Ever since Goods and Services Tax law was introduced, there have been lot of changes and amendments in ensuring that the law is addressing the concerns of all stakeholders. However, the understanding of basic concepts is essential as these have almost remained the same. In this article we will understand the key differences between Zero-rated supply and Nil rated supply
ZERO RATED SUPPLY
Section 16 of the IGST Act, 2017 identifies the following as zero-rated supplies:
- Export of goods or services or both
- Supplies to a unit situated in Special Economic Zone or a developer of Special Economic Zone
In addition to this, the provisions of Section 147 of CGST Act, 2017 deems the following supplies as ‘exports’ which mean these are also eligible for zero-rating:
- Supply of goods by a registered person against Advance Authorisation (AA)
- Supply of capital goods by the registered person against Export Promotion Capital Goods Authorisation (EPCG)
- Supply of goods by the registered person to Export Oriented Unit (EOU)/ Electronic Hardware Technology Park Unit (EHTP) / Software Technology Park Unit (STP) / Bio-Technology Park Unit (BTP)
- Supply of gold by Bank or Public Sector Undertaking against Advance Authorization
IGST Act applies to all inter-state supplies of goods or services or both. Inter-state supply has been defined under section 7 of the IGST Act to mean a supply of goods or services or both, where the location of the supplier and the place of supply are in two different states or Union Territories or a State and a Union Territory. Further Proviso to Section 8(1) and Section 8(2) of the IGST Act states that supply of goods or services to or by a Special Economic Zone developer or a Special Economic Zone unit shall not be treated as intra-state supply.
There are two methods in which zero-rating can be applied:
- Supplier can execute a Bond/Letter of Undertaking as per Rule 96A of CGST Rules, 2017 and supply goods or services without payment of integrated tax; or
- The supplier has to pay the applicable integrated tax and claim such tax paid as refund subject to the provisions of Section 54 of CGST Act, 2017.
An important point to note is that option to execute bond or LUT is not applicable for supplies classified as deemed exports u/s 147. In such cases, either the supplier or the recipient, who has borne the tax incidence, must claim the refund of tax paid. Where the supplier is claiming the refund of such, the recipient cannot claim input tax benefit.
NIL RATED SUPPLY
‘Nil’ Rated supply means supplies that attract tax at ‘nil’ rate or ‘0 %’. As per Section 2(47) of the CGST Act, 2017, nil rated supplies fall within the scope of exempt supply. This is in contrast to the erstwhile provisions under the Central Excise Act, 1944 which deemed nil rated goods as taxable goods that are taxed at 0%; however the erstwhile CENVAT Credit Rules, 2004 deemed nil rated goods as exempt goods for the purpose of CENVAT Credit.
POINTS OF DIFFERENCE
So, what differentiates zero-rated and nil rated supplies?
- Zero-rated supplies will always be inter-state supplies, whereas nil rated supplies can be either intra-state or inter-state supplies
- Only exports, deemed exports and supplies to SEZ units / developers are treated as zero-rated supplies – All other supplies are treated as nil rated supplies if they are subject to 0% tax.
- For Nil rated supplies, no requirement to execute Bond or LUT whereas for zero-rated supplies, execution of LUT or Bond is an option if the supplier intends to supply without payment of tax.
- Nil rated supplies are treated as exempt supplies and therefore input tax credit cannot be taken for executing such supplies. Zero-rated supplies are treated as taxable supplies and hence are eligible for taking input tax credit on eligible inputs, input services and capital goods.
- Refund of accumulated input tax credit on eligible inputs, input services and capital goods can be claimed in case supplier executes zero-rated supplies whereas such an option is not available for nil rated supplies.
Note: The above post is a compilation of the relevant statutory provisions for the purpose of understanding and simplicity. Users must frequently check the CBIC portal for updates and the statutory position changes.
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About the Author
Rajasekaran. KChartered Accountant in whole time practice. partner, Varun Agarwal & Associated, Chennai and Co-founder, PROCADEMY EDUVENTURES LLP