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What are Zero Rated Supplies Under GST?

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When the government adopted the goods and services tax (GST) law , one of its goals was to improve exports. In order to do so, it decided to make all exports zero rated, or tax-free. If you are an exporter, this means that you can offer lower prices and be more competitive in the international market.

What Are Zero Rated Supplies Under GST?

According to section 16 of the IGST Act, the term “zero rated supplies” means:

  • Export of goods or services or both
  • Supply of goods or services or both to a Special Economic Zone (SEZ) developer or unit

The intent of the government via zero rating was to make both the input as well as output for zero rated supplies tax free. The idea behind this was to make Indian goods and services competitive in the international market. Moreover, such type of supplies were introduced to ensure that taxes did not act as an impediment. That is increased taxes did not lead to increased cost of goods and services to be exported.

What’s the Difference Between Zero Rating and Exemptions?

Under GST, you might see references to both zero rated supplies and exempt supplies . Goods and services in both of these categories are tax free. A zero rating is applied with the intent to make the entire supply chain tax free. That means that there’s no tax on your business inputs or the products you sell. Usually, zero ratings apply to goods and services that are exported or sold to Special Economic Zones (SEZ) units or SEZ developers.

In comparison, an exemption only applies to a specific product, but not the entire supply chain. In that case, you’d need to pay tax on the inputs for your business, but not on the products you sell.

It’s also important to note that zero ratings and exemptions are different from nil ratings, which refer to goods and services that have 0% GST. Furthermore, they are even different from non-taxable supplies. Such supplies do not come under the ambit of GST.

GST and Refunds on Zero Rated Supplies

If your company makes zero rated supplies, you handle GST a bit differently than an ordinary company. On the input side, when you purchase supplies for your business, you pay GST at the time of the purchase. Then, you can claim that tax as an input tax credit (ITC). This credit builds up in your account.

When you export goods or services or make supplies to an SEZ, you still deal with integrated GST (IGST) on the sale. In this case, you have two options:

  • You can get a letter of undertaking (LUT) or a bond to cover the amount of IGST for the sale. Then, you can export goods without paying IGST. If you choose this option, you can claim a refund on the ITC accumulated on account of inputs used in making such supplies.
  • If you can’t get a bond or an LUT, you can pay IGST when you export. When you do that, you can claim a refund on the tax you paid by using your accumulated ITC.

The second case relates to the one where the supplier exports goods or services by paying integrated tax and claims refund for same. Such suppliers are further divided into two sub-categories:

  • Exporter of goods
  • The Exporter of services and persons making supplies to SEZs

There are separate cases for claiming refund for each of the suppliers mentioned above. Let’s have a look at the GST refund process for each of them.

I. GST Refund Process for Exporter of Goods

According to Rule 96 of the CGST Act, the suppliers claiming refund for IGST paid on export of goods comes under this category. Such exporters need not file a separate claim for refund of IGST paid on export of goods. This is because the shipping bill filed by the exporter of goods itself is considered a claim for refund.

Rule 96 of the CGST Act lays down the procedure for exporter of goods to claim IGST refund. As per the rule , the shipping bill filed by the exporter is treated as an application for refund of IGST paid on goods exported outside India. Furthermore, such an application is considered as filed by the exporter only when following conditions are satisfied:

  • Person responsible for conveyance carrying the export goods duly files an export manifest or an export report. Such a report includes number and date of shipping bills or bills of export.
  • The exporter applying for the IGST refund has filed a valid return in Form GSTR 3 or Form GSTR 3B as the case may be.

Therefore, the IGST refund shall be treated as filed after the shipping bill, the export general manifest and the valid return are filed. Accordingly, the refund shall be processed by the respective department.

Refund Process

IGST refund on export of goods is provided based on Form GSTR 1 and Form GSTR 3B. The export invoice details contained in Table 6A of Form GSTR 1 are electronically transferred by the GST common portal to the customs system. The customs system further transfers a confirmation to the common portal. Such confirmation entails that the goods included in export invoices are actually the ones that are exported outside India.

The customs system would initiate the claim for refund. This happens once the confirmation about filing of valid returns by the supplier in Form GSTR-3 or GSTR-3B and Form GSTR-1 is received from the common portal.

Such a refund is equal to the IGST paid towards the shipping bills. This amount is electronically credited to the bank account of the exporter applicant. Such an account is the one that is mentioned in the exporter applicant’s registration details as well as the one communicated to the customs authorities.

II. GST Refund Process for Exporter of Services and Persons Making Supplies to SEZs

Service exporters and persons making supplies to SEZs can also opt for paying IGST first and subsequently claiming refund for the same. According to rule 89(1) of the CGST Act 2017, exporters under such category are required to file refund claim in Form GST RFD 01 on the common portal. In case of service exporters, an additional statement needs to be filed along with such a refund claim. This statement contains number and date of invoices as well as relevant Bank Realization Certificates or Foreign Inward Remittance Certificates.

On the other hand, the Domestic Tariff Area supplier would be responsible for filing refund claim. This is in cases where refund is filed on account of supplies being made to SEZ.

As per the rules, in case of supplies made to SEZ unit or developer, the application of IGST refund is filed by:

  • Supplier of goods. Provided such goods have been declared to be admitted in full in the SEZ for the authorized operations by a specific zone officer.
  • The Supplier of services. Provided such services have been declared as received in the SEZ for authorized operations by the specific zone officer.

Needless to say such a declaration by the specified zone officer is mandatory for filing IGST refund by the DTA supplier.

Documents To Be Filed Along With Claim For Refund

Following documents need to be submitted along with the claim for refund for supplies made to SEZ unit or developer:

In case of goods supplied to SEZ unit or developer, a statement that contains:

  • number and date of invoices
  • proof of declaration made by the specific zone supervisor
  • A declaration that SEZ unit or developer has not received input tax credit for the tax paid by the supplier of goods or services or both

In case of services supplied to SEZ unit or developer, a statement that contains:

  • number and date of invoices
  • proof of declaration made by the specific zone supervisor and
  • details of payment together with its proof provided by the recipient to the supplier for authorized operations
  • A declaration that SEZ unit or developer has not received input tax credit for the tax paid by the supplier of goods or services or both

Getting a Refund for IGST on Zero Rated Supplies

To make things easier for exporters under GST , the government has created an easier refund process. When you opt to pay IGST on your zero rated supply of goods, you don’t need to use the usual refund form GST RFD-01. In fact, you don’t need to file a claim at all — when you file your shipping bill, the government automatically processes your refund. In order for this to happen, you need to provide an export manifest and file your usual monthly tax return.

Whereas, in case of export of zero rated supply of services, the exporter needs to file a separate refund application in GST RFD – 01. This is done in order to claim refund of IGST paid on export of services.

Now, when your refund is processed, the government gives you a provisional refund. That simply means that 90% of the refund is deposited into your bank account within seven days. The rest arrives when your refund is finalized.

If you export products, the zero rating system is an important benefit. By taking advantage of tax-free inputs and outputs, you can bring in more customers and boost profits.

So, to help you understand the concept behind zero rated taxable supplies under GST, here is an easy to understand infographic.