Ankit Rahangdale is a seasoned finance professional with a distinguished background as a Chartered Accountant. Currently, he leads the Finance Department at Pice. With over five years of invaluable experience in the banking and finance sector, honing his expertise through esteemed institutions such as ICICI Bank and Standard Chartered Bank.
Zero-rated supplies under GST include exports and supplies to SEZs, whereas nil-rated supplies involve domestic goods or services taxed at 0%.
Suppliers of zero-rated goods can claim Input Tax Credit (ITC) and file refunds either with IGST payment or under a Letter of Undertaking (LUT).
Nil-rated supplies do not allow ITC claims as they are exempted from tax payments under GST.
Proper classification of zero-rated and nil-rated supplies in GSTR-1, especially in Tables 6 and 7, helps avoid compliance errors and penalties.
Businesses must maintain accurate documentation, including invoices, SEZ approval letters, and export documents, to ensure smooth GST return filing and ITC claims.
A zero-rated and nil-rated supply under GST tax regime are probably the two most commonly heard components that, though they may sound similar, cannot be used interchangeably. ‘Nil rate' or 'zero-rated’ implies a 0% tax rate.
One might assume that applying a 0% tax rate is straightforward, but it is crucial to accurately distinguish between nil-rated and zero-rated supplies during the documentation process for filing GSTR-1 returns.
In this blog, you will find out what nil and zero-rated supplies are, as well as the steps you can take to avoid errors or discrepancies while reporting them, which could result in fines or penalties.
Identifying and Reporting Nil or Zero-Rated Supplies in GSTR-1
As per Section 16 of the Integrated Goods and Service Tax Act, a zero-rated supply indicates the export of commodities or services or both as well as their supply to a Special Economic Zone (SEZ). Let's understand better with a couple of examples of zero-rated GST supplies:
A company providing web designing services to their clients in the UK.
A supplier exporting their dates to the European market.
In both cases, you see a chain of supplies that are free of tax. It simply means neither the supplier nor the consumer is required to think about the tax burden.
There is no specific list of supplies that are to be mandatorily stated in GSTR-1 as zero-rated supplies. The same products or services when you try to sell them within India, a tax will be levied based on the category of supply.
Subsection 3 of Section 16 enables a supplier making zero-rated supplies to report refund claims by following any of the following options:
Registered individuals can offer services or goods under the Letter of Undertaking (LOU) without paying integrated tax or seeking refunds for Input Tax Credit on SGST, CGST, IGST and UTGST, as long as they comply with the prescribed conditions and procedures.
The registered person can also provide goods and services, subject to specific conditions and procedures while paying integrated tax and claiming a refund for the tax paid on those goods and services.
Note: The GST law allows any taxpayer to claim refunds for zero supplies, even if they are not taxable, as stated in subsection 2 of Section 16.
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Difference Between Zero-Rated and Taxable Supplies
Here’s a comprehensive table discussing the difference between two types of supplies: a taxable GST supply and a GST exemption supply or zero-GST supplies under the taxation law.
Parameter
Zero-rated Supply
Taxable Supply
Definition
Represents goods/services for which there is an exemption from payment
Standard GST rates apply to these supplies that vary for each product/service
Effective Rate of Tax
0%
Payment of tax varies as per standard rate of tax (5%, 12%, 18% and 28%)
Impact on Pricing
Prices seem to be lower as no tax is added
Total cost can be a bit elevated due to added GST
Revenue Reporting in Respect to Input
Zero-rated supplies are “zero-rated outward supplies” while filing the GSTR.
These supplies are reported along with applicable tax amounts.
Purpose
This category of non-taxable supply encourages the export and promotion of essential supplies.
These contribute to the standard revenue generation for both the State and Central Government.
Examples
Supply of service to a foreign country, agricultural services, selected items like fresh milk, oil seeds, raw silk, cereal grains, organic manure, clay lamps, leguminous vegetables and other agricultural items supplied to Special Economic Zones fall under the exemption list.
Everyday items that are listed under the standard GST rate schedule like pasteurised milk, butter milk, butter milk, meals of meat, fresh fruit, postal items, colouring books, animal oils, etc.
Note: An exempt supply is different from zero-rated supplies as they are entirely non-GST supplies. These include items like alcoholic liquor for human consumption, petroleum products, electrical energy, etc. that do not come under the GST regime but may attract other forms of tax like VAT.
Special Economic Zones are selected areas within the country where the business and trade regulations differ from the rest of the nation.
At times, the SEZs can be situated in international markets for which they are categorised under export and import. Here, the export of services or products refers to transactions involving goods and services between developers in different Special Economic Zones. Simultaneously, imports refer to receiving goods or services in a specific Special Economic Zone from another SEZ.
Objectives of Implementing Special Economic Zones
SEZs are developed to create newer employment opportunities and enhance trade balance evenly throughout India. Besides this, some other objectives of implementing Special Economic Zones include:
It helps promote revenue generation from foreign business as there is more export of supplies.
Developers witness faster improvement of the country’s infrastructure facilities.
The net foreign investment of a country increases.
Finally, SEZs call for more effective administration and strict financial policies that help establish businesses at reasonable costs.
Business Compliance Obligations for Nil or Zero-Rated Supplies
When dealing with nil-rated or zero-rated supplies under GST, businesses must follow specific compliance obligations to ensure accurate reporting and proper tax treatment. Below is a list of key actions that need to be taken to avoid further compliance burden:
In the case of GSTR-1 Filing
While reporting the nil-rated supply under GST, ensure to follow the given below points:
GSTR-1 should be filed precisely and before the announced deadlines to evade unwanted penalties and interest charges.
You can use Table 7 to list down all the zero-rated supplies.
While reporting, ensure that all the supplies, that are either tagged as “nil-rated” or “zero-rated”, attract 0% GST.
Finally, ensure to cross-check the details provided in the GSTR-1 form. This information includes your invoice particulars, numbers, amount of tax and most importantly the GSTIN.
In the case of Input Tax Credit
Suppliers, who produce and offer zero-rated supplies, can claim an Input tax Credit (ITC) against the tax they have already paid on resources used to make those supplies.
To file a valid claim, you must maintain proper records like the related invoices and credit input taxes. Additionally, you need to be aligned with the direct tax compliance and exclusive guidelines regarding ITC and zero-rated supply reversals.
Individuals/businesses dealing with zero-rated supplies must adhere to the following compliance regulations:
They require approvals and registrations that are relevant to zero-rated supplies, which even comprise approval from the Special Economic Zone(s).
Consequently, an appropriate accounting system has to be maintained so that zero-rated and nil-rated supplies can be accounted for.
These businesses can be asked to submit additional information on any kind of documents that are likely to assist the taxation bodies.
One must note that the GST rules keep on getting updated. Therefore, it is crucial for a registered taxpayer to monitor them in order to avoid missing any important notifications.
Documentation and Record Keeping for Nil or Zero-Rated Supplies
Let’s have a look at the documentation needed for zero-rated or nil-rated supply under GST:
All zero-rated or nil supply transactions need to have detailed invoices and purchase orders while filing the GSTR.
The export documents of the zero-rated suppliers, including the Bill of Lading invoices in export, should also be kept safe. It is highly recommended that businesses retain several copies of those invoices.
You must mindfully save the SEZ Approval Letters or any form of other documents for zero-rated supplies.
Storing the letters must be followed by proper review and amendments of the relevant documents to ensure that all the claims are accurate.
If registered taxpayers or businesses are unsure about the supplies or generated supplies then they must seek professional guidance from GST advisors.
Preventing Errors and Discrepancies in Reporting Nil or Zero-Rated Supplies
You need to pay attention towards how to avoid possible errors while claiming a refund in Form GST. To help you do this, we have suggested some effective steps below:
Thoroughly Scrutinise Every Document Before Filing the Return
All the invoices along with the purchase orders should be verified thoroughly before feeding all those details in the GSTR-1 form. You need to check the invoice numbers too. The invoices should bear your GSTIN at the time of supply. Next, you must ensure a proper classification between nil as well as zero-rated supplies in Tables 6 and 7 respectively.
Cross Check the Invoice Records and SEZ Approval Letters
Internally there has to be a match of all purchase and sales records before you proceed to file the GSTR-1 return. For this reason, GST advisors suggest every bit of information to be cross-checked against the original documents like bills, Special Economic Zone approval letters and more before filling up the application for refund.
You must ensure rectification of errors (if any), prior to filling up the GSTR-1 return.
Pay Close Attention to the Documentation Process
Your business has to have a seamless documentation standard to guarantee the easy availability of Letters of Approval and invoices during crucial moments. Hence, consider investing in technologies that allow easy storage of invoices and other supporting documents. Doing this and updating all the documents regularly will prove to be useful while you prepare for any possible queries from the tax department.
Seek Help From Professional GST Advisors
Not everyone involved in business can learn the entire process of GST filing, especially given how complex GSTR-1 return filing can be. Distinguishing between zero-rated and nil-rated supplies under GST is particularly tricky and requires careful attention.
Therefore, if the person responsible for filing taxes for your business is uncertain about reporting nil or zero-rated supplies, they should promptly seek professional assistance.
Strive Towards Continuous Learning
GST exemption policies are subject to continuous amendments. Thus, it is crucial for individuals to stay updated regarding absolute exemptions with the latest notifications. It makes the tax filing process smooth and error-free.
At present, services offered in a clinical facility fall under GST exemption policies. Also, distribution of electricity is free as per Notification 12/2017. Similarly, you should learn about other aspects of consumption tax for well-informed ITR filing.
Conclusion
Filing Tables 6 and 7 of GSTR-1 can be complicated, but these sections are important for ensuring that your Input Tax Credit (ITC) claims are valid. Proper attention and expertise are needed to complete them correctly. For these requirements, seeking help from experts is often recommended to maintain necessary business compliance for your venture.
FAQs
What is nil-rated supply in GST?
Nil-rated supply refers to goods or services that attract 0% GST under the GST regime. Though the GST rate is 0%, these supplies do not allow Input Tax Credit (ITC) claims for the tax paid on inputs. Examples of nil-rated supplies include fresh fruits, vegetables, grains, and salt.
What is zero-rated supply under GST?
Zero-rated supply under GST refers to supplies that attract 0% GST but allow the supplier to claim Input Tax Credit (ITC) on inputs used. These include exports of goods or services and supplies to Special Economic Zones (SEZs). For example, a company exporting IT services to the USA qualifies as a zero-rated supply.
What is exempted rated supply under GST example?
Exempted supply refers to goods or services that are not taxable under GST, and no tax is charged on them. Additionally, suppliers cannot claim Input Tax Credit on inputs. Examples of exempted supplies include healthcare services, education services, unprocessed agricultural products, and electricity.
What is nil code?
A nil code refers to the GST classification for supplies that attract a 0% tax rate under GST. This code is used to identify and report nil-rated supplies in GST returns. It simplifies reporting and ensures compliance for goods and services that are taxed at 0%.
Is bread zero-rated or exempt?
Bread is generally classified as exempt under GST, meaning it does not attract GST. However, it is not considered zero-rated, as suppliers of exempt goods cannot claim Input Tax Credit on inputs used in the production or supply of bread.
Is zero-rated GST free?
Yes, zero-rated supplies are effectively GST-free as they are taxed at 0% GST. However, unlike exempt supplies, businesses dealing in zero-rated supplies can still claim Input Tax Credit (ITC) for the GST paid on inputs used to make the supply.
Is milk zero-rated or exempt?
Milk is classified as exempt under GST, meaning it does not attract any GST. Suppliers of milk cannot claim Input Tax Credit (ITC) for inputs used, as exempt supplies fall outside the taxable GST net.
Ankit Rahangdale is a seasoned finance professional with a distinguished background as a Chartered Accountant. Currently, he leads the Finance Department at Pice. With over five years of invaluable experience in the banking and finance sector, honing his expertise through esteemed institutions such as ICICI Bank and Standard Chartered Bank.
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