IGST Section 16 — Zero rated supply
IGST Act · Zero rated supply
Quick Answer
Section 16 of the IGST Act, 2017 governs Zero rated supply. It provides the core statutory basis, outlining the essential legal principles, rights, and liabilities under Indian indirect tax law. Section 16 IGST: Zero rated supply — eligibility, conditions, case laws and compliance impact under Indian tax law.
Plain-English Explanation
Section 16 of the IGST Act deals with "Zero-Rated Supply," which essentially means certain types of supplies are treated as if they were tax-free, even though they are technically taxable. This section is designed to promote exports and supplies to Special Economic Zones (SEZs) by allowing businesses to claim refunds on input taxes related to these supplies.
This section applies to registered individuals making two specific types of supplies: (a) exporting goods or services or both out of India, or (b) supplying goods or services or both to a Special Economic Zone (SEZ) developer or unit for authorized operations within the SEZ. The aim is to ensure that Indian goods and services are competitive in the international market and that SEZs operate efficiently. It's important to note that the SEZ supply is restricted to authorized operations of the SEZ developer or unit.
Here are the key conditions and exceptions related to zero-rated supplies:
- Input Tax Credit (ITC): Businesses making zero-rated supplies can claim ITC on the inputs used to make those supplies, even if the final supply is exempt. This means you can get a refund for the GST you paid on raw materials or services used to create the exported or SEZ-supplied product.
- Refund Options: Registered individuals can claim refund of unutilised input tax credit on zero rated 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 Services Tax Act or the rules made thereunder, subject to conditions, safeguards and procedure.
- Non-Realization of Export Proceeds: If you export goods and don't receive the payment within the time limit prescribed under the Foreign Exchange Management Act (FEMA), you'll have to deposit the refund you received along with applicable interest.
- Government Notifications: The government has the power to specify certain classes of people or certain types of goods/services where the supplier may pay IGST on zero rated supply and claim the refund of tax so paid.
- Export Duty: No refund of unutilised input tax credit 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.
Let's consider a few practical examples:
- Exporter: Imagine a textile manufacturer in Surat exports a consignment of sarees to the United States. This is a zero-rated supply. They can claim a refund on the GST paid on the cotton, dyes, and other inputs used to manufacture the sarees.
- SEZ Supplier: A software company in Bangalore provides software development services to a unit in a SEZ. This supply is zero-rated, provided the services are for the authorized operations of the SEZ unit. The software company can claim a refund of the GST paid on the computers, internet services, and other inputs used to provide these services.
- Non-payment of Export Revenue: If the textile manufacturer doesn't receive payment for the sarees within the FEMA-prescribed timeframe, they will have to return the GST refund they claimed along with interest.
The IGST Act has been amended in recent years regarding zero-rated supplies. Specifically, Section 16 has been amended to clarify the refund process and conditions related to zero-rated supplies. The Finance Act, 2021 made changes which came into effect on October 1, 2023 and The Finance Act (No. 2) Act, 2024 also made changes regarding refund of tax paid.
Understanding Section 16 is crucial for businesses involved in exports and supplies to SEZs. Properly leveraging the provisions related to zero-rated supply can significantly reduce your tax burden and improve your cash flow. Keep up-to-date with notifications and circulars issued by the government, as they frequently provide clarifications and address practical issues related to zero-rated supplies.
No case laws found for this section yet.
Browse all case laws →Frequently Asked Questions
What constitutes a 'zero-rated supply' under Section 16 of the IGST Act, and what are the two options for claiming it?
Under Section 16 of the IGST Act, 'zero-rated supply' means any of the following taxable supplies of goods or services or both, namely: (a) export of goods or services or both; or (b) 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 supplies has two options: 1. Supply under Bond or Letter of Undertaking (LUT) without payment of IGST and claim refund of unutilized input tax credit (ITC); or 2. Supply on payment of IGST and claim refund of such IGST paid.
What is the difference between supplying goods or services under LUT/Bond vs. with payment of IGST for zero-rated supplies, particularly regarding the refund process?
When supplying under LUT/Bond, you don't pay IGST upfront but claim a refund of accumulated ITC related to those zero-rated supplies. This requires careful tracking of ITC and filing relevant refund applications. When supplying with payment of IGST, you pay IGST at the time of supply and then claim a refund of the IGST paid. This simplifies ITC tracking but requires upfront payment of IGST, which can impact cash flow. The choice depends on your ITC accumulation and cash flow management.
What documents are required for claiming a refund on zero-rated supplies made under LUT/Bond or with payment of IGST?
The specific documents required depend on the chosen method (LUT/Bond or with IGST payment) and may vary based on specific refund rules, however, generally needed documents include: * Invoice details of export/supply to SEZ * Export documents (shipping bills, airway bills etc.) * Proof of payment (if supplying with IGST payment) * Declaration/Undertaking (for LUT/Bond) * GST returns filed * Form RFD-01 (Refund Application Form) * Bank Realization Certificate (BRC) or Foreign Inward Remittance Certificate (FIRC) - for export of services. * Any other document as may be specified by the relevant GST authority.
What happens if I fail to comply with the conditions of the Letter of Undertaking (LUT) furnished for zero-rated supplies?
If you fail to comply with the conditions of the LUT (e.g., failure to export within the stipulated time), the LUT may be revoked. In such a case, you would be required to furnish a bond in lieu of the LUT. Further, you may also be liable to pay the IGST amount along with applicable interest from the date of the original supply until the IGST is actually paid. This could significantly impact your financial obligations.
How is the refund amount calculated for zero-rated supplies under Section 16, especially when dealing with a mix of zero-rated and taxable supplies?
The refund amount for zero-rated supplies is generally calculated based on the formula prescribed in Rule 89(4) of the CGST Rules. The formula considers the turnover of zero-rated supply of goods and services, total turnover, and adjusted total turnover. When dealing with a mix of zero-rated and taxable supplies, it's crucial to accurately apportion the input tax credit (ITC) to the zero-rated supplies to maximize the refund amount. Careful segregation and reconciliation of input tax credit are necessary to support the refund claim.
What are the time limits for claiming refunds on zero-rated supplies under Section 16?
As per Section 54 of the CGST Act, the time limit for claiming a refund is two years from the relevant date. For exports, the relevant date is generally the date of let export order in case of goods and the date of receipt of payment in convertible foreign exchange, in case of services.
Can a supplier claim ITC refund on input services used in providing zero-rated services?
Yes, a supplier can claim an ITC refund on input services used in providing zero-rated services. Section 16 allows for a refund of accumulated ITC related to zero-rated supplies, which includes ITC on both input goods and input services. Proper documentation and correlation of input services with zero-rated supplies are essential for successful refund claims.
Key Conditions & Requirements
| Condition | Details |
|---|---|
| Zero Rated Supply Definition | Means either (a) export of goods or services or both; or (b) supply of goods or services or both for authorised operations to a Special Economic Zone developer or a Special Economic Zone unit. |
| Input Tax Credit Availability | Credit of input tax may be availed for making zero-rated supplies, even if such supply is an exempt supply, subject to section 17(5) of the CGST Act. |
| Refund of Unutilised ITC | A registered person making zero rated supply is eligible to claim refund of unutilised input tax credit on such supplies without payment of integrated tax, under bond or Letter of Undertaking (LUT). |
| Refund Conditions and Procedures | The refund is subject to the conditions, safeguards, and procedures as may be prescribed under section 54 of the CGST Act or the rules made thereunder. |
| Non-Realisation of Export Proceeds | If the sale proceeds for exported goods are not realised, the registered person is liable to deposit the refund received, along with applicable interest under section 50 of the CGST Act, within 30 days after the expiry of the FEMA time limit for receipt of foreign exchange remittances. |
| Government Notification | The Government may, on the recommendation of the Council, and subject to such conditions, safeguards and procedures, by notification, specify a class of persons who may make zero rated supply on payment of integrated tax and claim refund of the tax so paid. |
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Browse all notifications →Amendment History
Inserted clause (aa) by s. 109 of The Finance Act, 2021 (No. 13 of 2021) dated 28th March, 2021 - Brought into force w.e.f. 01st January, 2022 vide Notification No. 39/2021-Central Tax dated 21.12.2021.
Substituted (w.e.f. 1st February, 2019) for "Explanation.-For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;" by s. 8 of The Central Goods and Services Tax (Amendment) Act, 2018 (No. 31 of 2018).
Inserted ( w.e.f. 1st October, 2022 vide Notification No. 18/2022 - CT dated 28.09.2022. ) by s. 100 of The Finance Act 2022 (No. 6 of 2022).
Substituted "section 41" (w.e.f. a date yet to be notified) by s. 8 of The Central Goods and Services Tax (Amendment) Act, 2018 (No. 31 of 2018).
Omitted “or section 43A” ( w.e.f. 1st October, 2022 vide Notification No. 18/2022 - CT dated 28.09.2022. ) by s. 100 of The Finance Act 2022 (No. 6 of 2022).
Substituted ( w.e.f. 1st October, 2022 vide Notification No. 18/2022 - CT dated 28.09.2022. ) by s. 100 of The Finance Act 2022 (No. 6 of 2022) for ''due date of furnishing of the return under section 39 for the month of September".
Omitted "invoice relating to such" (w.e.f. 1st January, 2021 vide Notification No. 92/2020-C.T. , dated 22nd December, 2020) by s. 120 of The Finance Act, 2020 (No. 12 of 2020) .
Inserted vide Order No. 02/2018 -Central Tax dated 31st December, 2018.
Substituted ( w.e.f. 1st October, 2023 vide Notification No. 28/2023-C.T. , dated 31st July, 2023 ) by s. 138 of The Finance Act 2023 (No. 8 of 2023) for "added to his output tax liability, along with interest thereon".
Inserted ( w.e.f. 1st October, 2023 vide Notification No. 28/2023-C.T. , dated 31st July, 2023 ) by s. 138 of The Finance Act 2023 (No. 8 of 2023).
Inserted by section 118 of The Finance Act (No. 2) Act, 2024 No. 15 of 2024 dated 16.08.2024.