Section 16 of the Integrated Goods and Services Tax (IGST) Act, 2017 defines zero-rated supply as the supply of goods or services, or both, that includes exports and supplies to a Special Economic Zone (SEZ) developer or SEZ unit. These supplies attract a GST rate of zero percent. No tax is charged on the outward supply, but the supplier can still claim a refund of the input tax credit (ITC) paid on inputs and input services used to make such supplies.
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What Are The Features of Zero-Rated Supplies

Zero-rated supplies differ from exempt supplies because they allow the claim of input tax credit. In exempt supplies, GST is not charged on the output, but the ITC on inputs and input services cannot be claimed, making the tax a cost to the supplier. In zero-rated supplies, the GST paid on inputs and input services can be refunded even when no GST is charged on the final product or service. This ensures that the supply chain remains tax-free and competitive.

What Are The Refund Options Under Section 16(3)

Section 16(3) of the IGST Act gives registered suppliers two refund options for zero-rated supplies. They can supply goods or services under a bond or Letter of Undertaking (LUT) without paying IGST upfront and claim a refund of the unutilised ITC. Alternatively, they can supply with payment of IGST and later claim a refund of the tax paid. Both methods aim to ensure that exporters and SEZ suppliers are not burdened with unrecoverable taxes.

What Is The Purpose of Zero Rating

The main goal of zero rating is to completely remove tax burdens from exports and supplies to SEZs. This system helps make Indian goods and services more competitive in global markets. It also promotes economic growth by supporting Special Economic Zones with tax-free procurement of goods and services.

Zero-Rated vs Exempt Supplies

While both zero-rated and exempt supplies may have a GST rate of zero, they operate differently. Exempt supplies block the benefit of ITC, resulting in higher costs for suppliers. Zero-rated supplies allow ITC claims and refunds, eliminating tax costs entirely. For example, exports of goods and services and supplies to SEZs qualify as zero-rated, while services like basic transportation or certain healthcare services fall under exemption without ITC benefits.

Conclusion

Zero-rated supply under Section 16 of the IGST Act ensures that exports and SEZ-related supplies remain free from tax burdens. By allowing ITC refunds, this provision supports seamless cross-border trade and boosts the competitiveness of Indian businesses. It is a vital mechanism in India’s GST framework to promote exports and encourage SEZ.