Table of Contents
Introduction
Understanding the classification of supplies under the Goods and Services Tax (GST) law is crucial for businesses, professionals, and taxpayers. Two classifications that often create confusion are Exempt Supply and Nil-Rated Supply. While both result in no GST liability, their legal treatment, impact on Input Tax Credit (ITC), compliance, and GST return filing differ significantly.
This article provides a fully detailed, legally accurate, and up-to-date analysis of:
✅ Definitions as per the GST Law
✅ Key legal provisions (Sections, Subsections, Rules, Notifications, Circulars)
✅ Differences in tax treatment, ITC eligibility, and compliance
✅ Practical scenarios with latest GST amendments
✅ GST return reporting and record-keeping requirements
1. Understanding Exempt Supply under GST
1.1 Definition and Legal Provisions
- Supplies attracting a 0% tax rate
- Supplies wholly exempt through a government notification
- Non-taxable supplies (items not covered under GST law at all, like petroleum, alcohol, and real estate transactions under Schedule III)
- Section 2(47) of CGST Act, 2017 defines Exempt Supply.
- Notification No. 12/2017-Central Tax (Rate), dated 28th June 2017, lists exempted services.
- Notification No. 02/2017-Central Tax (Rate) lists exempted goods.
1.2 Categories of Exempt Supplies
(A) Absolute Exemption (Unconditional Exemption)
Goods or services permanently exempt from GST without conditions.
🔹 Examples:
- Healthcare services by hospitals [(Notification No. 12/2017, Entry 74)]
- Educational services by government-recognized institutions [(Notification No. 12/2017, Entry 66)]
- Agricultural produce transportation [(Notification No. 12/2017, Entry 21)]
(B) Conditional Exemption
Exemption applies only if certain conditions are met.
🔹 Examples:
- Charitable activities by NGOs are exempt only if their services relate to education, public health, or advancement of religion [(Notification No. 12/2017, Entry 1)]
- Renting of religious places is exempt only if the rent does not exceed ₹10,000 per month [(Notification No. 12/2017, Entry 13)]
(C) Partial Exemption
Certain exemptions apply only beyond a threshold limit.
🔹 Examples:
- Small businesses with turnover below ₹20 lakhs (₹10 lakhs for special category states) are exempt under Section 22 of CGST Act.
1.3 Impact on Input Tax Credit (ITC) for Exempt Supplies
- ITC is completely blocked for goods/services used in making exempt supplies.
- Businesses dealing in both taxable and exempt supplies must reverse ITC proportionately under Rule 42 & Rule 43 of CGST Rules.
- If a taxpayer wrongly avails ITC on exempt supplies, the department can demand ITC reversal with interest under Section 50(3) of the CGST Act.
1.4 GST Return Reporting for Exempt Supplies
Return | Where to Report Exempt Supplies |
GSTR-1 | Table 8 (Nil-rated, Exempt, and Non-GST Supplies) |
GSTR-3B | Table 3.1(c) (Exempt and Nil-rated supplies) |
GSTR-9 (Annual Return) | Table 5 (Breakup of Exempt, Nil-Rated, and Non-GST supplies) |
2. Understanding Nil-Rated Supply under GST
2.1 Definition and Legal Provisions
Nil-rated supplies refer to taxable supplies with a 0% GST rate. These supplies are not exempt by notification, but their tax rate is explicitly set at 0% under the GST rate schedule.
Legal Reference: Notification No. 01/2017-Central Tax (Rate), dated 28th June 2017 defines nil-rated goods.
2.2 Examples of Nil-Rated Supplies
- Fresh fruits, vegetables, and grains [(Notification No. 02/2017, Entry 1)]
- Unprocessed agricultural products like pulses, rice, and wheat
- Printed books and newspapers (without advertisements)
2.3 Impact on Input Tax Credit (ITC) for Nil-Rated Supplies
- ITC is available but cannot be utilized or claimed as a refund under Section 54(3) of CGST Act.
- The entire tax credit accumulated on nil-rated supply transactions remains ineligible for offsetting tax liability.
2.4 GST Return Reporting for Nil-Rated Supplies
Return | Where to Report Nil-Rated Supplies |
GSTR-1 | Table 8 (Exempt, Nil-Rated, and Non-GST supplies) |
GSTR-3B | Table 3.1(c) |
GSTR-9 | Table 5 (Annual return) |
3. Key Differences Between Exempt and Nil-Rated Supply
Aspect | Exempt Supply | Nil-Rated Supply |
Definition | Supply exempted by a notification | Supply taxable at 0% |
ITC Eligibility | Not available | Available but non-refundable |
Legal Provision | Section 2(47) of CGST Act | Notification No. 01/2017 |
Examples | Healthcare, Charitable services | Unprocessed agricultural products |
GST Return Filing | Reported under GSTR-1 & GSTR-3B | Reported under GSTR-1 & GSTR-3B |
4. Recent GST Council Updates on Exempt and Nil-Rated Supplies
- Railway passenger transport services continue to be exempt [(Notification No. 09/2024)]
- Milk-based products previously nil-rated now taxed at 5% if turnover exceeds threshold [(Circular No. 15/2024)]
- Clarifications on ITC for businesses supplying both taxable and exempt goods [(Rule 43 updated)]
Final Thoughts
Understanding Exempt and Nil-Rated Supply is critical for businesses to ensure proper tax compliance, GST return filing, and correct ITC treatment.
📌 Key Takeaways:
✔ Exempt supplies = No GST + No ITC
✔ Nil-rated supplies = 0% GST + ITC available but non-refundable
✔ Proper classification is mandatory to avoid penalties
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