Understanding Zero-Rated Supplies Under GST: Concepts, Illustrations, and Regulatory Adherence

Zero-rated supplies represent a crucial GST concept, featuring a distinct tax application and a comprehensive refund mechanism. Essentially, this category includes all exports and deliveries to Special Economic Zones (SEZ). Taxpayers often mistake zero-rated supplies for exempt supplies under GST, leading to incorrect application of regulations and compliance issues. This guide offers a thorough explanation of zero-rated supplies under GST, alongside the relevant provisions governing their taxation. This article delves into the following key areas:

• Defining zero-rated supply
• Tax treatment of zero-rated supplies
• Illustrative examples of zero-rated supplies
• Advantages of zero-rated supplies
• Distinguishing zero-rated, exempted, nil-rated, and non-taxable supplies
• Input Tax Credit (ITC) claims and GST refunds for zero-rated supplies
• Calculating refunds for zero-rated supplies
• Frequently asked questions

What is Zero-Rated Supply?

Under GST, zero-rated supplies encompass all export-related deliveries by exporters, as well as provisions made to Special Economic Zone (SEZ) units or developers. The core principle of zero-rating ensures that the entire supply chain remains free from GST. This is achieved by setting the GST rate on such outgoing supplies to 'Zero,' effectively making them tax-exempt. Importantly, while outward supplies are tax-free, businesses can still claim input tax credit on their inward supplies. Section 16(1) of the IGST Act formally defines zero-rated supplies as:

• The provision of goods and services.
• Carried out either as exports, or
• Delivered to an SEZ developer or unit for approved activities.

Taxation of Zero-Rated Supplies

The IGST Act provides clear guidelines for taxing zero-rated supplies under GST. According to Section 16(3) of the IGST Act, taxpayers making zero-rated supplies can do so without paying Integrated GST by submitting a bond or Letter of Undertaking (LUT). It is important to note that exports and SEZ supplies are subject exclusively to IGST due to their inter-state nature, not CGST, SGST, or UTGST. If zero-rated supplies are made with tax payment, a bond or LUT is not required, and the taxpayer can claim a refund of the IGST paid.

When no tax payment is made for zero-rated supplies, the compliance steps are as follows:

• Obtain either a bond or a Letter of Undertaking (LUT) for the financial year, either before its commencement or prior to the initial export.
• Provide goods, services, or both under the bond or LUT, issuing a standard tax invoice while adhering to all applicable export regulations and procedures.
• Accurately declare these zero-rated supplies, including the shipping bill details, in GSTR-1 and GSTR-3B without making an IGST payment.
• For export of services or supplies to SEZs, file a refund application using Form RFD-01 at the end of the tax period. This applies to any unutilized input tax credit on inputs and input services used for such zero-rated supplies, irrespective of whether they are exempt or taxable.

Conversely, when tax payment is made for zero-rated supplies, the compliance requirements include:

• Supplying goods, services, or both, issuing a regular tax invoice, and complying with all relevant export norms.
• Declaring these zero-rated supplies, along with the shipping bill, in GSTR-1 and GSTR-3B, including the payment of IGST.
• For export of services or supplies to SEZs, submitting an IGST refund application via Form RFD-01 at the conclusion of the tax period for these zero-rated transactions.

Up to 90% of the total zero-rated supply refund may be granted provisionally. The remaining 10% will be disbursed following a thorough verification of the documents submitted by the applicant.

Example of Zero Rated Supplies

Consider an illustration to understand zero-rated supplies and their advantages. An Indian firm produces shoes for export to Germany. This company procures raw materials such as soles, leather, and glue, incurring GST on these purchases. The export of the completed footwear to Germany is categorized as a zero-rated supply under GST. Consequently, the company charges 0% GST on the export invoice and does not collect GST from the German buyer. Nevertheless, the company is eligible to claim a GST refund for the GST paid on the inputs consumed, like soles, leather, and glue. This mechanism reduces overall manufacturing expenses, enhancing the competitiveness of exported products in the global market.

Differences: Zero-Rated vs Exempted vs Nil-Rated vs Non-Taxable Supplies

Certain supplies are entirely free from GST liability. It is crucial to differentiate between these various categories of supplies:

Input Tax Credit Claims & GST Refunds in Zero-Rated Supplies

For their zero-rated supplies, exporters and suppliers to SEZs are eligible to claim input tax credit. Nonetheless, these claims remain subject to the blocked credit provisions outlined in Section 17(5) of the CGST Act. They are permitted to claim ITC on inputs and input services, irrespective of whether the outward supply is exempt or taxable under GST. Any unutilized ITC remaining in the electronic credit ledger qualifies for a GST refund, in accordance with Section 54 of the CGST Act.

GST refunds for zero-rated supplies fall into two main categories:

• Reimbursement of IGST paid on zero-rated supplies.
• Reimbursement of unutilized ITC when zero-rated supplies are made without tax payment.

Suppliers engaged in zero-rated activities are entitled to refunds for input tax paid on goods and services used for these supplies (including non-taxable and exempt items). For instance, if an exporter ships shoes to Dubai and uses soles in their manufacture, they can claim input tax credit for the GST paid on the sole purchase. Dealers have two available options for claiming refunds:

1. The dealer may export goods under a Bond or Letter of Undertaking (LUT) and seek a refund for the accrued input tax credit; or
2. The dealer can pay IGST while making the supplies and then claim a refund for that payment.

This flexibility allows dealers to choose the option that best suits their operational needs.

Refund Procedures for Export of Goods

Claiming refunds for export dealers has been simplified under GST laws. For zero-rated supplies, a separate refund application (Form GST RFD-01) is not required. The shipping bill submitted by the exporter serves as the refund claim itself, provided two conditions are met:

1. The individual transporting the export goods must file an export manifest; and
2. The applicant must have duly filed their GSTR-3 or GSTR-3B returns appropriately.

Upon the proper submission of these two documents, the relevant department processes the refund.

Refund Procedures for Export of Services and Supplies to SEZ

The option to pay IGST and subsequently claim a refund is consistently accessible. In such instances, the refund application must be submitted using Form GST RFD-01. Exporters of services are also required to submit the following alongside their refund claim:

1. A detailed statement listing invoice numbers and dates; and
2. Bank Realisation Certificates or Foreign Inward Remittance Certificates.

Suppliers of goods or services to an SEZ must also include the following with their refund application:

1. A statement detailing invoice numbers and dates; and
2. Proof of receipt for goods or services, verified by the designated SEZ officer;
3. Comprehensive payment records; and
4. A formal declaration confirming that neither the SEZ nor its developer has claimed input tax credit for the taxes paid by the supplier.

How to Compute ITC Refund for Zero-Rated Supplies?

The refund for unutilized Input Tax Credit (ITC) in relation to zero-rated supplies is determined using the following formula:

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

Here's a breakdown of the components:

1. The 'Refund Amount' signifies the maximum refund permissible by law.
2. 'Net ITC' represents the total ITC claimed on inputs and input services during the 'relevant period.'
3. 'Turnover of zero-rated supply of goods' is considered the lower of these two values:
   • The value of zero-rated goods supplied during the relevant period without tax payment under a bond or LUT, or
   • A value equivalent to 1.5 times the value of similar goods supplied domestically by the same or a comparable supplier, as declared by the supplier.
4. 'Turnover of zero-rated supply of services' is calculated as: The value of zero-rated services provided without tax payment under a bond or LUT, which includes payments received for services completed in the relevant period, minus any advances for incomplete services.
5. 'Adjusted Total Turnover' is derived from: Turnover within the state/union territory, minus turnover of services, plus turnover of zero-rated services (as defined in point 4), plus turnover of non-zero-rated services (excluding the value of exempt supplies other than zero-rated supplies during the relevant period).

The value of goods exported is determined by taking the lower amount between the FOB value stated in the shipping bill or bill of export and the value on the invoice or bill of supply.

Provisional Refund

Exporters and SEZ suppliers are eligible for a provisional refund of 90% of the claim amount. This provisional refund is disbursed within seven days of the refund application directly into the claimant’s bank account. However, certain conditions apply. A provisional refund will not be granted if the applicant has faced prosecution for any offense under current or previous GST laws within the last five years, provided the evaded tax amount in such prosecution exceeds Rs. 250 Lakhs.