When Paper’s Purpose Decides Its Tax!

When Paper’s Purpose Decides Its Tax!
 - The new end-use-based exemption under Notifications 09/2025 & 10/2025 makes compliance a legal tightrope for manufacturers & Traders

On September 3, 2025, the 56th GST Council approved a major rationalization of GST rates. Paper and paperboard (Chapter 48) saw significant changes. In particular, uncoated paper used for exercise book, graph book, laboratory notebook and notebooks was moved to a nil rate. In contrast, other uncoated paper (i.e. used for other purposes) was moved to the standard slab. These changes were notified by the following notifications;

• Vide Notification No. 09/2025-Central Tax (Rate) dated 17.09.2025, uncoated paper and paperboard (HSN 4802) are taxable @18%, excluding those used for exercise book, graph book, laboratory notebook and notebooks.
• Vide Notification No. 10/2025-Central Tax (Rate) dated 17.09.2025, paper used for exercise book, graph book, laboratory notebook and notebooks is exempt (Nil rate).
• Exemption is based on end-use, not product specification.

Issue

The new rate scheme creates a use-based bifurcation within HSN 4802. In practice, manufacturers of uncoated paper cannot know the ultimate end-use of every roll/sheet at the time of sale. The exemption applies only if the paper is actually used in exercise books, graph books, lab notebooks, etc. Any other use attracts 18% GST. This structure – effectively a partial exemption based on downstream use – poses practical difficulties. As industry commentators observe, a given grade of paper may be equally suitable for notebooks or for other printing; yet only the notebook use is exempt. Manufacturers and dealers, therefore, face uncertainty: unless they obtain concrete evidence of the intended use, they risk later disallowance of the exemption. The pulp and paper sector has warned that treating identical goods differently solely by end-use is administratively impractical (since manufacturers cannot “determine end-use at the time of supply”), potentially creating compliance burdens and input-credit reversals.  

Legal and Procedural Analysis

• Applicability of Exemption at Manufacturer/ Trader Stage: Under the GST Act, a supply is exempt only if it exactly matches the notified description. Here, Notification No.10/2025-CT(Rate) exempts “uncoated paper and paperboard…used for exercise book…notebooks etc”. Strictly interpreted, the exemption applies only if the paper is in fact used in those products. There is no independent category of “educational paper” at the tax point; the condition is contractual/use-based. Therefore, a manufacturer may avail the exemption only if he has reasonable certainty (and evidence) that the supplied paper will be used for that purpose. If a manufacturer sells directly to an exercise-book maker or a school board with documented intent to use the paper for books, he can treat the sale as exempt. In that case, the supplier must issue a “bill of supply” instead of a tax invoice, per CGST Section 31(3)(c), and record the supply as nil-rated. By contrast, if the sale is made to a general distributor or printer with no clear restriction on usage, the supplier is on safer ground charging 18% GST. Any supplier claiming zero-rate/ exemption bears the risk of being questioned on the end-use.
• Burden of Proof: It is settled law that the onus of proving exemption lies on the taxpayer. The Supreme Court has stated that “the burden of proof is cast upon the person who claims the benefit of exemption notification”. In other words, a manufacturer treating a sale as exempt must be prepared to justify it with records. If audited, the department may demand evidence that the paper was indeed destined for exercise-book production. In the absence of satisfactory proof, exemption may be denied and tax must be paid. Practically, this means manufacturers should be conservative: they should avail the nil rate only when clear documentation exists to satisfy the condition. Any shortfall or ambiguity could lead to demands under Section 73/ 74CGST (for tax shortfall), plus interest (Sec.50) and penalties.
• Section 31 (Invoice Requirements): If a sale is validly exempted, the supplier cannot issue a regular tax invoice. CGST Section 31(3)(c) mandates that for exempt supplies a “bill of supply” be issued instead. Such a bill of supply carries no tax charge and typically must state “exempt supply” or “nil-rated supply.” This procedural requirement underscores the fact that treating a sale as exempt is a formal decision – one that must be correctly documented. Failing to issue the proper invoice could itself attract penalties.
• Input Tax Credit (ITC) Implications: Separate from output tax, the GST law governs ITC on inputs. Under CGST Section 17(2),where inputs are used partly for taxable and partly for exempt supplies, credit is restricted to the taxable portion. If all of a supplier’s output is exempt, effectively, no credit is allowable. Thus, a paper mill that sells paper at nil rate for notebooks cannot claim credit on inputs used to make that paper. In practice, if a manufacturer’s production is used for both exempt (notebook paper) and taxable (other uses) supplies, he must apportion and reverse credit on the exempt share.
• Documentary Safeguards: Given the strict interpretation of exemptions and the onus on the taxpayer, manufacturers should adopt stringent documentary controls. Safeguards include obtaining end-use declarations from buyers (e.g. a signed letter on the buyer’s letterhead certifying that the paper is for exercise-book manufacture, etc). Contracts or purchase orders can explicitly state the intended use, and sales invoices/bills of supply can reference this condition. Some manufacturers may require customers to indemnify them if the goods are used outside the stated purpose, thereby shifting risk. Importantly, every exempt transaction should be backed by verifiable evidence – otherwise the exemption claim is fragile.

Practical Suggestions to Industry

• Customer Declarations: Before making a nil-rated sale, secure a written declaration or order form indicating the paper’s end-use (exercise books/graph books etc). Attach such documents to the sales invoice/bill of supply.
• Invoice Practices: If claiming exemption, issue a bill of supply (not a tax invoice) as per CGST Section 31(3)(c), clearly stating “Nil-rated – for notebooks” on the document. For all other sales, issue a regular tax invoice with 18% GST.
• Contractual Clauses: Include terms in supply agreements requiring the buyer to use the paper only for the exempt purpose, and obliging the buyer to reimburse tax/penalties if the condition is violated.
• End-Use Certificate: The Supplier may also insist on end-use certificate (like in case of Merchant Exports) from the customer.

Suggestion to CBIC/GST Council

• Revising Classification: Consider redefining the exempt category to reduce end-use ambiguity. For example, create a separate tariff heading or sub-heading for “paper specifically for exercise books/educational notebooks,” perhaps by specification (e.g. pulping, sizing, ply). This would allow manufacturers to classify products without relying on end-use pledges.
• Guidance/Circulars: The CBIC could issue a clarificatory circular explaining the practical criteria for claiming the exemption. For instance, prescribing acceptable proof (certificates, orders) that suffice for end-use validation would provide legal clarity. As it stands, no formal process (akin to Form H for zero-rated goods) exists for this use-based exemption.
• Amending Conditions: The GST Council might consider broadening or modifying the exemption. One option is to exempt a broader range of writing paper. Alternatively, if maintaining the educational focus, linking the exemption to the buyer’s status (e.g. if a recognized publisher or educational institution) could shift the decision point from manufacturer to a more identifiable party.
• ITC Relief: To mitigate the cash-flow impact on manufacturers (who now must reverse credits for notebook paper), policy could allow a refund or partial credit mechanism for ITC attributable to exempt outputs. For example, similar to the refund for zero-rated supplies, a targeted relief scheme or transitional credit could be considered for stocks on hand when the rate changed.
• Monitoring and Review: Given industry concern, the Council should monitor implementation (perhaps via State GST authorities) and be prepared to adjust if compliance issues become systemic. Timely corrigenda (as have been done) or notifications may be needed to fine-tune the policy.

Conclusion

The GST on paper now hinges on end-use, which is inherently hard to verify at manufacture. While the law permits the exemption only with proof of use, practical steps (declarations, contracts, invoicing discipline) can help manufacturers apply it safely. Policymakers might ease this compliance burden by redefining the exemption in more objective terms or by providing clear guidance. In the interim, diligent documentation and conservative tax treatment will be the best defense for businesses against disputes.

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By CA. Chitresh Gupta