Understanding Zero-rated supplies under GST in India

Introduction:

The Goods and Services Tax (GST) is a destination-based consumption tax that was introduced in India in 2017. Under the GST framework, the concept of zero-rated supply is of significant importance, especially for businesses engaged in exports and supplying to Special Economic Zones (SEZs).

Zero-rated supply refers to the supply of goods or services that are either exported or supplied to SEZs and are not subject to GST in India. The main objective behind zero-rating supplies is to promote exports and SEZs, which play a vital role in the Indian economy.

Exports of goods and services have always been a critical driver of economic growth and development, and the zero-rated supply provisions under GST provide a significant boost to Indian exporters by enabling them to compete in the global market. Furthermore, zero-rating supplies to SEZs help in creating a conducive environment for businesses and promoting investments in the SEZs.

This article aims to provide a comprehensive understanding of zero-rated supplies in GST, including the concept, legal framework, and eligibility criteria for such supplies. We will also discuss the implications of zero-rated supplies for businesses and the Indian economy.

Zero-rated supply in GST: Concept and legal framework

Zero-rated supply refers to the supply of goods or services that are exempted from GST under GST law in India. It is important to note that zero-rated supplies are distinct from exempt supplies, as exempt supplies do not attract any tax, while zero-rated supplies attract tax but are eligible for input tax credit (ITC) benefits. The main objective behind zero-rating supplies is to promote exports and SEZs, which play a vital role in the Indian economy.

The provisions for zero-rated supplies are contained in Section 16 of the Integrated Goods and Services Tax (IGST) Act, 2017, which deals with the entitlement of ITC on exports or zero-rated supplies. Section 16(1) of the IGST Act provides that a registered person making zero-rated supplies shall be eligible to claim a refund of the unutilized input tax credit (ITC) on goods or services or both that are used for such supplies. Section 16(2) of the IGST Act further provides that a registered person making zero-rated supplies may either export the goods or services under bond or Letter of Undertaking (LUT) or claim refund of the unutilized ITC.

Additionally, Section 2(6) of the IGST Act defines “zero-rated supply” as any taxable supply of goods or services or both:

1. Export of goods or services or both; or

2. Supply of goods or services or both to a Special Economic Zone (SEZ) developer or an SEZ unit.

Exports of goods or services are considered zero-rated supplies as they are intended for consumption outside India and are not subject to GST. To qualify as zero-rated supplies, the exporter must comply with the necessary documentation and procedure for shipping the goods or services and adhere to the prescribed timelines for filing returns.

Supplies of goods or services to SEZ developers or units are also considered zero-rated supplies. The SEZ scheme was introduced to promote exports and generate employment opportunities in the country. The supply of goods or services to SEZs is exempt from GST, provided that the supplier obtains a Letter of Undertaking or furnishes a bond with the proper authorities. SEZs have their own set of regulations and are governed by the SEZ Act, 2005.

In conclusion, zero-rated supplies play a crucial role in promoting exports and SEZs in India. The legal framework for zero-rated supplies is provided under the IGST Act, and businesses engaged in such supplies can claim ITC refunds or opt for the bond or LUT route. Exports of goods or services and supplies to SEZs are two examples of zero-rated supplies under GST in India.

Export of goods or services as zero-rated supplies:

Export of goods or services is a crucial driver of economic growth and development in India. Under the Goods and Services Tax (GST) regime, exports of goods or services are considered zero-rated supplies, which means they are exempt from GST. The main objective behind zero-rating supplies is to promote exports and help Indian businesses compete in the global market.

Export under GST refers to the supply of goods or services that are intended for consumption outside India. The term “export” is defined under Section 2(5) of the IGST Act, 2017, which states that “export of goods” means taking goods out of India to a place outside India. Similarly, “export of services” means the supply of any service when:

1. The supplier of service is located in India

2. The recipient of service is located outside India

3. The place of supply of service is outside India

4. The payment for such service is received in convertible foreign exchange

For exports to be considered zero-rated supplies under GST, businesses must comply with certain eligibility criteria. One of the key criteria is obtaining the necessary documentation, such as a shipping bill, invoice, and other documents required under the Customs Act, 1962. The exporter must also follow the proper procedure for shipping the goods or services and adhere to the prescribed timelines for filing returns.

To claim the benefits of zero-rated supplies, the exporter must file a refund application under the GST law. The refund application must be filed within two years from the relevant date, as specified under Section 54(1) of the CGST Act, 2017. The relevant date for the purpose of filing a refund claim is either the date of issue of invoice or the date of payment of tax, whichever is later.

The benefits of zero-rated supplies under GST for businesses engaged in exports are manifold. Firstly, exporters can claim a refund of the unutilized ITC on goods or services or both that are used for such supplies. This helps in reducing the cost of exports and enables exporters to compete in the global market. Secondly, the exemption from GST helps in making Indian exports more competitive in the international market, which, in turn, promotes economic growth and development.

However, compliance and documentation-related challenges are some of the key issues faced by businesses engaged in exports. Exporters must ensure that the necessary documentation is in place, and the procedures for shipping the goods or services are followed meticulously. Failure to comply with the prescribed timelines or provide the required documents can lead to delays in processing refund claims or even rejection of such claims. Additionally, the refund process itself can be time-consuming and cumbersome, which can impact the cash flow of businesses.

In conclusion, exports of goods or services are considered zero-rated supplies under GST, and complying with the necessary eligibility criteria is essential for businesses to claim ITC refunds. The benefits of zero-rated supplies for businesses engaged in exports are significant, and it helps in promoting exports and boosting the Indian economy. However, compliance-related challenges and documentation requirements can be a hindrance for businesses, and it is essential to ensure that the necessary procedures are followed to claim the benefits of zero-rated supplies.

Supply of goods or services to SEZs as zero-rated supplies:

Special Economic Zones (SEZs) are designated areas within a country that are established to promote exports, attract foreign investment, and create employment opportunities. SEZs in India were introduced in 2005 and have been a significant contributor to the country’s economic growth. As per the GST law, supplies made to SEZs are treated as zero-rated supplies.

Concept of SEZs and their role in the Indian economy

SEZs are designed to create an environment that is conducive to the establishment and growth of industries, particularly those that are export-oriented. These zones are established with a view to creating a level playing field for businesses that are competing in the global market. In India, SEZs have been set up in various sectors such as information technology, manufacturing, biotechnology, and pharmaceuticals.

Eligibility criteria for supplies to SEZs to be considered zero-rated supplies

Under the GST law, supplies made to SEZs are treated as zero-rated supplies if the supplier satisfies certain conditions. To avail of the benefit of zero-rating, the supplier is required to furnish an LUT (Letter of Undertaking) or a bond to the concerned authorities. The LUT or bond acts as a guarantee that the supplier will comply with the conditions prescribed by the GST law. Additionally, the supplier must ensure that the goods or services supplied are received by the SEZ unit or developer and are used for authorized operations.

Advantages of zero-rated supplies to SEZs

The treatment of supplies made to SEZs as zero-rated supplies provides several benefits to both the supplier and the SEZ unit/developer. The major advantage is that such supplies are exempt from GST, which reduces the cost of goods or services for the SEZ unit/developer. This exemption allows SEZs to become more competitive and attract more investment, leading to increased economic activity and employment opportunities.

Another advantage of zero-rated supplies is that they allow for the smooth flow of credit. The supplier can claim input tax credit (ITC) on the inputs, input services, and capital goods used in the supply of goods or services to SEZs. The ITC can be utilized to offset the GST liability on other supplies or can be claimed as a refund.

In addition to the benefits, zero-rated supplies to SEZs also pose some challenges related to compliance and documentation. The supplier must comply with the conditions prescribed by the GST law to avail of the zero-rating benefit. These conditions include obtaining an LUT or bond, maintaining proper documentation, and following the prescribed timelines for filing returns. Any non-compliance with the conditions can lead to the denial of the zero-rating benefit and may result in penalties.

The zero-rating of supplies made to SEZs is a significant provision under the GST law that aims to promote exports, attract foreign investment, and create employment opportunities. The treatment of such supplies as zero-rated supplies provides several benefits to both the supplier and the SEZ unit/developer. However, compliance with the conditions prescribed by the GST law is essential to avail of the zero-rating benefit. As SEZs continue to play a crucial role in India’s economic growth, the significance of zero-rated supplies to SEZs is likely to increase.

Conclusion:

In conclusion, zero-rated supplies play a vital role in promoting exports and supporting the development of SEZs in India. It refers to the supplies on which no GST is levied, and businesses engaged in such supplies can claim Input Tax Credit (ITC) refunds. The legal framework for zero-rated supplies is governed by Section 16 of the IGST Act and Section 2(6) of the IGST Act. Export of goods or services and supplies to SEZs are two examples of zero-rated supplies. While complying with the necessary procedures and documentation can be challenging, businesses can benefit from the advantages of zero-rated supplies such as exemptions from GST, boost to export-oriented industries, and increased competitiveness in the global market.