The terms "exempted" and "non-taxable demand" under the GST have historically been used and interpreted incorrectly. Keep reading to find out why.
The usage and interpretation of terms like “zero rated,” “nil rated,” “exempted,” and “non-taxable” under the Goods and Services Tax (GST) system have often been subject to confusion. Despite the implementation of GST, uncertainty persists in understanding these terms. In this article, we delve into each of these concepts and explore their implications.
Zero-Rated Supply Under GST
Zero-rated supply, as defined in Section 16(1) of the Integrated Goods and Services Tax (IGST) Act, 2017, encompasses certain supplies of goods, services, or both that are considered zero-rated. These include:
- Export of Goods or Services:
– Supplies involving the export of products or services to a foreign country.
- Supplies to a Special Economic Zone (SEZ) or a Unit within an SEZ:
– Providing goods, services, or both to a company operating within a Special Economic Zone or a unit established within such a zone.
For supplies falling under the category of zero-rated supply, both the output supplies and the supplies or input services used to facilitate these supplies are exempt from Goods and Services Tax (GST). Key points related to zero-rated supply include:
– Taxes paid on zero-rated supplies are reimbursed.
– Both input services and credit for inputs are permitted.
– Taxes paid on inputs and/or input services used for supplies exempted from tax are reimbursed, leading to a refund of unutilized input tax credit.
Furthermore, Section 54 of the Central Goods and Services Tax (CGST) Act, 2017, explains the provisions for the refund of unused input credit. Refunds encompass taxes paid on inputs or input services utilized for making zero-rated supplies of goods or services. This also includes taxes paid on the supply of goods considered as deemed exports, along with refunds of unused input tax credits, as specified in subsection (3).
Nil Rated Under GST
Goods and services that fall under the category of “NIL rated” under the Goods and Services Tax (GST) system are those for which a GST rate of 0% is applicable. These specific items or services are explicitly listed in Schedule 1 of the GST rate schedule, and they attract a 0% GST rate. Examples of goods falling under this category include salt, jaggery, cereals, and other items.
It’s important to note that for supplies with a nil GST rate, there is no entitlement to claim input tax credit on the inputs and/or input services used to facilitate the supply. In other words, businesses engaged in the production or provision of nil-rated goods or services cannot offset the tax paid on their inputs against their final GST liability because the final product or service is taxed at a zero rate.
Exempted Supply Under GST
Exempted supply under the Goods and Services Tax (GST) refers to any supply of goods or services, or both, that is either subject to a zero percent tax rate or completely exempt from taxation under section 11 of the Central Goods and Services Tax (CGST) Act or section 6 of the Integrated Goods and Services Tax (IGST) Act. This category also includes non-taxable supplies.
Key considerations for exempted supply include:
- Exemption from GST:
– Outward exempted supplies are not subject to GST. These supplies may have a zero percent tax rate or may be entirely exempt from taxation.
- No Input Tax Credit (ITC):
– There is no entitlement to claim input tax credit on the inputs and/or input services used to provide exempted supplies. Unlike taxable supplies, where businesses can offset the tax paid on inputs against their final GST liability, exempted supplies do not provide this benefit.
- Bill of Supply:
– A registered person supplying exempted goods or services, or both, must issue a “bill of supply” rather than a tax invoice. This document is used for recording exempted supplies and does not include any tax details.
Non GST Supply
Non-GST supplies are goods or services that are not liable to the Goods and Services Tax (GST). For such supplies, there is no provision for claiming input tax credit on the inputs and/or input services used to facilitate the non-GST supplies. In other words, input tax credit does not apply to non-GST supplies.
Examples of non-GST supplies include alcohol intended for human consumption, petroleum products, electricity, and other similar items.
Difference Between Nil Rate, Exempted, Zero Rated and Non-GST Supply
| Type of Supply | GST Applicability | Type of Supply | ITC | Examples |
| Nil Rated Supply | 0% | Everyday items | No | Grains, Salt, Jaggery, etc. |
| Exempted Supply | – | Basic essentials | No | Bread, Fresh fruits, Fresh milk, Curd, etc. |
| Zero Rated Supply | 0% | Overseas supplies, Supply to SEZ or SEZ Developers | Yes | – |
| Non-GST Supply | – | Supplies not under GST but may attract other taxes | No | Petrol, Alcohol, etc. |
The Takeaway
In conclusion, understanding the distinctions among zero-rated, nil, exempted, and non-GST supplies is crucial for businesses to navigate the complexities of the Goods and Services Tax (GST) system in India.
Since each category has its own implications for tax rates, eligibility for Input Tax Credit (ITC), and the nature of the supplies involved, businesses need to carefully categorize their supplies to ensure proper compliance with GST regulations and optimize their tax liabilities.
For assistance with your GST registration formalities or GST returns filing, reach out to our tax professionals today!
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