Difference Between Zero-Rated, Nil-Rated, and Exempt Supplies Under GST

The Goods and Services Tax (GST) is a destination-based tax in India. It is charged at every stage of value addition. Introduced on July 1, 2017, it replaced multiple indirect taxes and simplified the taxation system.

Under GST, supplies are categorized as zero-rated, nil-rated, or exempt-rated. Zero-rated supplies, like exports, are taxed at 0% with Input Tax Credit eligibility. Nil-rated supplies also have a 0% tax rate but no ITC, while exempt supplies are fully GST-free with no ITC. Here, in this blog, you will get the details about these supplies in details.

What is Zero-Rated Supply Under GST?

Zero rated supply is a term used in the Goods and Services Tax. It is taxed at 0% but is eligible for Input Tax Credit (ITC). This means businesses can claim a refund on the GST they have paid on inputs used to provide these supplies.

Zero-rated supplies include exports of goods or services and supplies made to Special Economic Zones (SEZs). It reduces the costs of exporting products and international trade. Zero rates supplies are beneficial; for exporters and SEZ suppliers.

Examples of zero-Rated Supply.

• Exports of Goods and Services: To promote international trade, all goods and services exported outside India are zero-rated.
• Supplies to Special Economic Zones (SEZs): Supplies made to SEZ developers or units are zero-rated.
• Deemed Exports: Some products are treated as exports whether the goods leave India or not such as supplies to Export Oriented Units (EOUs).

Importance of Zero-Rated Supplies

• Encourages Exports: With a 0% tax on exports, businesses can reduce costs. It makes Indian goods and services more competitive in the global market.
• Promotes SEZ Growth: Supplies economic zones come under o-rated credit. It encourages investment and development in these regions.
• Supports in Economic Growth: 0-rated supplies contribute to economic growth with no tax on exports.

What is Nil Rated Supply Under GST?

Nil-rated supplies are goods that are taxed at 0% under the GST. It means that no tax will be charged. However, businesses can’t claim ITC on the purchases made for the goods. Grains, salt and jaggery are some common examples of Nil Rated Supply.

Businesses must report nil-rated goods they sell in their GSTR-1 form under the correct section. As the GST rate is 0% businesses don’t need to pay any tax on the sales. This helps maintain clear and transparent records.

Example of Nil Rated Supplies

• Unprocessed Food Items: Grains, cereals, and pulses that are not branded or packaged.
• Fresh, Fruits and vegetables: Unprocessed and unbranded fruits and vegetables.
• Salt: Both iodized and non-iodized salt.
• Jaggery and Sugarcane: Unprocessed jaggery and raw sugarcane.
• Books and newspapers: Printed books and newspapers.

What is Exempt Supplies Under GST?

Exempt Supplies under GST refer to services that are not charged under the GST. In simple words, no tax is charged on exempt supplies. However, businesses that exempt supply goods or services cannot claim Input Tax Input (ITC) on the sales purchases related to these supplies.

Educational services, healthcare services, agricultural products, and essential public services are common examples of exempt supplies. As no GST is charged on exempt supplies. These supplies do not contribute to tax liability.

Example of Exempt Supplies Under GST

• Healthcare Services: This includes services provided by schools, clinics, and medical professionals.
• Educational Services: This includes services offered by schools and colleges up to the higher secondary level.
• Agricultural Services: Services related to harvesting, cultivation, or supply or unprocessed agricultural produce.
• Financial Services: This includes basic savings bank account services and life insurance under government schemes.
• Public Transportation: Transportation of passengers by non-air-conditioned buses or railways.

How Zero-Rated Supply Differs from Nil-Rated and Exempt Supplies?

Here is a quick overview of the differences:

GST Rate: 

• Zero Rated Supply: 0%
• Nil Rated Supply: 0%
• Exempt Supply: No GST Applicable 

Input Tax Credit:

• Zero Rated Supply: Allowed (Can claim ITC and get refunds)
• Nil Rated Supply: Not Allowed
• Exempt Supply: Not Allowed

Purpose:

• Zero Rated Supply: Mainly for exports and supplies to SEZs.
• Nil-Rated Supply: Basic necessities like unprocessed food items.
• Exempt Supply: Social welfare services (e.g. healthcare and education).

Compliance and Filing:

• Zero Rated Supply: Detailed reporting and refund claims are required.
• Nil Rated Supply: Reported in GST returns but no refunds.
• Exempt Supply: Reported in GST returns but no tax payment.

How to Claim Input Tax Credit (ITC) on Zero-Rated Supplies?

A zero rated supplier can claim ITC through the following options:

• Option 1: The supplier can export or supply to SEZ without paying any IGST, and claim a refund of the accumulated ITC.
• Option 2: The supplier can export or supply to SEZ by paying IGST. After that, they can claim a refund of the IGST paid.

Conclusion

Understanding the difference between zero-rated, nil-rated, and exempt supplies under GST is important for business. It helps manage tax compliance and optimise tax benefits. Zero rated supplies, mainly related exports and SEZs. It allows businesses to claim Input Tax Credit (ITC). It reduces cost and enhances competitiveness. Nil-rated supplies, although taxed at 0%, it do not permit ITC claims but cover essential goods like unprocessed food items. Exempt supplies focus on social welfare services, such as healthcare and education.

FAQs

What are Zero-rated supplies under GST?

Zero rated supplies under GST are goods or services taxed at 0% with eligibility to claim Input Tax Credit (ITC).

What are Nil Rated supplies in GST?

Nil rated supplies in GST are goods or services taxed at 0% without eligibility for ITC.

What are examples of a zero rated supply?

Exported goods, equipment for the disabled, water, medications, and sewage services are examples of a zero rated supply.

What is example of nil rated supply under GST?

Food items like cereals, grains and salt are some examples of nil rated supply.

What is the difference between nil rated and zero rated supply?

Nil rates supplies are charged 0% GST rate with no ITC, while zero rated supplies also have a 0% rate but allow ITC claims.

Is milk exempted from GST?

Unprocessed and unflavoured packed milk is exempt from GST.

What is the difference between exempt supply and nil rated supply?

Exempt supplies are completely GST-free with no ITC typically for social welfare services like healthcare and education.

Nil-rated supplies are charged 0% but can’t claim ITC. It basically covers goods like unprocessed food items.