Zero Rated Supplies Under GST – Meaning, Benefits, LUT & GST Refund Guide

What are Zero Rated Supplies Under GST?

Zero rated supplies are supplies of goods or services on which the GST rate is 0%. Under Section 16(1) of the IGST Act, 2017, "zero rated supply" means any of the following supplies of goods or services or both: (a) export of goods or services or both; or (b) supply of goods or services or both to a Special Economic Zone (SEZ) developer or a SEZ unit. Unlike exempt supplies where no tax is charged but input tax credit is not available, zero rated supplies allow the supplier to claim a refund of input tax credit. This makes zero rating a powerful incentive for exporters and SEZ suppliers. DisyTax helps businesses navigate zero rated supplies and claim refunds. Start with our GST basic terms to build a foundation.

Meaning of Zero Rated Supply Under GST

A zero rated supply means that the entire value of the supply is taxed at 0%. However, it is not merely an exemption. The law treats zero rated supplies as taxable supplies, but with a nil rate of tax. This distinction is critical because it preserves the supplier's right to claim input tax credit on purchases used for making such supplies. In simple terms, the government says: "We will not collect any tax on your export or SEZ supply, but we will refund the tax you already paid on your inputs." This ensures that Indian goods and services are competitive in the global market without the cascading burden of taxes.

Section 16 of the IGST Act Explained

Section 16 of the IGST Act, 2017 is the legal provision that defines and governs zero rated supplies. It states:

• Section 16(1): "Zero rated supply" means any of the following supplies: (a) export of goods or services or both; or (b) supply of goods or services or both to a SEZ developer or a SEZ unit.
• Section 16(2): The supplier can claim a refund of input tax credit even though the output tax is zero.
• Section 16(3): A registered person making zero rated supply shall be eligible to claim refund under either of the following options: (a) supply under a Letter of Undertaking (LUT) without payment of IGST and claim refund of unutilised ITC; or (b) supply on payment of IGST and claim refund of such IGST paid.

This section is the backbone of export incentives under GST. It ensures that no tax cost is embedded in exports.

Which Supplies Qualify as Zero Rated Supplies?

Only two categories of supplies qualify as zero rated:

• Exports of goods: Taking goods out of India to a place outside India.
• Exports of services: Providing services to a recipient outside India, with place of supply outside India and payment in convertible foreign exchange.
• Supplies to SEZ: Any supply of goods or services to a SEZ developer or a SEZ unit, whether located in the same state or different state.

Note: Supplies to SEZ are considered zero rated even if they are intra‑state. No IGST or CGST+SGST is charged. The SEZ recipient receives the goods/services without any GST burden.

Export of Goods as Zero Rated Supply

Export of goods is the most common zero rated supply. As per Section 2(5) of the IGST Act, export of goods means taking goods out of India. The exporter can choose to export under LUT without paying IGST, or pay IGST and claim refund. The shipping bill filed with Customs must reflect the zero rated status. The exporter can claim a refund of ITC on raw materials, packaging, freight, and other inputs. For detailed guidance, see our Export of Goods Under GST guide.

Export of Services as Zero Rated Supply

Export of services is also zero rated. The conditions under Section 2(6) of the IGST Act must be satisfied: supplier in India, recipient outside India, place of supply outside India, payment in convertible foreign currency, and distinct entities. Service exporters typically file LUT and issue export invoices without GST. They can claim a refund of accumulated ITC on software, hardware, and other business expenses. Our Export of Services Under GST guide covers all aspects.

Supplies Made to SEZ Units and Developers

Supplies to Special Economic Zones are treated as zero rated. Whether you supply goods or services to a SEZ unit or a SEZ developer, you do not charge any GST. You can either supply under LUT without payment of IGST, or pay IGST and claim a refund. The SEZ recipient must provide a certificate or endorsement on the invoice to confirm the zero rated status. These supplies are distinct from exports because the goods or services may not physically leave India, but they are deemed as zero rated to promote SEZ development.

Zero Rated Supply vs Exempt Supply

This is the most critical distinction in GST. Both have no tax on the output, but the treatment of input tax credit is opposite:

• Zero Rated Supply: Output tax is 0%. Input tax credit is available and refundable.
• Exempt Supply: Output tax is 0%. Input tax credit is not available – it becomes a cost. ITC must be reversed proportionately under Rule 42/43 if you make both taxable and exempt supplies.

For example, if an exporter buys raw material with GST, that GST can be claimed back. If a hospital (exempt healthcare services) buys medical supplies with GST, the GST cannot be claimed; it becomes a cost.

Zero Rated Supply vs Nil Rated Supply

Nil rated supplies are those where the GST rate is fixed at 0% by the GST Council (e.g., fresh fruits, vegetables, unprocessed grains). Like exempt supplies, ITC is not available on nil rated supplies. The difference is that nil rated supplies are listed in the rate schedule with a specific 0% rate, whereas exempt supplies are specifically notified as exempt. For both, ITC is blocked. Only zero rated supplies (exports and SEZ) allow ITC. This is a common misconception – many assume "zero" means they can claim ITC; but only if it's an export or SEZ supply.

Benefits of Zero Rated Supplies Under GST

• Input Tax Credit Refund: The biggest benefit – ITC on all inputs, input services, and capital goods can be claimed as a cash refund.
• Global Competitiveness: Exported goods and services are free from Indian taxes, making them price‑competitive internationally.
• Cash Flow Options: Exporters can choose between the LUT route (no upfront IGST) or the IGST route (with refund), depending on their cash flow preference.
• No Tax on SEZ Supplies: Suppliers to SEZs can sell without GST, encouraging domestic manufacturing and service delivery to SEZs.
• Seamless Credit Chain: Unlike exemptions that break the credit chain, zero rating maintains the integrity of the GST system while refunding the accumulated credit.

Input Tax Credit (ITC) on Zero Rated Supplies

Yes, ITC can be claimed on zero rated supplies and is refundable. Since the output tax is 0%, the ITC on purchases and expenses cannot be set off against output liability. Instead, it accumulates in the electronic credit ledger. The exporter or SEZ supplier can file a refund application in Form GST RFD‑01 to claim a cash refund of this accumulated ITC. The ITC must be directly attributable to the zero rated supplies. Proper documentation – invoices, shipping bills, FIRC/BRC – is essential. The refund must be claimed within 2 years. Our ITC guide covers all conditions.

LUT for Zero Rated Supplies

A Letter of Undertaking (LUT) is a declaration filed on the GST portal that allows a zero rated supplier to export goods or services, or supply to SEZ, without paying IGST at the time of supply. The LUT is valid for one financial year. It must be filed before the first zero rated supply of the year. Without LUT, the supplier must pay IGST and claim a refund. Filing LUT is the preferred method for most exporters. DisyTax files LUTs within 24 hours. See our LUT for Export Business guide for step‑by‑step filing.

Export Without Payment of IGST Under LUT

Once LUT is filed, you can issue export invoices without any IGST. The invoice must contain the LUT ARN and the declaration: "Supply meant for export under LUT without payment of IGST". In GSTR‑1, you report the export in Table 6A with the LUT option. The IGST is not paid, so there is no IGST refund to claim. However, the ITC on inputs continues to accumulate. You can file a refund claim for this accumulated ITC via Form GST RFD‑01. This route preserves cash flow and is ideal for regular exporters.

Export With Payment of IGST and Refund Claim

If you do not file LUT, or choose the IGST route, you must charge IGST on the export invoice at the applicable rate (same as domestic rate). You pay this IGST through the electronic cash ledger. Subsequently, you can claim a refund of the IGST paid. For goods, the refund is largely automatic when the shipping bill matches GSTR‑1. For services, you file Form GST RFD‑01. This route means you temporarily block working capital in IGST but may be simpler for occasional exporters. The net refund is the same as the LUT route, but with a timing difference.

GST Refund on Zero Rated Supplies

Refund on zero rated supplies can be claimed in two forms:

• Refund of accumulated ITC: For suppliers using LUT. File Form GST RFD‑01 with supporting documents.
• Refund of IGST paid on exports: For suppliers who paid IGST. For goods, automatic based on shipping bill matching. For services, via RFD‑01.

The refund application must be filed within 2 years from the relevant date. Processing time is 60 days. Our GST Refund for Exporters guide covers the process in detail.

Documents Required for GST Refund

• Export invoices with LUT/IGST declaration
• Shipping bills (for goods) with GSTIN
• Proof of foreign exchange receipt (FIRC/BRC or bank/PayPal/Wise statements)
• GSTR‑2A extract showing ITC
• Statement of invoices and ITC claimed
• CA certificate if refund exceeds ₹2 lakhs

For SEZ supplies, the SEZ recipient's endorsement and proof of receipt of goods/services are also required.

GST Return Filing for Zero Rated Supplies

Suppliers making zero rated supplies must file regular returns:

• GSTR‑1: Report exports in Table 6A (with or without IGST). Report SEZ supplies in Table 6B.
• GSTR‑3B: Report zero rated turnover in Table 3.1(b). Claim ITC in Table 4(A).
• GSTR‑9: Annual return.

Accurate reporting is critical for refund processing. Any mismatch can lead to rejection or delay. DisyTax provides specialized return filing for exporters and SEZ suppliers.

Reporting Zero Rated Supplies in GSTR‑1

In GSTR‑1:

• Table 6A: For exports – report each invoice with shipping bill number (for goods), value in INR, and whether made under LUT or with IGST payment.
• Table 6B: For supplies to SEZ – report invoice‑wise with SEZ recipient's GSTIN (if registered).

Ensure the data matches the shipping bill (for goods) and the export invoice. For services, the LUT ARN is validated by the portal.

Reporting Zero Rated Supplies in GSTR‑3B

In GSTR‑3B, the turnover from zero rated supplies is reported under Table 3.1(b) as "Zero rated supplies". The ITC claimed on inputs, input services, and capital goods is reported in Table 4(A). If you have paid IGST on exports, that IGST is shown as liability and paid through the cash ledger. The ITC on zero rated supplies should match GSTR‑2A. Reconciliation is key.

Common Mistakes Made by Exporters

Frequently Asked Questions (FAQs) on Zero Rated Supplies Under GST

📚 Essential GST Resources for Zero Rated Supplies