Zero Rated Supplies in GST: Meaning, Examples, Benefits, and Compliance

Zero rated supplies are integral concept in GST as it has a completely different approach in tax charge and attracts refund mechanism. Simply put, zero-rated supplies covers exports and supplies to SEZ. Many taxpayers confuse zero-rated supplies with exempt supplies under GST and end up wrongly applying the GST provisions, leading to cases of non-compliance. You can get a complete understanding of the concept of zero-rated supplies under GST and relevant provisions guiding its taxation. Explore the below topics in this article-

• What is zero-rated supply?
• Taxation of zero-rated supplies
• Example of zero rated supplies
• Benefits of zero-rated supplies
• Comparison: Zero-rated supply vs exempted supply vs Nil-rated supply vs Non-taxable supply
• Input tax credit claims & GST refunds in zero-rated supplies
• How to compute refund in case of zero-rated supplies?
• FAQs

What is zero-rated supply?

Zero rated supplies in GST refer to any export supplies made by exporter or anyone making supplies to the Special Economic Zones (SEZ) units or developers. Zero rating concept means the entire value chain of the supply is exempt from GST. It is done by keeping the GST rate on such outward supplies ‘Zero’ (tax-free). In other words, not only the outward supplies are kept tax-free, input tax credit on inward supplies are allowed for claims.

Section 16(1) of the IGST Act defines the term zero-rated supplies. It is defined as follows-

• Supply of goods and services
• Either as exports, or
• To an SEZ developer or unit, for authorised operations

Taxation of zero-rated supplies

The IGST Act clearly defines the taxation of zero-rated supplies under the ambit of GST. Section 16(3) of the IGST Act says that any taxpayer making zero-rated supplies can make such supplies without payment of Integrated GST under a bond or Letter of Undertaking (LUT). Note that exports and SEZ supplies attract only IGST due to its nature and not CGST/SGST/UTGST. In case zero-rated supplies are made with tax payment, taxpayer need not take bond or LUT and can apply for refund of such IGST.

Wherever tax payment is not made for zero-rated supplies, compliance of zero-rated supplies are as follows-

1. Take either a bond or letter of undertaking (LUT) for the financial year before it begins/before first-time export.
2. Supply goods or services or both under the bond or LUT, by issuing a normal tax invoice and by adhering to the export norms/procedures, as may be applicable.
3. Make necessary declaration of such zero-rated supplies, including shipping bill, in GSTR-1 and GSTR-3B without payment of IGST.
4. Where it is export of services/supplies to SEZ, apply for refund in RFD-01 at the end of tax period for any unutilised input tax credit for the inputs and input services used for such zero-rated supplies (whether or not exempt).

Wherever tax payment is made for zero-rated supplies, compliance of zero-rated supplies are as follows-

1. Supply goods or services or both, by issuing a normal tax invoice and by adhering to the export norms/procedures, as may be applicable.
2. Make necessary declaration of such zero-rated supplies, including shipping bill, in GSTR-1 and GSTR-3B by making payment of IGST.
3. Where it is export of services/supplies to SEZ, apply for refund of such IGST in RFD-01 at the end of tax period for such zero-rated supplies.

90% of the total refund on account of zero-rated supply may be sanctioned on a provisional basis. The remaining 10% can be refunded later after due verification of documents furnished by the refund applicant.  

Example of zero rated supplies

Here's a demonstration of zero-rated supplies and its benefits. Suppose that a company located in India manufactures some shoes for exporting to Germany. For soles, leather, and glue, the company purchases raw materials. GST is paid in respect of these inputs.

The export of the finished shoes to Germany is treated as zero-rated supply under GST. The company levies 0% GST on the export invoice while does not collect GST from the Germany customer.

However, the company is able to claim a GST refund in regard to the inputs used. Soles, leather, and glue serve as examples of such inputs used to manufacture the shoes. This lowers overall production costs, making exported goods compete more internationally.

Differences: Zero-rated vs exempted vs Nil-rated vs Non-taxable supplies

There are certain supplies on which there is no incidence of GST. It is important to understand the underlying difference among all such supply criterions :

Input tax credit claims & GST refunds in zero-rated supplies

Exporters and suppliers to SEZ can claim input tax credit on their zero-rated supplies. However, they shall be subject to blocked credit defined u/s 17(5) of the CGST Act. They can claim ITC on inputs and input services whether or not the outward supply is exempted or taxable under GST. Such ITC lying unutilised in the electronic credit ledger shall be eligible for a GST refund by the provisions of Section 54 of the CGST Act.

GST refund in zero-rated supplies can be of two types-

1. Refund of IGST paid on zero-rated supplies.
2. Refund of unutilised ITC on making such zero-rated supplies without payment of tax.

The suppliers making zero-rated supplies are entitled to claim refunds. The refunds are for the input tax paid on the goods and services which are used for such zero-rated supplies (including non-taxable and exempt supplies). 

For example, an exporter supplies shoes to Dubai and uses soles in the production of such shoes. The exporter has an option of claiming Input tax credit of GST paid on the purchase of soles. There are two options available with a dealer to claim refunds-

I. The dealer can export under Bond or LUT (Letter of Undertaking) and claim a refund of the accumulated Input credit of tax; or

II. The dealer can pay IGST while making the supplies and claim refund of the same.

Therefore, the dealers are provided with a flexibility to choose between any two options as per their convenience.

Refund procedures for export of goods

Under GST laws, the process of claiming refund has been made easy for the export dealers. For zero-rated supplies, there is no need to file refund application (GST RFD-01) separately. The shipping bill filed by the exporter is a refund claim in itself. The law specifies that shipping bill is to be considered as a refund claim on satisfying following two conditions:

I. A person carrying the export goods should file an export manifest; and

II. Applicant should have filed the returns GSTR-3 or GSTR-3B appropriately.

Once the above two documents are filed appropriately, the refund is processed by the department.

Refund procedures for Export of Services and Supplies to SEZ

The option to pay IGST and claim a refund is always available. In this case, the refund claim has to be filed in Form GST RFD-01. For exporters of services, the following are also required to be filed along with the refund claim:

I. A Statement containing Number and Date of Invoices; and

II. Bank Realisation Certificates / Foreign Inward Remittance Certificates

The supplier of goods or services to an SEZ are required to file the following along with the refund claim:

I. A Statement containing Number and Date of Invoices; and

II. Proof of Receipt of goods or services which is authorised by the specified officer of SEZ

III. Details of payment made

IV. The declaration that the SEZ or developer of SEZ has not claimed the input tax credit of the taxes paid by the supplier

How to compute ITC refund for zero-rated supplies?

Refund of unutilised ITC in case of zero-rated supplies is calculated as per the below formula-

Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC ÷ Adjusted Total Turnover

1. Refund amount refers to maximum refund allowed by the law
2. Net ITC= amount of ITC claimed on inputs and input services in the 'relevant period'
3. Turnover of zero-rated supply of goods is defined lower of the two values=
   1. Value of zero-rated supply of goods made during the relevant period without payment of tax under bond or LUT, or
   2. Value which is 1.5 X value of like goods domestically supplied by the same or, similarly placed, supplier, as declared by the supplier
4. Turnover of zero-rated supply of services refers to the formula= Value of zero-rated supply of services made without payment of tax under bond or LUT, i.e.,payment received in past for services completed during relevant period(-)advances for incomplete services
5. Adjusted total turnover= Turnover of state/UT(-) Turnover of services (+) Turnover of zero-rated supply of services as per (4) (+) Turnover of non-zero-rated supply of services (excluding the value of exempt supplies other than zero-rated supplies during the relevant period)

Value of export of goods is lower of FOB value in shipping bill or bill of export and invoice/bill of supply value.

Provisional Refund

The exporters and suppliers of SEZ are entitled to a 90% refund on a provisional basis. Provisional refund is granted within 7 days of the refund claim. The amount of provisional refund is credited directly to the claimant’s bank account. There is a condition attached to provisional refunds. The provisional refund is not granted if the applicant has been prosecuted for any offense under the GST law or earlier law within past 5 years. The amount of tax evaded in such prosecution shall be more than Rs.250 Lakhs.