Different tax classifications under GST

Goods and Services Tax, the biggest tax-related reform in the country was implemented to eliminate the cascading effects of taxes and bring uniformity in overall tax structure. Even if critics called it a refined version of the earlier VAT it is way more structured and devoid of the complexities that came with VAT and other taxes.

The GST has classified the goods and services as below for taxation purposes:

  • Nil-rated
  • Non-GST (non-taxable)
  • Exempted
  • Zero-rated
  • Taxable supplies

The above classifications make it easy for charging taxes GST rates under different GST tax slabs. These can also be called different types of GST rates in India.

The terms nil-rated, non-taxable, exempted and zero rated, supply under GST have always been misused and misinterpreted. There has always been a misunderstanding regarding the said terms and the said confusion still prevails even after introduction of GST.

It is imperative to comprehend the meaning and difference between these terms. This is because, there are reporting requirements for all these supplies in GSTR-1, 2, 3 & 3B. In addition, aggregate turnover considers Exempt Supply for the purpose of calculating threshold limit for registration. However, it does not consider Non –GST Supply. Even after this, we are required to reverse input tax credit on inward supply which are used for exempt outward supply as per Rule 42 of CGST Rule, 2017.

Let’s get into the basics of these categories and how they work under GST.

Nil rated

Some supplies (everyday items) attract no GST at all i.e. 0% GST.

Nil rated supply is nowhere defined in GST Law.  The basic difference between nil rated and exempt supply is that the tariff or tax rate is higher than 0% in case of exempt supply. However, no tax is payable since the goods are exempted from tax via a notification. In case of Nil Rated supplies the tariff or tax rate itself is 0% and hence even if there is not exemption, the tax will amount to ‘zero’.

These supply items include grains, salt, jaggery, natural honey, cereals, etc. Also, input tax credit (ITC) cannot be claimed on such supplies. In case any GST is paid on such goods or services or both used in providing nil rated supply, such GST credit is not available to the registered dealer.

Non-GST (Non-Taxable)

Some supplies do not fall under the scope of the GST. Such supplies are termed as Non-GST supplies. However, non-GST supplies can attract taxes other than the GST as per the jurisdiction of the state or the country. Some examples of such supplies include petrol, alcohol, electricity, etc. Also, ITC cannot be claimed on non-GST supplies since they don’t come under the purview of GST law.

Non Taxable Supply is supply under section 7 of the act which is not chargeable to tax due to excluded by charging section i.e. by section 9 of the Act.

Exempted

Here, it includes supply of the items that are used for daily purposes. These items being basic necessities and daily essentials, they do not attract any GST. These items include bread, fresh fruits, milk, curd, livestock (except horse), etc. However, no input tax credit (ITC) can be claimed on such supplies.

Further, supply of exempt goods is considered non-taxable. Hence, such supplies do not trigger Registration, claim for input tax credit and other relevant provisions.

Some of the important points under exempted supply are:

  • No GST is applicable on outward exempted supplies;
  • Input tax credit of inputs and / or input services used in providing exempted supply is not available i.e. no input tax credit on exempted supplies;
  • A registered person supplying exempted goods or services or both has to issue ‘bill of supply’ instead of tax invoice

Zero-rated

Basically, zero-rated supplies mean supplies on which GST will not be charged. The main difference between zero rated and exempt supplies is that the suppliers of zero-rated goods and / or services can still reclaim all their input tax, but the suppliers of exempt goods are either not registered for GST or if they are, they cannot reclaim their input taxes or GST.

Zero-rated supplies are exports or supplies made to Special Economic Zones (SEZ), Special Economic Zone Developer, and supplies made to overseas. For example, export of mobile phones to Australia, providing bookkeeping services to a company located in California.

This is in contrast with exempted supplies, where only output is exempted from tax but tax is levied on the input side. The essence of zero rating is to make Indian goods and services competitive in the international market by ensuring that taxes do not get added to the cost of exports.

As stated above, under zero-rated supply, the output supplies as well as the inputs or input services used in supplying the outward supplies would be free from GST. Some of the important points under zero-rated supply are:

  • The taxes paid on the supplies which are zero rated are refunded;
  • The credit of inputs and input services are allowed;
  • Wherever the supplies are exempted, or the supplies are made without payment of tax, the taxes paid on the inputs and / or input services will be refunded (i.e. unutilized input tax credit would be refunded).

Zero-rated supplies include agricultural products, essential food stuffs, eggs, fish, livestock, water for domestic users, etc.

Taxable supplies

When we talk about the above-mentioned tax rates under GST, taxable supplies also come into the picture.

A taxable supply is a supply of goods, services, or both that is chargeable to goods and services tax under the GST Act. According to the GST ACT, the value of a supply of goods or services or both shall be the transaction value, which is the price either payable or actually paid for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

The value of the supply shall not include any discount which is given under two circumstances as mentioned below:

Then, what all values such supplies should include? The value of supply shall include the following:Value of supply

The taxable supplies are charged to tax under different slabs of 5%, 12%, 18% and 28% based on their categories and usage. Whereas many essential items have been exempted or taxed at 0%, many daily needs are charged @5% rate to ease the burden on the common man. The luxury and sin items however have been charged @28% to regulate their usage and consumption.

These are the broad classifications under GST for charging taxes on goods and services. The rates have been changing and the government has always tried to bring maximum daily needs and essential items under 0% rate or a minimum of 5%. Overall the classifications have been made to make sure there is uniformity and standardisation in the implementation of GST.

At Cygnet we make sure that the solutions we provide are always up to date with the latest rates and that the logic of all these classifications is clearly followed by our systems.Cygnet GSP is committed to providing cutting edge technologically driven solutions to file your GST returns easily with speed and accuracy. We strive to make your business a priority by simplifying GST return filing through our IT solutions. We live by our belief of ‘IT is about you’.

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