Is Zero-Rated Supply a taxable supply?

Friends!

            Whether a Zero Rated Supply is a Taxable Supply, is an important question. For the reasons given hereunder, my personal opinion is that a zero-rated supply is not a taxable supply of goods or services or both for the purpose of goods and services tax (GST).

A.         Expression "taxable supply" has been defined in clause (108) of section 2 of the Central Goods and Services Tax Act, 2017 as follows:

'(108) “taxable supply” means a supply of goods or services or both which is leviable to tax under this Act;'

            This definition of expression "taxable supply" is also applicable to the provisions of the Integrated Goods and Services Tax Act, 2017 by virtue of clause (24) of section 2 of the said Act. It is to be noted that where any supply is leviable to any tax, such amount of tax is to be paid by the person specified in the tax levy provision of the Act.

B. In the draft of the Integrated Goods and Services Tax Act released on November 16, 2016, sub-section (1) of section 16 had run as follows:

16. Zero rated supply

"(1) “zero rated supply” means any of the following taxable supply of goods and/or services, namely -

(a) export of goods and/or services; or

(b) supply of goods and/or services to a SEZ developer or an SEZ unit."

            Here, after the word "following", expression "taxable supply of goods and/or services" had occurred. In the Integrated Goods and Services Tax Act, 2017, passed by the Parliament, sub-section (1) of section 16 of the said Act runs as follows:

"Zero rated supply.

16. (1) “Zero rated supply” means any of the following supplies of goods or services or both, namely:—

(a) export of goods or services or both; or

(b) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit."

            Here we see that word "taxable", used in the draft, is missing. This is not an omission. The Goods and Services Tax Council, in its 12th meeting held on March 16, 2017, on suggestion from the Ministry of Commerce and Industry, Government of India, had taken a decision of including export supplies of alcoholic liquor for human consumption, crude oil, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel and supplies of such goods in zero rated supply. These are the goods on supply of which goods and services tax (GST) cannot be levied in view of provisions of the Constitution. Since, zero rated supplies include supply of such goods, therefore, in respect of a zero rated supply, it cannot be said that supply is leviable to tax.

C. Sub-section (2) of section 16 of the Integrated Goods and Services Tax Act, 2017 runs as follows:

"(2) Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply."

            Here we notice that the sub-section (2) clarifies that benefit of input tax credit shall also be available in respect of exempt supplies. Definition of expression "exempt supply", provided in clause (47) of section 2 of the Central Goods and Services Tax Act, 2017 is also applicable to the provisions of the Integrated Goods and Services Tax Act, 2017. This definition runs as follows:

'(47) “exempt supply” means 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;'

            Non-taxable supply is nothing but supply of goods on the supply of which goods and services tax (GST) cannot be levied. This also clarifies that zero-rated supply includes supplies on which GST cannot be levied.

D. On zero-rated supply, goods and services tax is not payable. This is clear from the FAQ issued by the Central Board of Excise and Customs (CBEC). Also, no person is paying goods and services tax (GST) on zero rated supply and Government is accepting returns without any objection. It is noteworthy that levy of tax creates liability, of payment of certain amount of tax, of some person specified in the tax levy provision of the Act. If in respect of an event no person is liable for payment of any money as tax, event (here supply of goods or services or both) cannot be said an event leviable to tax i.e. a taxable supply.

            In view of the discussion above, I am of the view that a zero rated supply is not a taxable supply but benefit of input tax credit is admissible in respect of inputs and input services used in making such supply.

Disclaimer: Readers of the post are advised that before using my views they should consult some expert on the subject. I disown any liability.