CHAPTER-7 ZERO RATED SUPPLY
SECTION-16 Zero rated supply
SECTION AND RELEVANT RULE
Section 16. Zero rated supply.-
(1) “zero rated supply” means any of the following supplies of goods or services or both, namely:–
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- export of goods or services or both; or
- supply of goods or services or both [for authorized operations][1] to a Special Economic Zone developer or a Special Economic Zone unit.
(2) Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.
[(3) A registered person making zero rated supply shall be eligible to claim refund of unutilized input tax credit on supply of goods or services or both, without payment of integrated tax, under bond or letter of undertaking, in accordance with the provisions of section 54 of the Central Goods and Service Tax Act or the rules made thereunder, subject to such conditions, safeguards and procedures as may be prescribed :
Provided that the registered person making zero rated supply of goods shall, in case of non- realization of sale proceeds, be liable to deposit the refund so received under this section along with the applicable interest under section 50 of the Central Goods and Service Tax Act within thirty days after the expiry of the time limit prescribed under the Foreign Exchange Management Act, 1999 (42 of 1999) for receipt of foreign exchange remittances, in such manner as may be prescribed .
(4) The Government may on the recommendation of the Council, and subject to such conditions, safeguards and procedures, by notification, specify—
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- A class of persons who may make zero rated supply on payment of integrated tax and claim refund of the tax so paid [in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder][3];
- A class of goods or services [or both, on zero rated supply of which, the supplier may pay integrated tax and claim the refund of tax so paid, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder][4][2]
[(5) Notwithstanding anything contained in sub-sections (3) and (4), no refund of unutilised input tax credit on account of zero rated supply of goods or of integrated tax paid on account of zero rated supply of goods shall be allowed where such zero rated supply of goods are subjected to export duty.][5]
Reference for Amendments:-
[1] Inserted by Finance Act, 2021 brought to be w.e.f. 01.10.2023 vide Notification No. 27/2023-Central Tax dated 31.07.2023.
[2] Substituted by Finance Act, 2021 w.e.f. 01.10.2023. The applicability date is notified vide Notification No. 27/2023-Central Tax dated 31.07.2023. Prior to its substitution sub-section (3), read as under:
“(3) A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely:––
(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed , without payment of integrated tax and claim refund of unutilised input tax credit; or
(b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed , on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Actor the rules made thereunder.”
[3] Inserted vide The Finance (No.2) Act, 2024 (No. 15 of 2024) dated 16.08.2024, to be bought in force w.e.f. 01.11.2024 Notification No. 17/2024-Central Tax dated 27.09.2024.
[4] Substituted for words “which may be exported on payment of integrated tax and the supplier of such goods or services may claim the refund of tax so paid” vide The Finance (No.2) Act, 2024 (No. 15 of 2024) dated 16.08.2024, to be bought in force w.e.f. 01.11.2024 Notification No. 17/2024-Central Tax dated 27.09.2024.
[5]Inserted vide The Finance (No.2) Act, 2024 (No. 15 of 2024) dated 16.08.2024, to be bought in force w.e.f. 01.11.2024 Notification No. 17/2024-Central Tax dated 27.09.2024.
ANALYTICAL REVIEW
Zero rated supply
As per the provisions contained in Section 16(1) of the IGST Act, 2017:
“zero rated supply” means any of the following supplies of goods or services or both, namely: ––
- export of goods or services or both; or
- supply of goods or services or both for authorized operations to a Special Economic Zone developer or a Special Economic Zone unit.
The concept of zero-rated supplies requires the supplies as well as the inputs or input services used in supplying the goods or services to be free of GST. This is done by the following means:
- The taxes paid on the supplies which are zero rated are refunded;
- The credit of inputs/ input services is allowed;
- Wherever the supplies are exempted, or the supplies are made without payment of tax, the taxes paid on the inputs or input services i.e. the unutilized input tax credit is refunded.
Thus, even if a supply is exempted, the credit of input tax may be availed for making zero-rated supplies.
A registered person making zero rated supply can shall be eligible to claim refund when he either makes supply of goods or services or both under bond or letter of undertaking (LUT) or makes such supply on payment of Integrated tax.
Provided that the registered person making zero rated supply of goods shall, in case of non- realization of sale proceeds, be liable to deposit the refund so received under this section along with the applicable interest under section 50 of the Central Goods and Service Tax Act within thirty days after the expiry of the time limit prescribed under the Foreign Exchange Management Act, 1999 (42 of 1999) for receipt of foreign exchange remittances, in such manner as may be prescribed
In the case of zero-rated supply of goods or services or both without payment of tax under bond or letter of undertaking in accordance with the provisions of section 16(3) of the IGST Act, refund of input tax credit shall be granted as per the following formula [rule 89(4) of CGST Rules, inserted w.e.f. 23-10-2017].
Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) x Net ITC ÷Adjusted Total Turnover
| (A) | “Refund amount” means the maximum refund that is admissible. | |
| (B) | “Net ITC” means input tax credit availed on inputs and input services during the relevant period * [* The words were ‘other than the input
tax credit availed for which refund is claimed under rule 89(4A) or 89(4B) or both’. These words have been omitted w.e.f. 8-10-2024]. |
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| Stores, spares, packing material, stationery are all ‘inputs’ and its ITC is permissible However, refund of ITC on capital goods is not allowable
– CBI&C circular No. 79/53/2018-GST, dated 31-12-2018. |
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| (C) | “Turnover of zero-rated supply of goods” means the value of zero-rated supply of goods made during the relevant period without payment of
tax under bond or letter of undertaking or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed, supplier, as declared by the supplier, whichever is less * [* The words were ‘other than the input tax credit availed for which refund is claimed under rule 89(4A) or 89(4B) or both’. These words have been omitted w.e.f. 8-10-2024]. |
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| The words in italics are inserted w.e.f. 23-3-2020 to provide for cap of value of goods for exports. The purpose is that the taxable person
should not inflate export value to get undue export benefits. |
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| For the purposes of rule 89(4), the value of goods exported out of India shall be taken as – (i) the Free on Board (FOB) value declared in the
Shipping Bill or Bill of Export form, as the case may be, as per the Shipping Bill and Bill of Export (Forms) Regulations, 2017; or (ii) the value declared in tax invoice or bill of supply, whichever is less – Explanation to rule 89(4) of CGST Rules inserted w.e.f. 5-7-2022. |
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| [Clause (C) was reading as follows upto 23-3-2020 -“Turnover of zero-rated supply of goods” means the value of zero-rated supply of goods
made during the relevant period without payment of tax under bond or letter of undertaking, other than the turnover of supplies in respect of which refund is claimed under rule 89(4A) or 89(4B) or both]. |
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| The provision of keeping cap of 1.5 times the value of goods domestically supplied as contained in rule 89(4)(C) of CGST Rules has been held
invalid in Tonbo Imaging India v. UOI (2023) 4 Centax 443 = 97 GST 709 = 148 taxmann.com 487 = 73 GSTL 200 (Kar HC). In this case, the exporter was engaged in export of various customised/unique imaging and sensor systems. |
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| (D) | “Turnover of zero-rated supply of services” means the value of zero-rated supply of services made without payment of tax under bond or
letter of undertaking, calculated in the following manner, namely:- Zero-rated supply of services is the aggregate of the payments received during the relevant period for zero-rated supply of services and zero-rated supply of services where supply has been completed for which payment had been received in advance in any period prior to the relevant period reduced by advances received for zero-rated supply of services for which the supply of services has not been completed during the relevant period. |
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| (E) | “Adjusted Total Turnover” means the sum total of the value of- (a) the turnover in a State or a Union territory, as defined under section
2(112) of CGST Act, excluding the turnover of services; and (b) the turnover of zero-rated supply of services determined in terms of clause (D) above and non-zero-rated supply of services, excluding the value of exempt supplies other than zero rated supplies during the relevant period [The words in italics substituted w.e.f. 8-10-2024. [Till 8-10-2024, the words were ‘ excluding- (i) the value of exempt supplies other than zero-rated supplies during the relevant period; and (ii) the turnover of supplies in respect of which refund is claimed under rule 89(4A) or rule 89(4B) or both, if any, during the relevant period. |
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| excluding—
(i) the value of exempt supplies other than zero-rated supplies during the relevant period; and (ii) the turnover of supplies in respect of which refund is claimed under rule 89(4A) or rule 89(4B) or both, if any, during the relevant period [definition as amended w.e.f. 4-9-2018]. |
| Exempted supply has been excluded as ITC in respect of such supply is not available and hence will not be part of ‘Net ITC’. | ||
| ‘Turnover in State’ or ‘turnover in Union territory’ means the aggregate value of all taxable supplies (excluding the value of inward supplies on
which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union territory by a taxable person, exports of goods or services or both and inter-State supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, State tax, Union territory tax, integrated tax and cess – section 2(112) of CGST Act. |
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| The value of export/zero-rated supply of goods to be included while calculating “adjusted total turnover” will be same as being determined as
per the amended definition of “Turnover of zero-rated supply of goods” in the rule 89(4) [i.e. considering value cap of 1.5 times value of like goods domestically supplied – CBI&C Circular No. 147/03/2021-GST dated 12-3-2021. |
No refund of ITC or IGST paid if export duty is actually payable on exported goods (Section 16(5))
Notwithstanding anything contained in this section, no refund of unutilised input tax credit on account of zero rated supply of goods or of integrated tax paid on account of zero rated supply of goods shall be allowed where such zero rated supply of goods is subjected to export duty. (Inserted vide The Finance (No.2) Act, 2024 (No. 15 of 2024) dated 16.08.2024, to be bought in force w.e.f. 01.11.2024 Notification No. 17/2024-Central Tax dated 27.09.2024). Similar amendment made in Section 54 of the CGST Act, 2017, to restrict IGST refunds for goods subject to export duty, including those exported or supplied to SEZs, regardless of with or without payment of tax.
RELEVANT NOTIFICATION
| Date of Issue | Notification No. | Matter |
| 28th June, 2017 | 3/2017-Integrated Tax | Seeks to bring into force certain sections of the IGST Act, 2017 w.e.f. 01.07.2017 |
| 31st July, 2023 | 01/2023- Integrated Tax | Seeks to notify all goods or services which may be exported on payment of integrated
tax and on which the supplier of such goods or services may claim the refund of tax so paid. |
| 26th October, 2023 | 05/2023- Integrated Tax | Seeks to notify supplies and class of registered person eligible for refund under IGST Route |
| 31st July, 2023 | 27/2023-Central Tax | Seeks to notify the provisions of section 123 of the Finance Act, 2021 (13 of 2021) |
| 27th September, 2024 | 17/2024- Central Tax | Seeks to notify the provisions of Finance (No. 2) Act, 2024 |
Relevant Circular
| Date of Issue | Circular No. | Matter |
| 15th November, 2017 | 17/17/2017 – GST | Manual filing and processing of refund claims in respect of zero-rated supplies. Rescinded
vide Circular No. 125/44/2019 – GST dated 18.11.2019. |
| 14th July, 2018 | 48/22/2018-GST | Circulars clarifying miscellaneous issues related to SEZ and refund of unutilized ITC for job
workers. |
| 18th July, 2019 | 108/27/2019-GST | Seeks to clarify issues regarding procedure to be followed in respect of goods sent / taken
out of India for exhibition or on consignment basis for export promotion. |
