# Exempt vs Nil-Rated vs Zero-Rated Supply: What Is the Difference?

**Category:** GST | **Published:** 2026-06-26 | **Last reviewed:** 2026-06-26 | **Author:** Mrs. Swapna Patel

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.

> **Myth:** Exempt, nil-rated, and zero-rated all mean the same thing: 0% GST on the bill.
>
> **Fact:** Only zero-rated supply keeps your input tax credit refundable under [Section 16 of the IGST Act](https://cbic-gst.gov.in/). 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](https://cbic-gst.gov.in/). Zero-rated supplies are exports and SEZ supplies under [Section 16 of the IGST Act](https://cbic-gst.gov.in/).

- 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)](https://cbic-gst.gov.in/).

| 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](https://cbic-gst.gov.in/) and [Section 17(2) CGST Act](https://cbic-gst.gov.in/). See the document-choice exhibit, [which document to issue under GST by registration status](/atlas/tax-invoice-vs-bill-of-supply-vs-kaccha-decision-tree).*

## How do exporters claim the zero-rated refund?

> **Short answer:** A zero-rated supplier takes one of two routes under [Section 16(3) IGST](https://cbic-gst.gov.in/): 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](https://cbic-gst.gov.in/pdf/CGST-Rules-Sept-2023.pdf), 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](https://cbic-gst.gov.in/pdf/CGST-Rules-Sept-2023.pdf).

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](/answers/non-gst-invoice-format-bill-of-supply).

**[Generate a compliant bill of supply for exempt or nil-rated goods](https://hrareceipt.in/bill-of-supply)**

## Primary sources

- [Section 16, Integrated Goods and Services Tax Act 2017 — CBIC](https://cbic-gst.gov.in/) — Zero-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 — CBIC](https://cbic-gst.gov.in/) — Definition of exempt supply and the power to exempt supplies.
- [Section 17(2), Central Goods and Services Tax Act 2017 — CBIC](https://cbic-gst.gov.in/) — ITC reversal where supplies are exempt or nil-rated.
- [Rule 96A, Central Goods and Services Tax Rules 2017 — CBIC](https://cbic-gst.gov.in/pdf/CGST-Rules-Sept-2023.pdf) — Letter of Undertaking (LUT) for export without payment of IGST.

## Related

- [Bill of supply: the non-GST invoice format and when to use it](https://hrareceipt.in/answers/non-gst-invoice-format-bill-of-supply)
- [Composition scheme or unregistered: when do you issue a bill of supply?](https://hrareceipt.in/answers/composition-vs-unregistered-bill-of-supply-when)
- [What are the GST rate slabs after the GST 2.0 reform?](https://hrareceipt.in/answers/gst-rate-slabs-after-gst-2-0-reform)
- [What is GSTR-2B, and why does it decide your input tax credit?](https://hrareceipt.in/answers/what-is-gstr-2b-auto-drafted-itc-statement)

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*Source: [Exempt vs Nil-Rated vs Zero-Rated Supply: What Is the Difference?](https://hrareceipt.in/answers/exempt-vs-nil-rated-vs-zero-rated-supply-gst) — HRAReceipt.in*
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