Difference between Exempt, Nil & Zero Rate and Eligibility of ITC and Registration Requirement By FCA Pankaj Sharma


[In case Export of Exempted Goods]

  • EXEMPT SUPPLIES: Section 2(47) of CGST Act, 2017, means the supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply.

  Hence, it includes the following type of supplies of goods or services

  1. Non-taxable supplies: As per section 2(78) of CGST Act, 2017 “non-taxable supply” means a supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act. So transaction or activities specified in schedule III of CGST Act, 2017 notified which are neither considered as a supply of goods nor supply of services. Hence, on these types of supplies act not apply.
  2. Nil rate of tax: It means that goods or services are taxable but at Nil Rate.
  3. Exempt Supplies: Supplies exempt under section 11 of CGST Act, 2017 or section 6 of IGST Act, 2017.

Taxable Supply: As per section 2(108) of CGST Act, 2017, taxable supply means a supply of goods or services or both which is leviable to tax under this act.

Eligibility of Input Tax Credit: Under section 17(2) where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies.

Hence, exempt supplies u/s 2(47) of the Act not eligible for an input tax credit on the procurement of input or input services used in effecting such exempt supplies including Nil rate, Non-taxable supplies.

Also point noted to be here that, Zero-rated supplies are made at the same level /at par with taxable supplies.

Also as per definition of taxable supply under section 2(108) of the Act, zero-rated supplies are taxable under the act which attracting rate of tax at zero due to giving some special treatment or benefit under the Act.

Since Zero {0%} is a rate of tax whereas Nil is not a tax rate due to which nil rate is not leviable to tax/exempt under the Act as every leviable provision must have taxable value and rate of tax (Rear section 9 of CGST Act).

Author view: Zero has valid recognition as a rate of tax under the Act.

HENCE, ZERO RATED SUPPLIES ARE NOT EXEMPT SUPPLIES UNDER GST

WHETHER REGISTRATION REQUIRE TO BE OBTAIN IN CASE ASSESSEE ENGAGED IN EXCLUSIVELY IN BUSINESS OF EXPORT OF GOODS OR SERVICES OR BOTH

As per Section 24 of CGST Act, 2017, says Notwithstanding anything contained in sub-section 1 of section 22 of CGST Act, 2017, the following categories persons shall be required to get registered under this act:

  • Persons making any inter-state taxable supply
  • casual taxable persons making a taxable supply
  • persons who are required to pay tax under reverse charge
  • person who is required to pay tax under sub-section (5) of section 9
  • non-resident taxable persons making a taxable supply
  • persons who are required to deduct tax under section 51, whether or not separately registered under this Act
  • persons who make a taxable supply of goods or services or both on behalf of other taxable persons whether as an agent or otherwise
  • Input Service Distributor, whether or not separately registered under this Act
  • persons who supply goods or services or both, other than supplies specified under sub-section (5) of section 9, through such electronic commerce operator who is required to collect tax at source under section 52
  • every electronic commerce operator
  • every person supplying online information and database access or retrieval services from a place outside India to a person in India, other than a registered person; and
  • Such other person or class of persons as may be notified by the Government on the recommendations of the Council.

Registration is mandatory when person making taxable supplies. Export is inter-state supplies as defined u/s 7(1) or 7(3) or 7(5) of IGST Act, 2017.

Under the above discussion an exempt supply does not include zero-rated supplies, Hence registration is mandatory under the act by a person engaged exclusively in the export of goods or services.

ANALYSIS OF ZERO RATED SUPPLY

Section 16 (1), Zero rated supply means any of the following supplies of goods or services or both, namely;

  1. Export of goods or services or both; or
  2. Supply of goods or services or both to a Special Economic Zone Developer or a Special Economic Zone Unit.

What is Export or goods or services, read the following provisions

  1. Section 2(5) of IGST Act, 2017 says that export of goods with its grammatical variations and cognate expressions, mean taking goods out of India to a place outside India.
  2. Section 2(6) of IGST Act, 2017 says that Export of services means the supply of any services when-
    1. Supplier of service is located in India
    2. The recipient of service is located outside India
    3. The place of supply of service is located outside India
    4. The payment for such service has been received by the supplier of service in convertible foreign exchange and
    5. The supplier of service & recipient of service is not merely the establishment of a distinct person in accordance with explanation 1 in section 8 of IGST Act, 2017.

Section 16(2) of IGST Act, 2017 talks about the availability of credit of input tax used in making such zero-rated supplies.

“Subject to provisions of section 17(5) of the CGST Act, 2017, the credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supplies may be an exempt supply.

Some has wrongly interpreted this section in respect to registration requirement as zero rated supplies are exempt supplies and u/s 23, exemption has been given from registration who is wholly engaged in exempt supplies.

But this provision saying that no input tax credit can be availed in respect of inputs specified under section 17(5) of CGST Act whether same is exempt supply or taxable supply. Also note here that word is may used which indicate that such zero rated supply can be of taxable or exempt supply not shall. Means export can be of goods or services which is taxable attracting tax rate or exempt supply.

“This section in clarification in nature as under the Act, Refund of taxes can be claimed for zero rated supply”.

Meaning here for such supplies that export of goods or services which is exempt supply under the Act, can be exported as per provision of section 16(1) of IGST Act, 2017. 

Input tax paid on input or input services used in relation to making export of such exempt supplies will also be treated as zero rated supplies as defined u/s 16(1) of IGST Act, 2017.

Hence, input tax credit can be availed on exempt supplies being export as per provisions of the Act.

Zero rated supplies are colorable device on satisfying such condition as may be prescribed under the act.

Conclusion: Noted here that Provisions section 17 (1) or (3) of CGST Act, itself restrict credit of input tax used in making exempt supplies.

So, Act in itself cannot be contradictory at two different stages. If zero-rated supply treated as exempt supply then no input tax credit can be availed, so by virtue of this, no refund can be claimed since it is an exempt supply. For claiming refund first credit should be available, think for such situation where registration is required to be obtained due to other reasons then-No refund of tax can be claimed at any stage since it is exempted supply as defined u/s 16(2) of IGST Act,2017. 

REFUND FOR EXEMPT SUPPLY EXPORTED OUTSIDE INDIA

According to the definition of export of goods or services u/s 2(5) or (6) of IGST Act, 2017, does not makes difference in exempt or taxable. It only talks for exporting goods or services only. These goods or services may be exempt or taxable under the Act.

Also, Section 16(2) of IGST Act, 2017 includes exempt supplies also. So input tax can be availed on exempt supplies being exported outside India.

REFUND MECHANISM UNDER THE ACT OF INPUT TAX CREDIT

Section 16 sub-section (3) A registered person making zero-rated supply shall be eligible to claim a refund under either of the following options, namely:––

  • he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim a refund of un-utilized input tax credit; or
  • he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder.

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