If you’re navigating the world of GST in India, you’ve likely come across the terms “0% rate” and “Nil rate.” At first glance, they seem identical—both mean no tax is paid by the customer. So, why does GST make a distinction? Aren’t they the same thing?
This is one of the most common areas of confusion for businesses and taxpayers. While the outcome (a tax invoice with ₹0 GST) looks the same, the reasons and implications behind these classifications are vastly different. Understanding this difference is crucial for accurate GST return filing (especially GSTR-1 and GSTR-3B) and for managing your Input Tax Credit (ITC).
The Bottom Line Up Front
- Nil Rated Supply: A supply that is exempt from GST. It is not taxable under GST law.
- 0% Rated Supply: A supply that is taxable under GST, but the current tax rate levied on it is zero.
What is a Nil Rated Supply?
A Nil rated supply refers to goods or services that are exempt from GST entirely. They are listed in Schedule III of the CGST Act or are otherwise fully exempt via a government notification.
- Nature: Non-Taxable: These items are outside the scope of the tax levy.
- GST Return Filing: You must still report these transactions in your GSTR-1 under the “Nil Rated” or “Exempt” column.
- Input Tax Credit (ITC): This is the critical difference. You cannot claim ITC on the inputs, input services, or capital goods used to make a Nil-rated or exempted supply. This is a major cost consideration for businesses dealing in such items.
- Examples:
- Fresh milk, eggs, and curd.
- Fresh fruits and vegetables.
- Common educational services provided by schools and colleges.
- Healthcare services provided by a clinical establishment.
- Jute, handlooms, and certain agricultural produce.
What is a 0% Rated Supply?
A 0% rated supply is a supply that is taxable under GST, but the rate of tax applicable to it is zero percent. These are primarily exports and supplies to Special Economic Zones (SEZs).
- Nature: Taxable. Even though the tax charged is zero, it is considered a taxable supply under the law.
- GST Return Filing: You report these transactions as “Zero Rated” supplies in your returns.
- Input Tax Credit (ITC): This is the biggest advantage. You CAN claim a full refund of the ITC accumulated on the inputs used to make a 0% rated supply. Since the final product is exported and not sold domestically, the government refunds the entire chain of taxes paid earlier.
- Examples:
- Export of goods to a customer in the USA.
- Export of services to a client in the UK.
- Supplying goods to a unit located in a Special Economic Zone (SEZ).
Key Differences
Feature | Nil Rated Supply | 0% Rated Supply |
Nature | Exempt from GST (Non-Taxable) | Taxable under GST |
Tax Rate | Not Applicable (Exempt) | 0% |
Input Tax Credit | NOT Available | Available & Refundable |
Purpose | To provide essential goods/services tax-free to the public. | To promote exports and make Indian products competitive in the global market. |
Reporting in Returns | Reported as “Exempt” or “Nil” rated. | Reported as “Zero Rated” supply. |
Conclusion:
The next time you see an invoice with ₹0 GST, don’t stop there. Ask the critical question: “Is this supply exempt (Nil) or is it zero-rated?”
Remember:
- Nil Rate = Exempt = No ITC
- 0% Rate = Taxable = ITC Available for Refund
Understanding this crucial distinction will ensure you are compliant with GST laws, avoid costly errors, and optimize your working capital. Always consult with a tax professional if you are unsure about how to classify your specific goods or services.