Understanding Zero-Rated Supply Under GST: A Practical Guide

Overview : When GST was introduced in India, one of its smartest features was the concept of "zero-rated supply." Simply put, it's the government's way of making Indian exports competitive globally by completely removing the tax burden. This guide breaks down everything you need to know about zero-rated supplies, with all the relevant legal provisions explained in plain language.

What is Zero-Rated Supply?

Section 16 of the IGST Act 2017 defines zero-rated supply in straightforward terms. It covers only two categories: exports (goods or services) and supplies to Special Economic Zones (SEZ units or developers). That's it. No domestic supplies qualify, keeping the definition clean and simple.

What makes zero-rated supplies special? You don't charge GST on the output, but you still get to claim all your input tax credits. Better yet, you can get refunds on the accumulated ITC. This is backed by Section 54 of the CGST Act for refunds and Rule 89 of CGST Rules for procedures. It's the government's way of ensuring our exports don't carry any hidden tax costs.

Three Types of Zero-Rated Supplies

• Export of Goods : According to Section 2(5) of the IGST Act, exporting goods means physically moving them out of India. It's pretty straightforward, but there are rules to follow. The goods must actually leave the country (no fake exports!), you must get paid in foreign currency, and you must complete the export within the time limits set by FEMA. Section 7 of the IGST Act and Rule 96 of CGST Rules provide a detailed framework.
• Export of Services : Service exports are trickier. Section 2(6) of the IGST Act sets five conditions: you're in India, your client is abroad, the service is delivered outside India, you get paid in foreign currency, and you're not just billing another branch of your own company. All five boxes must be checked – miss one, and it's not a zero-rated supply
• Supplies to SEZ : SEZs are treated as foreign territory for GST purposes. Under Section 16(1)(b) of the IGST Act, any supply to an SEZ unit or developer gets zero-rated treatment. Just make sure you're GST registered, get the SEZ endorsement on your invoice, and the supply matches their approval letter. The SEZ Act, 2005 and its rules provide additional guidelines.

Two Ways to Make Zero-Rated Supplies

Once you've determined that your supply qualifies as zero-rated, you have two options for handling the GST aspect. Both routes lead to the same destination – no tax burden on your exports – but their approach and cash flow impact differ. Most exporters prefer the first option for its simplicity, while others choose the second for specific business reasons. Let's explore both paths.

• Option 1: The LUT Route (Most Popular):
  • Under Rule 96A of CGST Rules, you can file a Letter of Undertaking (LUT) and export without paying GST upfront. Just file Form GST RFD-11 online – it's valid for a full financial year. Then, export freely and claim ITC refunds through Form GST RFD-01A.
  • Who can use LUT? Anyone who hasn't been prosecuted for tax evasion in the last 5 years and whose tax liability was under ₹2 crores last year. Most exporters qualify easily.
• Option 2: Pay Now, Refund Later
  • If you can't or don't want to file an LUT, there's another way. Pay IGST on your exports as per Section 16(3)(b) of the IGST Act, then claim it back. File your shipping documents, submit Form GST RFD-01, and get your refund as per Rule 91. It's more paperwork, but some prefer the cleaner compliance trail.

Getting Your Refunds

Since zero-rated supplies allow you to claim back the GST you've paid on your inputs while not charging any GST on your exports, the refund mechanism becomes crucial for maintaining your cash flow. Think of it as the government's way of ensuring you don't bear any tax cost on your export transactions – you either get to use your accumulated input credits or claim back the tax you've paid upfront. The refund process is governed by Section 54 of the CGST Act and Rules 89-97A. You have two types of refunds:

• ITC Refunds (under LUT) : Calculate using the formula in Rule 89(4) – essentially, your zero-rated turnover ratio determines how much ITC you can claim back.
• IGST Refunds : Simpler – just get back what you paid, supported by export proof.

Remember the golden rule: File within 2 years from the relevant date (usually when you filed your return or received payment). If you miss this deadline, you will lose your refund rights under Section 54(1).

Essential Documentation

Documentation plays a significant role in claiming a refund from the GST Department. Without proper documentation, even legitimate exports can face rejections of their refund applications. The tax authorities need concrete proof that your supplies genuinely qualify as zero-rated – that goods actually left India, payments came in foreign currency, or SEZ units received your supplies. Here's exactly what you need to maintain for smooth refund processing:

Key Updates and Best Practices

Recent changes have made life easier for exporters. Circular No. 147/03/2021-GST clarified service export issues, while Circular No. 178/10/2022-GST simplified LUT procedures The introduction of automated refund processing means faster refunds if your paperwork is right. To stay compliant, maintain organised records, file refunds on time, reconcile your GSTR-1 and GSTR-3B regularly, ensure forex comes in within FEMA deadlines, and double-check that your supplies actually qualify as zero-rated. Simple habits, big benefits.

Common Challenges and How to Handle Them

Exporters often struggle with delayed payments from overseas clients. Since Section 2(6) of the IGST Act requires payment in foreign exchange for service exports, any delay can create compliance issues. The solution? Apply for a FEMA extension and keep clear records of why the payment was delayed.

Another headache is refund rejections, usually due to mismatched data or missing documents. If your refund gets rejected, don't panic. Check the deficiency memo, fix the issues, and reapply under Rule 90 of CGST Rules. Learning from each rejection makes future applications smoother.

Watch out for ITC restrictions too. Section 17(5) of the CGST Act blocks certain credits, and claiming these by mistake can derail your refund. Stay on top of what credits you can and can't claim to keep your refund process hassle-free.

Conclusion

Zero-rated supplies are to promote exports out of India – no output tax, full input credits, and refunds of the taxes paid on purchases. The legal framework might seem complex with its various sections and rules, but the core concept is simple: help Indian businesses compete globally without tax burdens. As explained documentation plays a significant role in zero rated supplies and the exporters must stay updated with the latest circulars.

Author Bio

Sanjeev Kumar | in

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.