Analysis of Zero Rate Supply in GST

Exports have been focus area in various policy initiatives of the government for last three decades. With introduction of GST which promises seamless flow of credit, GST demands that the input output chain should not be broken. At the same time government intends that exports should not be burdened with domestic taxes.  Zero rated supply is the method by which the government has approached to address all these important consideration.

Before understanding zero rated supply it is important to understand the difference between certain supplies on which there is no incidence of GST.

As per section 16 of IGST Act,2017  “zero rated supply” means any of the following supplies of goods or services  or both, namely-

1. Export of goods or services or both; or
2. Supply of goods or services or both to a special economic zone developer or a special economic zone unit

A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely:-

1. He may supply goods or services or both under bond or LUT, without payment of IGST and claim refund of unutilised tax credit or
2.  He may supply goods or services or both on payment of IGST and claim refund of such tax paid on goods or services or both supplied.

Other Relevant points

1. Eligibility:  All registered persons who intend to supply goods or services for export without payment of integrated tax are eligible except those who have been prosecuted for any offence under the CGST Act ,or IGST Act or any of the existing laws and the amount of tax evaded in such cases exceeds 250 lakhs rupees. So for such exporters option of paying IGST and claiming refund or to submit bond with bank guarantee and export without payment of GST is available.
2. Validity of LUT: The LUT for exports without payment of GST is valid for the whole financial year in which it is submitted .The LUT would be required to be submitted separately for each financial year. In case the goods for which LUT/Bond has been submitted is not exported within 3 months from the date of invoice, the exporter would be liable to pay interest @ 18% along with tax. In case of export of service the payment should be received within one year from date of invoice.
3. GST Invoice: Exporters are required to raise tax invoice with prescribed particulars mentioning “Supply meant for export under bond or letter of undertaking without payment of integrated tax”.
4. Receipt of export proceeds: There is no restriction on invoicing of export contracts in Indian Rupees in terms of the Rules, Regulations, Notifications and Directions framed under the Foreign Exchange Management Act, 1999. All export contracts and invoices shall be denominated either in freely convertible currency or Indian rupees but export proceeds shall be realized in freely convertible currency (i.e. in foreign currency only). It is also clarified that the acceptance of LUT for supplies of goods to Nepal or Bhutan or SEZ developer or SEZ unit will be permissible irrespective of whether the payments are made in Indian currency or convertible foreign exchange as long as they are in accordance with the applicable RBI guidelines. It may also be noted that the supply of services to SEZ developer or SEZ unit under LUT will also be permissible on the same lines. The supply of services, however, to Nepal or Bhutan will be deemed to be export of services only if the payment for such services is received by the supplier in convertible foreign exchange.
5. Merchant exporters: It is clarified that there is no provision for issuance of CT-1 form which enables merchant exporters to purchase goods from a manufacturer without payment of tax under the GST regime. The transaction between a manufacturer and a merchant exporter is in the nature of supply and the same would be subject to GST.
6. Transactions with EOU: Zero rating is not applicable to supplies to EOUs and there is no special dispensation for them under GST regime. Therefore, supplies to EOUs are taxable like any other taxable supplies. EOUs, to the extent of exports, are eligible for zero rating like any other exporter.