, and
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suppression of facts,
triggering Section 74 with full penalty exposure.
Most penalty orders are sustained on ITC misuse — not exemption disputes.
Judicial Position — No Doctrinal Conflict
Appellate authorities consistently hold:
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payment + invoice determine recipient,
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facilitation theories are untenable,
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benefit-based arguments have no statutory footing.
Perceived conflicts in rulings are fact-driven, not principle-based.
Departmental Audit Trigger Points (High-Risk Indicators)
GST authorities typically flag cases where:
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parents pay transporters directly,
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invoices are raised on parents but routed through school,
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transport fee collected separately without school payment,
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ITC claimed on fuel or repairs,
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multiple transport vendors with inconsistent invoicing,
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legacy arrangements continued post-GST without review,
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transport income shown as “recovery” instead of consideration.
Any two or more triggers together usually escalate the case.
Penalty Exposure — Realistic Risk Assessment
| Provision | When Invoked |
|---|---|
| Section 73 | Disclosure / interpretation disputes |
| Section 74 | Wrong ITC, misstatement |
| Section 122 | Procedural contraventions |
| Section 125 | Residual penalty |
Voluntary reversal and payment before SCN materially weaken penalty sustainability.
Registration, Rate & RCM — Settled Positions
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Transporter registration required if turnover > ₹20 lakh (including exempt supplies)
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Taxable transport rates:
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5% without ITC, or
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12% with ITC
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No reverse charge applicable to schools for exempt transport
Only Structuring Model That Survives Audit
✔ Transporter invoices only the school
✔ School pays from its own bank account
✔ Transport charges recovered from parents by school
✔ Transport component disclosed transparently
✔ No ITC claimed on transport inputs
Any deviation materially increases tax and penalty exposure.
Full Caution Points — What Schools Must Not Do
❌ Allow parents to contract directly with transporter
❌ Route payments “for convenience”
❌ Claim ITC on exempt transport expenses
❌ Treat transport as mere reimbursement
❌ Change structure mid-year without tax reset
❌ Assume educational purpose grants immunity
Final Legal Takeaway
GST on school transport is not equity-driven.
It is recipient-driven, payment-driven, and documentation-driven.
Under GST, compliance succeeds on statutory precision — not benevolence of purpose.
