GST · 26 June 2026
Exempt vs Nil-Rated vs Zero-Rated Supply: What Is the Difference?
Exempt, nil-rated, and zero-rated supplies all carry no output GST, but they treat input tax credit (ITC) very differently. Nil-rated and exempt supplies block ITC, so the tax you paid on purchases becomes a cost. Zero-rated supplies, exports and supplies to a Special Economic Zone under Section 16 of the IGST Act, keep ITC fully refundable. The distinction decides whether you recover the GST on your inputs.
By Mrs. Swapna Patel
Last reviewed
26 June 2026
In this section
Answers
- Exempt vs Nil-Rated vs Zero-Rated Supply: What Is the Difference?
- What Is GSTR-1, the GST Return of Outward Supplies?
- What Is GSTR-3B, the Monthly GST Summary Return?
- What Is the Time of Supply Under GST, and When Does Tax Become Due?
- Advance Receipt Under GST: When Do You Issue a Receipt Voucher?
- Credit Note vs Debit Note Under GST: When Do You Issue Each?
- What Is GSTR-2B, and Why Does It Now Decide Your Input Tax Credit?
- What Is the Value of Supply Under Section 15 of the CGST Act?
- What Are the GST Rate Slabs in India After the GST 2.0 Reform?
- Composite vs Mixed Supply Under Section 8: Which GST Rate Applies?
Exempt, nil-rated, and zero-rated all mean the same thing: 0% GST on the bill.
Only zero-rated supply keeps your input tax credit refundable under Section 16 of the IGST Act. Exempt and nil-rated supplies carry no output tax but also block the credit on your purchases.
What does each term mean?
Short answer
Nil-rated supplies sit at 0% in the rate schedule. Exempt supplies are notified as exempt under Section 11 of the CGST Act. Zero-rated supplies are exports and SEZ supplies under Section 16 of the IGST Act.
- Nil-rated: the tariff lists the item at a 0% rate, for example certain unbranded staples.
- Exempt: the supply is taken out of tax by notification, and the term also covers non-taxable supplies under Section 2(47).
- Zero-rated: a specific status for exports and supplies into a Special Economic Zone (SEZ), where the whole supply chain is meant to be tax-free.
- Non-GST is a fourth, separate category, such as petrol and alcohol for human consumption, which GST does not reach at all.
Exempt vs nil-rated vs zero-rated: the ITC difference
Short answer
The output tax is the same (none), but only zero-rated supply preserves input tax credit. Exempt and nil-rated supplies require you to reverse ITC under Section 17(2).
| Feature | Nil-rated | Exempt | Zero-rated |
|---|---|---|---|
| Output GST | 0% (in the tariff) | Exempt by notification | Effectively 0% |
| Input tax credit | Not available | Not available | Available and refundable |
| Typical supply | Listed 0% goods | Notified exempt goods or services | Exports and SEZ supplies |
| Statutory basis | Rate schedule | Section 11 CGST | Section 16 IGST |
| Document issued | Bill of supply | Bill of supply | Tax invoice (export invoice) |
The ITC column is the real difference: zero-rated keeps credit; exempt and nil-rated block it. Source: Section 16 IGST Act and Section 17(2) CGST Act. See the document-choice exhibit, which document to issue under GST by registration status.
How do exporters claim the zero-rated refund?
Short answer
A zero-rated supplier takes one of two routes under Section 16(3) IGST: export under a Letter of Undertaking (LUT) without paying IGST and claim a refund of unused ITC, or pay IGST and claim a refund of the tax paid.
- Route 1, LUT: file a Letter of Undertaking under Rule 96A, export without charging IGST, then claim a refund of the accumulated input credit.
- Route 2, pay and reclaim: charge IGST on the export invoice, then claim a refund of that IGST.
- Why it matters: this is why an exporter is far better off zero-rated than exempt. Exempt status would strand the GST paid on inputs as a cost.
- Both routes need a proper export tax invoice, not a bill of supply.
Which document do you issue for an exempt or nil-rated supply?
Short answer
A supplier of exempt or nil-rated goods or services issues a bill of supply, not a tax invoice, under Section 31(3)(c) read with Rule 49.
A bill of supply carries no tax line because there is no GST to charge. Issuing a tax invoice with 0% instead is the common error. For the exact fields and when this document applies, see the non-GST invoice format and bill of supply.
References & related
Primary sources
- Section 16, Integrated Goods and Services Tax Act 2017 — CBICZero-rated supply: exports and supplies to an SEZ, with ITC refund routes.
- Section 2(47) and Section 11, Central Goods and Services Tax Act 2017 — CBICDefinition of exempt supply and the power to exempt supplies.
- Section 17(2), Central Goods and Services Tax Act 2017 — CBICITC reversal where supplies are exempt or nil-rated.
- Rule 96A, Central Goods and Services Tax Rules 2017 — CBICLetter of Undertaking (LUT) for export without payment of IGST.
Last reviewed: 26 June 2026