Export supplies from GST registered taxpayers are classified as zero-rated supply under GST. Zero-rated supply under GST is refundable. Taxpayers must furnish details of all zero-rated supplies in GSTR 3B and GSTR 1 returns. The government’s goal in introducing a category called zero-rate supply was to make both inputs used and outputs produced tax-free.
What is the Meaning of zero-rated supplies?
Pursuant to section 16(1) of the IGST Act zero-rated supply means the supply of any or both of the following goods or services:
- Export of goods or services or both; or
- Supply of goods or services or both to a special economic zone developer or special economic zone unit.
What are zero-rated taxable goods?
A zero-rated supply is usually goods or services that are a key component in the manufacture of another final product. The government does not want to overuse items that are essential for continuous manufacturing.
Similarly, most governments do not want to overcharge for items considered basic necessities of life, such as food, water, medicine, and sanitary products. A zero rating for these goods and services means that their final market price is more affordable to the final consumer.
What is the difference between exempt and zero-rated GST?
| Exempt Supplies | Zero-rated Supplies |
| Exempt Supply means a supply of goods and/or services to which no tax rate applies or is fully tax-exempt under Section 11 of the CGST Act or Section 6 of the IGST Act, including non-taxable supplies | zero-rated supply is defined in section 16 |
| Outward exempted supplies are not taxable but input supplies for making exempt supplies are taxable | Outward and input supplies are not taxable |
| The input tax credit is reversed. Exempt supplies do not have an ITC. | Input tax credits can be claimed on zero-rate supplies even if they are exempt supplies where the ITC allows zero rate supplies. |
| The value of tax-exempt supplies for allocating ITC includes supplies for which the recipient is obligated to pay tax under a reverse charge, transactions in securities, sales of real estate, and items subject to clause (b) of paragraph 5 of Schedule II, a sale of the building | The value of the zero-rated supply is added together with the taxable supply to distribute the ITC |
| Persons who only offer goods or services that are tax-exempt or wholly tax-exempt under the CGST Act, or both, are not required to register. | Those who manufacture only zero-rated goods may require registration to claim refunds for unused ITC or consolidated tax paid. |
| Registrants who provide exempted goods and/or services will issue a bill o in lieu of a tax invoice. | A normal tax invoice will be issued |
How do I claim ITC on zero-rated supply?
A zero tax rate means that the entire supply chain for certain zero-rated supplies is tax-free. ie. There is no tax burden on either the input tax or the output side. This is in contrast to tax-exempt supplies where only the output is tax-exempt and the input side is taxable. The essence of zero tariffs is to make Indian goods and services competitive in the international market by ensuring that export costs are tax-free.
Under section 16, subsection (3) of the Integrated Goods and Service Tax Act, registrants who offer zero-rated goods are entitled to request a refund under one of the following options:
- he may supply goods or services in accordance with the terms, safeguards and procedures stipulated, without claiming payment of Integrated Tax (IGST) or refund of ITC of Central Tax (CGST), State Tax (SGST)/Union Territory Tax (UTGST) and Integrated Tax (IGST); or
- he may, subject to the prescribed conditions, safeguards and procedures, provide goods and/or services against payment of consolidated tax and claim a refund of taxes provided on goods and/or services.
The GST Act requires exporters (including suppliers supplying to SEZs) to claim refunds in advance as integrated tax (by supplying supplies against payment of tax export without paying tax by executing a Bond/LUT in the ITC) and claim a refund of the relevant ITC for taxes paid on inputs and input services used in making zero rated supplies.
What is Provisional Refund?
Taxpayers who provide zero-rated supplies are entitled to a provisional refund of 90% on the claim. This provisional refund will be made within 7 days from the date of confirmation of the refund request. The amount will be digitally deposited into the applicant’s bank account.
TA provisional refund order is made on the applicant’s behalf in her GST RFD 04 form along with the payment notice on her GST RFD 05 form. However, no provisional refund will be granted if the person requesting the refund has been prosecuted for any offense under the Act or any applicable law in the last five years (if the amount of tax evasion exceeds her Rs 2.5 crore).
How do you calculate zero-rated supply?
Refund of an input tax credit is granted as per the following formula:- Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) × Net ITC ÷ Adjusted Total Turnover.
Mr. Ankit, registered in Pune, deals with intra-state/inter-state supply of taxable and tax-exempt goods/services. He exports goods and services without paying taxes, under a bond or letter of undertaking.
In addition, the input tax availed by him includes amounts that the supplier had claimed under Regulations 89(4A) and 4(B). As per 89(4A) & (B), if a supplier has claimed the benefit of Deemed Export / Merchant Export, a refund is available if the recipient makes a Zero rated Supply ).
Here are the details of Mr. A zero rated supplies during the relevant period:
| Description | Amount (in lakhs) | Amount (in lakhs) |
| Taxable Supply of Goods in Pune | 300 | |
| Taxable Supply of Goods in Pune | 150 | |
| Inter state supply of goods | 125 | |
| Inter state supply of services | 50 | |
| Total exempted supply | 25 | |
| Zero rated supply of goods | 250 | |
| Zero rated supply of services | 190 | |
| Advance payment received in previous period ( zero rated supply of services completed in the relevant period) | 10 | |
| Total payment received during the relevant period for zero rated supply of services ) | 100 | |
| Payment received in advance for which zero rated supply has not completed in relevant period | 20 | |
| Turnover of supplies under Rule 89(4A) & (4B) | 10 | |
| Input Tax on amount under Rule 89(4A) & (4B) | 5 | |
| Input Tax Credit on input and input services | 15 | |
| Turnover in State aggregate value of all taxable supplies+ exempt supplies+ exports of Goods and Services +interstate supply | 300+150+125+50+25+250+190+15 | 1,105 |
| Adjusted Total Turnover | 1,105-(150+50+190) 190+50+150-(25+10) Total | 715 355 1,070 |
| Net ITCITC on Inputs & services Other than ITC rule 89 (4A) & (4B) | 15 – 3 10-3 | 12 7 |
| Turnover of zero Rated Goods | 150 – 15 250-15 | 135 235 |
| Turnover of Zero Rated Supply of services Payment received during the relevant period + Received in the prior period – Advance received for which supply not completed | 90 |
Calculation of Refund: Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) × Net ITC ÷ Adjusted Total Turnover. Refund Amount = (235+90)*7/1,070= 2.14 lakhs
Frequently Asked Questions (FAQ)
Is milk a zero-rated item?
Yes, milk is a zero-rated item.
Is water supply zero-rated?
Water attracts GST at the NIL rate. Public drinking water supplies are exempt from GST if they are not supplied in sealed containers.
Are trees zero-rated?
Plants, shrubs, and trees commonly used to produce edible fruit in this country are zero-rated.
Is LPG VAT exempt?
LPG subsidy that the individual receives in his bank account is exempt from income tax.
Wrapping Up
Businesses do not need to pay any GST on these supplies, but they can still claim input tax credits for the GST paid on their inputs. Zero-rating is beneficial to businesses as it saves GST-related costs while maintaining the ability to claim input tax credits. This helps businesses to remain competitive and increase their profitability.