Three terms that confuse every GST taxpayer: zero-rated, exempt, and nil-rated supplies. They all mean “no GST charged on invoice”, but their impact on Input Tax Credit (ITC) and compliance is completely different. In 2025, with stricter AIS/TIS reconciliation, getting this wrong can block your ITC or trigger notices. Here’s a breakdown of the terms.
What Are Zero-Rated Supplies Under GST?
Zero-rated supplies refer to specific transactions taxed at 0% GST, mainly exports and supplies to SEZs. However, they differ from exempt supplies in an important way. Under zero-rated, exempt, and nil-rated supplies in India, zero-rated supplies allow businesses to claim ITC. Therefore, exporters can recover GST paid on inputs like raw materials and services.
For example, exporting goods to the US or supplying services to an SEZ unit qualifies as zero-rated. Moreover, businesses can choose between exporting under bond without paying GST or paying GST and claiming a refund later. According to the Central Board of Indirect Taxes and Customs (CBIC), exports account for nearly 20% of India’s total goods trade, making zero-rated supplies crucial for exporters.
Understanding Exempt Supplies:
Exempt supplies are goods or services completely free from GST under law. However, unlike zero-rated supplies, ITC cannot be claimed on exempt supplies. Common examples include fresh fruits, vegetables, milk, healthcare services, and educational services. These exemptions aim to reduce the tax burden on essential items and public welfare services.
In the context of zero-rated, exempt, and nil-rated supplies in India, exempt supplies reduce compliance but may increase hidden costs. Therefore, businesses dealing mainly in exempt goods often face higher input costs. For example, a hospital cannot claim GST paid on medical equipment. As a result, operational expenses may rise slightly.
What Does Nil-Rated Supply Mean?
Nil-rated supplies are taxable supplies with a GST rate of 0%. However, they are still considered taxable under GST law. Items like cereals, salt, and books fall under this category. Moreover, nil-rated supplies differ from exempt supplies because they appear in GST rate schedules.
Under zero-rated, exempt, and nil-rated supplies in India, nil-rated supplies also do not allow ITC claims. Therefore, businesses must carefully classify products to avoid filing errors. The standard GST rate in India is 18%, as reported by Economic Times, which highlights why correct classification matters.
Nil-Rated vs Exempt: Simple Comparisons
Understanding the difference between nil-rated and exempt supplies helps businesses classify sales correctly:
- Nil-Rated Supplies: GST rate notified as 0%. Examples include certain agricultural products like grains and jaggery. No ITC claim available.
- Exempt Supplies: GST is legally exempt. Examples are fresh milk and bread. These typically serve basic consumer needs, and ITC is not available.
- Zero-Rated Supplies: Exports or sales to SEZs at 0% GST with the ability to claim ITC.
These distinctions also matter for compliance and reporting. Zero-rated supplies go in separate tables in GSTR-1 and GSTR-3B, whereas exempt and nil-rated supplies are disclosed differently to avoid mismatches in return filings.
Conclusion:
In summary, zero-rated, exempt, and nil-rated supplies in India serve different purposes under GST. Zero-rated supplies benefit exporters with ITC refunds, exempt supplies reduce tax on essentials, and nil-rated supplies clarify taxable items with 0% GST. Understanding these distinctions helps businesses stay compliant, optimize costs, and plan growth effectively. Explore more GST insights now!
– Ketaki Dandekar (Team Arthology)
Read more about Zero-Rated, Exempt, and Nil-Rated Supplies in GST here – https://www.taxmann.com/gst/