Zero Rated Supplies Vs Exempted Supplies. Which is better?

1.1) One of the major concepts in the study of taxation is of exempted goods and zero rated goods. 

1.2) Taxpayers often come across these terminologies and in most of the cases due to lack of understanding of tax laws they are only willing to be considered as individuals covered under the exempted regime. However, that might not be advisable in every case.

1.3) We will try to elaborate these concepts in detail and try to conclude which of the both concept is more favorable. 

1.4) Exempted goods are those which are outside the ambit of the taxation and the incidence of tax is not applicable on those goods. These are completely exempted from taxation and no tax either in advance, at source or at the time of filing of return should be collectible on such exempted goods. 

1.5) Whereas, in case of zero rated goods the tax is applicable. However, the rate of such tax would be 0% .

1.6) This means that the tax shall not be collected on both zero rated and exempted goods. In such case a question arises as to the need of having these two separate concepts with same outcome. The reason behind this is that the Government often wants to give benefits to certain goods and sectors under tax laws in order to encourage taxpayers to come under the tax net. For this purpose the government often introduce lower rated taxes or zero rated taxes for such supplies. This results in increase of tax registrations under the respective tax laws.

1.7) All the responsibilities regarding registration, filing of returns, monthly statements, withholding provisions, audits e.t.c. would be applicable on zero rated supplies. Whereas, in case of exempted goods such requirements are not applicable to the suppliers.

1.8) Which of the two concepts is more beneficial for the taxpayer? In this regard it is submitted that it is always better to fall under zero rated tax regime rather than an exempted one.

1.9) The reason behind this is that a tax payer falling under the zero rated regime enjoys several benefits allowed by the tax laws including the following:

• The taxpayer falling under the zero rated regime has an advantage to claim the incidence of input tax (incase of VAT where input tax has been passed on certain previous stages of value addition) against the output tax and that the supplier can transfer all such input tax to the end consumer. Whereas, in case of an individual involved in exempted supplies he cannot claim such an input tax and the burden of that input tax would fall upon him resulting in increase in the price of supplies as compared to the supplies of zero rated goods. 

• Furthermore, in case of zero rated supplies the supplier will be properly registered with the tax authorities and would be treated as a 'Filer' and a 'registered person' and the benefits allowed to filer regarding lower rates of taxes would be applicable to this person and also the benefits of supplies to registered persons would also be applicable to him again resulting in the lower price of the product as compared to the price of the product of an exempted supplier. 

1.1.0) It is therefore advisable getting oneself registered under the zero rated tax regime rather than willing to be covered as an exempted supplier.