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Zero rated supply is a term used in the Goods and Services Tax (GST) regime to describe a supply of goods or services that are subject to zero percent GST. This means that the supplier does not have to charge any GST on the supply. They can also claim a refund of the input tax credit (ITC) paid on the inputs used to make the supply. Zero rated supply is different from exempt supply, which is also not taxable, but does not allow the supplier to claim any ITC. For businesses dealing with vehicles, understanding GST on cars can be crucial, especially when calculating overall costs and benefits.
What is zero rated supply?
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According to section 16 of the Integrated Goods and Services Tax (IGST) Act, 2017, zero rated supply means any of the following supplies of goods or services or both:
- Export of goods or services or both; or
- Supply of goods or services or both to a special Economic zone (SEZ) developer or an SEZ unit.
The objective of zero rated supplies is to make Indian exports more competitive in the global market, and to encourage the development of SEZ as hubs of economic activity.
GST refund for zero rated supply
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A supplier of zero-rated supply can claim a refund of the ITC paid on the inputs used to make the supply, subject to certain conditions and processes. The supplier has two options to claim the refund:
- Option 1: The supplier can export or supply to SEZ without paying any IGST, and claim a refund of the accumulated ITC.
- Option 2: The supplier can export or supply to SEZ by paying IGST, and claim a refund of the IGST paid.
The supplier can choose either option depending on the availability of ITC and cash flow. However, once the option is chosen, it cannot be changed for the same financial year, unless there is a change in the constitution or ownership of the business. To facilitate smooth operations, suppliers must ensure they have the documents required for GST registration to comply with GST regulations.
Zero rated vs. exempt supply vs. nil rated vs. non-GST
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Nil rated, exempt, zero rated and non-GST supplies are different categories of supplies that are not taxable under GST. The main difference between them is whether they are eligible for input tax credit (ITC) or not. The following table summarises their characteristics:
Supply GST applicable Type of supply Eligibility for ITC Examples Nil rated 0% Intra-state or inter-state Not available Fresh fruits, vegetables, milk, etc. Exempted - Intra-state or inter-state Not available Education, health, public transport, etc. Zero rated 0% Export or SEZ supply available Software, handicrafts, jewellery, etc. Non-GST 0% Outside the purview of GST Not available Alcohol, petroleum, electricity, etc. As can be seen from the table, zero rated supplies are the most beneficial for the suppliers. Against them, they can claim ITC and GST refund, whereas the other supplies do not. When managing transactions across different states, it is important to reference the GST state code list to ensure accurate reporting and compliance.
Refund process for export of goods
The refund process for export of goods under GST are as follows:
- Step 1: The exporter files an application for refund in form GST RFD-01 within two years from the date of export.
- Step 2: Furnish a statement containing the number and date of shipping bills or bills of export. Also provide the number and date of relevant export invoices, in form GST RFD-01A.
- Step 3: Submit a copy of the shipping bill or bill of export containing details of IGST paid (if any), along with proof of export general manifest or export report.
- Step 4: Self-certify that there is no prosecution pending against him for any offence under GST or under any other law.
The refund will be processed within 60 days from the date of receipt of application. It will be credited directly to the bank account of the exporter. For new businesses, knowing how to register for GST online is a vital step towards compliance and operational efficiency.
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Refund process for export of services and supplies to SEZ
The refund procedures for export of services and supplies to SEZ under GST are as follows:
- Step 1: File an application for refund in form GST RFD-01 within two years from the end of the quarter in which such supply was made.
- Step 2: Furnish a statement containing details of invoices along with proof of receipt of payment in convertible foreign exchange (for export of services). Also provide the proof of endorsement by specified officer (for supplies to SEZ), in form GST RFD-01A.
- Step 3: Self-certify that there is no prosecution pending against them for any offence under GST or under any other law.
The refund will be processed within 60 days from the date of receipt of application and credited directly to the bank account of the exporter or SEZ supplier.
Zero rated supplies in GST are those exports or supplies to SEZ that do not attract any GST. They are beneficial for the economy as they boost exports and generate foreign exchange. They are also advantageous for the exporters as they can claim refund of the input tax credit they paid.
Additional read: GST Calculator
Additional read: What is the E-Way bill?
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Frequently Asked Questions
Overview
What is zero-rated supply in GST?
Zero-rated supply in GST refers to the supply of goods or services that attract 0% GST under Section 16 of the IGST Act, 2017, while allowing eligible businesses to claim Input Tax Credit (ITC). If you are wondering what is zero-rated supply, it primarily covers exports and supplies made to eligible Special Economic Zones (SEZs), subject to the applicable conditions under the GST law.
Can I claim GST on zero-rated imports into India?
No. You cannot claim GST on zero-rated imports because imports are not zero-rated supplies under the GST law. Under the IGST framework, imports are generally subject to IGST, and eligible businesses may claim Input Tax Credit on the tax paid, subject to the prescribed conditions. To clarify, zero rated supply applies to exports and eligible supplies to Special Economic Zones (SEZs), not to imports.
What are the GST accounting implications for zero-rated supplies?
Zero-rated supply requires businesses to maintain accurate GST records to support compliance and Input Tax Credit claims. Key accounting requirements include reporting transactions in GSTR-1 and GSTR-3B, tracking ITC separately for eligible claims, and maintaining export-related invoices and supporting documents for at least 5 years. Proper record-keeping helps ensure accurate GST reporting and facilitates compliance during audits or assessments.
How do you identify zero-rated supplies for GST registration purposes?
To identify a zero-rated supply for GST registration purposes, check whether the supply qualifies as an export or a supply to an eligible Special Economic Zone (SEZ) under Section 16 of the IGST Act, 2017. 1. Confirm the type of supply. 2. Verify eligibility under Section 16. 3. Retain the prescribed supporting documents. 4. Report the transaction correctly in the applicable GST returns. Correct classification helps ensure accurate GST compliance and return filing.
Is supply to an SEZ unit considered zero rated under GST?
Yes. A zero-rated supply includes eligible supplies made to an SEZ unit or an SEZ developer under Section 16 of the IGST Act, 2017, subject to the prescribed conditions. If you are wondering whether selling to an SEZ is a zero-rated supply under GST, both eligible SEZ units and SEZ developers qualify for zero-rated treatment under the Act.
What are the benefits of zero-rated supplies for my startup?
Zero-rated supplies can benefit your start-up by allowing eligible exports and supplies to Special Economic Zones (SEZs) to attract 0% GST while preserving eligibility to claim Input Tax Credit (ITC), subject to the applicable conditions. This can improve cash flow, reduce the overall tax burden, and enhance the competitiveness of export-oriented businesses.
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