Zero-Rated and Exempt Supplies under GST

Zero-rated supplies and exempt supplies differ mainly in how GST paid on inputs is treated. Zero-rating preserves eligibility for input tax credit and refunds, subject to statutory conditions, whereas exemption generally prevents credit for tax attributable to exempt supplies. Thus, the absence of GST on an outward supply does not necessarily mean that its inputs are free of tax cost.

Which supplies fall in each category?

Zero-rating is a specific legal category, not merely another name for a GST rate of zero.

• Under Section 16 of the Integrated Goods and Services Tax Act, 2017, zero-rated supplies cover exports of goods or services or both, and supplies to a Special Economic Zone developer or unit for authorised operations.
• Under Section 2(47) of the Central Goods and Services Tax Act, 2017, exempt supplies include supplies attracting a nil rate, supplies wholly exempted under the relevant exemption provisions, and non-taxable supplies.
• A nil-rated supply attracts a GST rate of zero, while a non-taxable supply is not leviable to GST under the relevant Acts; both fall within the statutory definition of exempt supply.

Input tax credit and refund treatment

Input tax credit (ITC) allows an eligible registered person to offset GST paid on business inputs against output tax liability. Its treatment is the decisive distinction between these categories.

• For zero-rated supplies, eligible ITC remains available even where the supply is otherwise exempt, subject to restrictions such as those on blocked credits.
• For ordinary exempt supplies, credit attributable to those supplies is generally unavailable; where inputs serve both taxable and exempt supplies, common credit must be apportioned under the prescribed rules.
• An eligible registered supplier can make zero-rated supplies under a bond or Letter of Undertaking, without paying integrated tax, and claim a refund of unutilised ITC subject to statutory conditions.
• The route of paying integrated tax on zero-rated supplies and claiming its refund is subject to notified eligibility and conditions; it should not be treated as an unrestricted option.
• Exemption alone does not confer the zero-rated entitlement to claim a refund of input taxes.

Economic significance

Zero-rating seeks to remove the domestic GST burden from qualifying supplies, especially exports. Exemption removes output GST but can leave unrecovered input tax embedded in costs.

• Zero-rating supports the destination-based character of GST by relieving exports of domestic tax.
• Exemption can interrupt the credit chain, so an exempt final supply need not be free of embedded taxation.