Zero Rated Supply under GST: Meaning, Examples & Refund Guide (2025)
Introduction: Why GST Loves Exporters
If you’re involved in exports or supplying goods/services to a Special Economic Zone (SEZ), you’ve probably heard the term "Zero Rated Supply" (ZRS). It sounds technical, but it’s actually one of the most beneficial provisions under the GST law.
The core philosophy is simple: Taxes should not be exported.
The Indian government wants our products and services to be competitive globally. To achieve this, ZRS ensures that when a product leaves India, it carries zero domestic tax burden, making it cheaper and more attractive in international markets.
1. What Exactly Does Zero Rated Supply Mean?
In simple terms, Zero Rated Supply under GST refers to those specific supplies where the output tax rate is effectively zero (0%), AND the supplier is still allowed to claim a refund of the Input Tax Credit (ITC) paid on the inputs used to make that supply.
Think of it like this:
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₹100 (Cost of Inputs) + ₹18 (GST/ITC Paid) = ₹118
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If you export the final product, you charge ₹0 GST on the sale, AND the government gives you back that ₹18 ITC.
This ensures the final export price is not inflated by any domestic taxes.
2. The Two Golden Zero Rated Supplies
Under Section 16 of the GST Act, only the following two types of supplies qualify as Zero Rated:
A. Export of Goods or Services
This is the most common category. When you sell goods or services outside the territorial limits of India, it qualifies as an export and is considered ZRS.
B. Supply to SEZ Developer or Unit
A Special Economic Zone (SEZ) is treated as "foreign territory" for the purpose of taxation. Therefore, any supply made to an SEZ unit or SEZ developer is also treated on par with an export and falls under ZRS.
3. How to Claim Your Zero Rated Benefits? (The Mechanism)
Exporters have two clear routes to ensure their goods are truly "tax-free":
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Option
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What You Do
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The Benefit
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Route 1: Supply Under LUT/Bond
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You supply goods/services without paying any IGST upfront by furnishing a Letter of Undertaking (LUT) or Bond.
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You later apply for a refund of the ITC accumulated on your inputs (e.g., raw materials, services).
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Route 2: Supply on Payment of IGST
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You pay the applicable IGST at the time of supply.
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You later claim a full refund of the IGST paid. This is often faster as the shipping bill itself is treated as the refund claim.
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Both routes achieve the same goal: The final product is zero-taxed.
4. Zero Rated vs. Exempt Supply: Don't Get Confused!
This is where many people trip up! Both Zero Rated Supply and Exempt Supply result in tax being collected from the customer on the final sale, but they are fundamentally different in the eyes of the law, especially concerning ITC.
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Feature
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Zero Rated Supply (ZRS)
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Exempt Supply
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ITC Benefit
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Full Refund Available. The exporter gets back all the ITC paid on inputs.
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Not Available. The ITC paid on inputs must be reversed and cannot be claimed as a refund.
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Legal Basis
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Governed by Section 16 (Focuses on Exports/SEZ).
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Governed by Section 11 (Focuses on Welfare/Social Goods).
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Impact on Cost
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Product cost is lower because the tax component is removed.
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Product cost is higher because the ITC becomes a cost to the supplier.
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Example
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Exporting readymade garments, Supplying IT services to an SEZ.
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Fresh vegetables, Unbranded flour, Health services.
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The Human Takeaway: If your supply is Exempt, you bear the cost of the tax you paid on your inputs. If your supply is Zero Rated, the government refunds that cost to you. ZRS is designed for prosperity; Exempt is designed for affordability.
Conclusion
For any business aiming to go global or partner with SEZ units, understanding Zero Rated Supply is not optional—it’s crucial for maximizing profitability. By taking advantage of the ITC refund mechanism, you can ensure your pricing remains competitive and your business thrives under the GST regime. Make sure to choose the correct route (LUT/Bond vs. IGST Payment) that best suits your cash flow needs!
Need help filing your LUT or claiming your IGST refund? Our experts at onlinegstregistration.co can guide you through the seamless process!
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