What is Zero-Rated Supply?

Zero-rated supply under GST refers to supplies on which the GST rate is 0%, but unlike exempt supplies, the supplier can claim full Input Tax Credit (ITC) on inputs used to make those supplies. This is a critical distinction -- in exempt supplies, ITC cannot be claimed, but in zero-rated supplies, the entire tax chain is preserved, ensuring that no tax burden falls on the final supply. Zero-rated supply is defined under Section 16 of the IGST Act, 2017.

Under Indian GST law, only two categories of supplies qualify as zero-rated: (1) Export of goods or services (or both) out of India, and (2) Supply of goods or services to a Special Economic Zone (SEZ) developer or unit. The objective is to ensure that Indian exports remain internationally competitive by removing the embedded tax cost, and that SEZ operations -- designed as enclaves for export-led growth -- are not burdened by domestic taxes.

Exporters have two options for claiming the zero-rating benefit: (a) Export under Bond/Letter of Undertaking (LUT) without payment of IGST, and claim refund of accumulated ITC; or (b) Pay IGST at the time of export (using ITC or cash) and claim refund of the IGST paid. The refund application must be filed within two years from the relevant date.

Key Features

# Feature Details
1 Legal Basis Section 16, IGST Act 2017
2 Applicable to (a) Exports out of India; (b) Supplies to SEZ developer/unit
3 GST Rate 0% on the output supply
4 ITC Full ITC on inputs can be claimed (unlike exempt supplies)
5 Option 1 Export under Bond/LUT without IGST; claim ITC refund
6 Option 2 Pay IGST on export; claim IGST refund
7 Refund Timeline Application within 2 years from relevant date
8 Key Difference from Exempt Exempt supply: no ITC; Zero-rated: full ITC allowed

Current Status / Latest Data

  • India's goods exports FY2024-25: Approximately $437 billion; services exports around $340 billion -- all qualifying for zero-rating.
  • SEZ exports FY2024-25: Approximately Rs 14.5 lakh crore from 270+ operational SEZs.
  • Refund mechanism: Exporters can claim refund of accumulated ITC through the GST portal; automated refund processing has reduced timelines significantly.
  • LUT facility: Most exporters prefer the LUT route (no upfront IGST payment), reducing working capital blockage.
  • Inter-SEZ supplies: Supplies between SEZ units continue to be treated as zero-rated, as both fall outside the domestic tariff area.
  • Post-GST 2.0 (September 2025): Zero-rating provisions remain unchanged; the simplification of rate slabs does not affect the zero-rating framework for exports and SEZs.

UPSC Exam Corner

Prelims: Key Facts

  • Zero-rated supply: GST rate is 0% but full ITC is allowed
  • Only two categories: exports out of India + supplies to SEZ
  • Defined under Section 16 of IGST Act
  • Two options: Export under LUT (claim ITC refund) or Pay IGST (claim IGST refund)
  • Difference from exempt supply: exempt = no ITC; zero-rated = full ITC
  • Refund must be claimed within 2 years

Mains: Probable Themes

  1. Explain the concept of zero-rated supply under GST and its importance for India's export competitiveness
  2. Distinguish between zero-rated, nil-rated, and exempt supplies under GST with examples
  3. Analyse the challenges faced by exporters in claiming timely GST refunds and the impact on their working capital

Sources: ClearTax - Zero Rated Supplies in GST, IndiaFilings - Zero Rated Supply, GST Council - Zero Rating Flyer