Zero-Rated Vs Nil-Rated Vs Exempt Supplies in GST

Last Updated on January 28, 2026 by Juhi Bohra CS, LLB, BCom

The Goods and Services Tax (GST) system in India does not offer consistent taxation across all goods and services. To ensure equitable taxation, encourage essential sectors, and stimulate the economy, GST categorises several products into several rate groups. These categories influence the tax treatment of goods, the GST rate to be applied, the availability of input tax credits, and the tax compliance obligations for taxpayers. Based on the particular rates, GST supplies can be fully taxable or divided into categories such as zero-rated, nil-rated, exempt, and non-taxable supplies.

Each of these categories aims to meet particular government needs, including encouraging exports, shielding consumers from inflation, and funding health, education, and welfare initiatives. Correct GST registration, invoice raising, pricing choices, tax returns, and input tax credit claims depend on knowledge of the many kinds of rated supplies. Correct categorisation guides taxpayers through erroneous tax payments, tax penalty navigation, and tax department disagreements. Effective management of indirect taxes in India, therefore, demands a fundamental need for separately rated supplies for GST compliance.

What is Zero-Rated Supplies Under GST?

Zero-rated supplies under GST are specific supplies that are liable to a 0% GST rate and are also liable to tax. These supplies are mainly linked to exports and Special Economic Zones.

Key features:

1. Zero-rated supplies are taxable under GST with a zero effective tax rate, which helps businesses avoid tax liability.

2. Legal provision: Section 16 of the 2017 Integrated Goods and Services Tax Act defines the concept of zero-rated supplies.

3. Supplies covered: Zero-rated supplies include the export of goods, the export of services, and the supply of goods or services to SEZ developers or units.

4. GST Liability: Even though zero-rated supplies are taxable, they do not have to pay GST.

5. Input tax credit (ITC): The total input tax credit is available for inputs, input services, and capital goods used in the production of zero-rated supplies.

6. Refund Facility: A refund can be claimed for:

• IGST paid on exports, or
• Unutilised ITC when exports are made under LUT or bond.

7. Objective: The primary objective of zero rating is to encourage exports and make Indian goods and services competitive in the international market.

What is Nil-Rated Supplies Under GST?

Nil-rated supplies under GST are the supplies of goods or services that are rated at 0% GST as per the GST rate notifications. Although these supplies are taxable, the government has chosen not to tax them in order to keep the cost of essential commodities low.

Key features:

1. Nil-rated supplies under GST are taxable and have a GST rate of 0%, as announced by the government.
2. Nature of Supply: These supplies are taxable; however, since the rate is zero, no GST is charged on the supply.
3. Legal Basis: Nil-rated supplies are mentioned in GST rate notifications as “0%”.
4. Input Tax Credit (ITC): Goods or services used solely for nil-rated supplies cannot be used to claim ITC. The GST paid on inputs is considered a cost of the supplier.
5. ITC Reversal: When common inputs are used for taxable as well as nil-rated supplies, the ITC for these supplies needs to be reversed as per GST rules.
6. Refund for ITC: The accumulated input tax credit is not refundable for nil-rated supplies.
7. The supplies that fall under the category of nil-rated supplies include fresh milk, fruits and vegetables, unbranded cereals and pulses, salt, and unbranded bread.
8. Filing Returns: Nil-rated supplies need to be shown separately in the GST returns.

What is Exempt Supplies Under GST?

Exempt Supplies under GST: Exempt supplies under GST are the supplies that are exempt from GST as per the exemptions granted under the GST law. These suppliers are exempt from the tax liability in order to ease the financial burden on necessary commodities and social services.

Key features:

1. Exempt supplies are those that are completely exempt from GST as a result of a government notification or the provisions of the GST Act.
2. Legal Definition: As per Section 2(47) of the CGST Act, 2017, exempt supplies include supplies with a zero tax rate, supplies exempted by notification, and non-taxable supplies.
3. GST Applicability: Exempt supplies are invoiced without the consideration of GST.
4. Input Tax Credit (ITC): Input tax credit on goods or services used in the manufacture of exempted goods is not allowed. In case common inputs are used, the value of ITC should be reversed.
5. Refund of ITC: Refund of input tax credit is not allowed for exempt supplies.
6. Exempt supplies include healthcare services delivered by hospitals and clinics, educational services delivered by recognized institutions, charitable activities, services delivered by the Reserve Bank of India, and non-air-conditioned transport services.
7. Return Filing: Exempt supplies are required to be shown separately in GST returns even if no tax is payable.

Difference Between Zero-Rated, Nil- Rated and Exempt Supplies in GST

Not all supplies subject to the Goods and Services Tax (GST) regime in India are treated equally. Some supplies are taxed at 0%, some are totally exempt, and some are categorised individually for export advantages.

It is important to understand the differences between zero-rated, nil-rated, and exempt supplies in relation to GST registration, GST return filing, input tax credit (ITC), pricing, and GST compliance.

Though all three types of supplies seem to be the same since no GST is charged, their treatment under law, entitlement to input tax credit, and GST return filing are totally different.

Basis	Zero-Rated Supplies	Nil-Rated Supplies	Exempt Supplies
Meaning	Taxable supplies under GST but taxed at 0%, with eligibility to claim full Input Tax Credit (ITC). These supplies are not exempt.	Taxable supplies are taxed at 0% GST, but ITC is not available. The government has chosen to levy a NIL rate.	Supplies are completely exempt from GST by government notification or statutory exemption under the GST Act.
Legal Basis	Covered under Section 16 of the IGST Act, 2017.	Specified under GST rate schedules where the rate is shown as “0%”.	Defined under Section 2(47) of the CGST Act, 2017, including nil-rated, fully exempt, and non-taxable supplies.
Nature of Supply	Taxable supply at a zero rate.	Taxable supply at a zero rate.	Non-taxable supply due to exemption.
Input Tax Credit (ITC) Eligibility	Eligible for full ITC.	Not eligible for ITC.	Not eligible for ITC.
ITC Refund Option	Available.	Not available.	Not available.
Impact on GST Registration	Aggregate turnover includes zero-rated supplies.	Aggregate turnover includes nil-rated supplies.	Aggregate turnover includes exempt supplies; however, suppliers dealing only in exempt supplies are not required to register, unless they cross the taxable threshold.
GST Return Filing Requirement	Must be separately reported in GST returns.	Must be reported under the exempt/nil-rated column.	Must be reported under the exempt supply column.
Applicability of Return Filing	Return filing is mandatory despite 0% tax.	Return filing is mandatory despite 0% tax.	Return filing is mandatory if registered.
Examples of Supplies	Export of goods Export of services Supply to SEZ developers Supply to SEZ units	Fresh fruits and vegetables Milk and salt Unbranded cereals and bread	Healthcare services by hospitals Education by recognised institutions Charitable activities Non-AC public transport Services by RBI Funeral and burial services
Practical Example	ITC of ₹18,000 paid on inputs can be claimed as a refund when goods are exported.	ITC of ₹18,000 cannot be claimed and is treated as a cost.	ITC of ₹18,000 cannot be claimed and is treated as a cost.
Business Impact	Improves cash flow and profitability, especially for exporters.	Keeps essential goods affordable but restricts ITC benefits.	Encourages social welfare activities, but increases input cost due to ITC blockage.

It is vital to have a clear understanding of these differences in order to ensure correct GST registration, pricing, and filing of returns to avoid any reversals of ITC or disputes.

Conclusion

Although the nil-rated, exempt, and zero-rated GST shipments appear similar due to the absence of tax on exports, the treatment of these shipments in terms of law and tax differs significantly. Being taxed at a zero percent rate, zero-rated supplies, such as exports and SEZ supplies, provide a full input tax credit along with the refund option, thus ensuring that the exporter does not pay any tax. On the other hand, nil-rated supplies are also taxed at a zero per cent rate of taxation, but do not provide input tax credit; the GST paid on inputs is treated as a cost. Exempt supplies are completely outside the GST regime due to statutory exemptions and do not offer input tax credit. It is important for taxpayers to understand the differences in these shipments to ensure GST compliance.

Understanding the distinction between nil-rated, exempt, and zero-rated supplies is essential for accurate GST compliance and effective tax planning. Incorrect classification can lead to loss of input tax credit, compliance errors, and potential penalties under the GST law.

Kanakkupillai provides professional GST advisory services to help businesses correctly identify the nature of their supplies, manage input tax credit, and comply with GST regulations seamlessly. From GST registration and return filing to advisory support on zero-rated and exempt supplies, our experts ensure your business remains compliant while optimising tax benefits.

If you need expert assistance with GST classification, input tax credit, or returns, visit Kanakkupillai’s GST services page to get reliable and end-to-end GST compliance support.