Introduction: Zero-rated Supply under GST is a category of outward supply, defined under Section 16 of the Integrated Goods and Services Tax Act, 2017, on which the rate of tax is effectively nil while the supplier retains full input tax credit recovered through refund. It covers two limbs — the export of goods or services, and the supply of goods or services for authorised operations to a Special Economic Zone developer or unit. This page sets out the meaning of zero-rated supply, its limbs, and the refund routes under Section 16(3) and 16(4).

Zero-rated Supplies under GST

Zero-rated supply is the GST regime’s mechanism for ensuring that taxes are not exported. Although the outward supply itself attracts a notional rate of zero, the supplier is allowed to recover the GST embedded in its inputs through a refund, so that the price of goods or services leaving India, or moving into a Special Economic Zone for authorised operations, carries no Indian tax burden. Both the export of goods or services and the supply for authorised operations to a Special Economic Zone unit or developer fall within this treatment.

Zero-Rated Vs Exempt Supply

Zero-rated supply must not be confused with Exempt Supply under Section 2(47) of the CGST Act, 2017, which covers nil-rated and wholly exempt supplies where input tax credit on inputs is blocked and the embedded tax becomes a cost in the supplier’s price. Refund on a zero-rated supply flows through two routes: under Section 16(3), supplies are made without payment of IGST under a bond or Letter of Undertaking and unutilised input tax credit is refunded; under Section 16(4), supplies of notified classes are made on payment of IGST and the tax paid is refunded.

Zero-rated Supply u/s 16 of the IGST Act, 2017

No	Element	Meaning
1	Export of goods or services	Outward supply of goods physically taken out of India, or supply of services qualifying as export of services under Section 2(6) of the IGST Act, 2017.
2	Supply for authorised operations to SEZ	Supply of goods or services to a Special Economic Zone developer or unit, but only where the supply is for the authorised operations of that developer or unit.
3	Input tax credit on inputs	ITC may be availed on inputs used for making zero-rated supplies even though such outward supply may itself be an exempt supply, subject only to the blocked-credit list in Section 17(5) of the CGST Act, 2017.
4	Default refund route without IGST	Supply made under a bond or Letter of Undertaking without payment of IGST; refund claimed of unutilised ITC under Section 54 of the CGST Act, 2017, with deposit-back-with-interest if export proceeds for goods are not realised within FEMA timelines.
5	Notified refund route with IGST	Supply made on payment of IGST and refund of the tax so paid, available only to classes of persons or classes of goods or services notified by the Central Government on the recommendations of the GST Council.
6	Bar on refund where export duty applies	No refund of unutilised ITC or of IGST paid is allowed where the zero-rated supply of goods is subjected to export duty.

Legal Provisions

For the operative statutory language, refer to Section 16 of the Integrated Goods and Services Tax Act, 2017, read with Notification No. 01/2023-Integrated Tax dated 31 July 2023. The Bare Act, Rules, and notifications are available on the Central Board of Indirect Taxes and Customs website at cbic-gst.gov.in.

Frequently Asked Questions

What is the difference between a zero-rated supply and an exempt supply under GST?

Zero-rated supply differs from exempt supply because the supplier of a zero-rated supply is fully entitled to input tax credit on inputs, with the embedded tax recovered through refund under Section 16(3) of the IGST Act, 2017. In an exempt supply under Section 2(47) of the CGST Act, 2017 — including nil-rated and wholly exempt supplies — input tax credit on inputs is blocked, and the embedded tax remains a cost in the supplier’s price.

Under which section is zero-rated supply defined under GST?

Zero-rated supply is defined under Section 16 of the Integrated Goods and Services Tax Act, 2017. The provision was substantially amended by Section 123 of the Finance Act, 2021, brought into force from 1 October 2023 vide Notification No. 27/2023-Central Tax dated 31 July 2023, which restricted SEZ supplies to those for authorised operations and rationalised the refund routes; sub-section (5) was later inserted by Section 153 of the Finance (No. 2) Act, 2024 with effect from 1 November 2024.

What are the refund routes available for zero-rated supplies under the IGST Act?

Two refund routes are available for zero-rated supplies. Under Section 16(3) of the IGST Act, 2017, the default route, supplies are made without payment of IGST under bond or Letter of Undertaking and the supplier claims refund of unutilised input tax credit. Under Section 16(4), the notified route, supplies are made on payment of IGST and the tax is refunded — available only to classes of persons or goods notified by the Central Government.

Author Bio

Sanjeev Kumar

Meet Sanjeev Kumar, a distinguished advocate before the Supreme Court of India, High Courts, and National Tribunals. Founding Partner of Juriskps Law Offices, a premier law firm, he specializes in commercial, corporate, tax, arbitration, and IPR matters. His incisive legal insights enrich Setindiabiz’s blog with expert commentary.

Zero-rated Supplies under GST – Meaning & Legal Basis