Zero Rated Supply



As per section 16, Zero rated supply refers to any of the following supplies of goods or services or both, namely:
a.      Export of goods and/or services; or
b.      Supply of goods and/or services to Special Economic developer or a Special Economic Zone unit

The concept of zero rated supply is limited to exports and supply to SEZ developer/unit. Hence, supplies made to EOU, EHTP, STP, etc. does not come under zero rated supply. It is also important to understand that zero rated supply is different from tariff rate of 0%, as here the recipient of supply is entitled to pay 0% GST to the supplier. While 0% rate of tax is not eligible for input tax credit, zero rated supply does receive tax credit (except if it is an exempt supply).

Manner of claiming refund of accumulated input tax credit (ITC) under zero rated supply is as follows:

Option 1- Without payment of IGST
Option 2- With payment of IGST
Make supply of goods and/or services under bond or letter of undertaking (LOU), without payment of integrated tax and claim refund of unutilised input tax credit.

For this, make payment of IGST on supply by debit to ‘electronic credit ledger’ but without collecting tax from recipient.
Make supply of goods and/or services, on payment of integrated tax and claim refund of such tax paid on supply of such goods and/or services.

For this, after completing the supply, claim refund of IGST so debited.
*These are subject to such conditions, safeguards and procedures as may be prescribed.
Let us understand the major instances of refund of ITC under zero rated supply with the help of some illustrations.

Case 1: Supply for Export
Suppose Ajay Ltd. from Mumbai supplies goods to Raj Ltd. in Kolkata to export the same to USA.
In this situation following alternatives can be exercised.

Option 1
Option 2

·         Ajay Ltd. will charge IGST of say ₹100 to Raj Ltd.
·         Raj Ltd. will avail ITC
·         Raj Ltd. will issue invoice for $10 (no IGST is charged)
·         Raj Ltd. to debit electronic credit ledger with IGST applicable of ₹150 on export (assuming sufficient balance in credit ledger including input, input service and capital goods)
·         Raj Ltd. will obtain proof of export and fulfil all the conditions
·         Raj Ltd. can claim refund of ITC of ₹150 debited in electronic credit ledger for export

·         Ajay Ltd. will charge IGST of say ₹100 to Raj Ltd.
·         Raj Ltd. will avail ITC
·         Raj Ltd. will issue invoice for $10 (no IGST is charged)
·         Raj Ltd. will obtain proof of export and fulfil all the conditions
·         Raj Ltd. can claim refund of ITC of ₹100

Case 2: Supply to SEZ
Suppose Ajay Ltd. from Mumbai supplies goods to Raj Ltd. in Kolkata, who further supplies the same to SEZ in Kolkata.
When a supply is made to/by SEZ developer or unit, it shall be considered as inter-state supply as per section 7(5), and hence will be liable to IGST. Raj Ltd. can avail either of the options as mentioned below, following the similar procedure.

Option 1
Option 2

·         Ajay Ltd. will charge IGST of say ₹100 to Raj Ltd.
·         Raj Ltd. will avail ITC
·         Raj Ltd. will issue invoice to SEZ for ₹1200 (no IGST is charged)
·         Raj Ltd. to debit electronic credit ledger with IGST applicable of ₹240 (assuming sufficient balance in credit ledger including input, input service and capital goods)
·         Raj Ltd. will bring proof of admittance to SEZ and fulfil all the conditions
·         Raj Ltd. can claim refund of ITC of ₹240 debited in electronic credit ledger

·         Ajay Ltd. will charge IGST of say ₹100 to Raj Ltd.
·         Raj Ltd. will avail ITC
·         Raj Ltd. will issue invoice to SEZ for ₹1200 (no IGST is charged)
·         Raj Ltd. will bring proof of admittance to SEZ and fulfil all the conditions
·         Raj Ltd. can claim refund of ITC of ₹100 



Case 3: Supply by SEZ to SEZ
 If Star-SEZ of Chennai supplies goods produced in the unit to Moon-SEZ in Bangalore.
Supply from one SEZ to another SEZ is considered as inter-state supply, although they are in same state or different states. Following steps shall be considered.

·         Star-SEZ will issue invoice to Moon-SEZ excluding IGST
·         No ITC to be availed by Moon-SEZ
·         Star-SEZ will obtain proof of admittance to Moon-SEZ and fulfil all conditions
·         Neither of the SEZs can claim refund, since no IGST was paid


Case 4: Supply by SEZ to non-SEZ
Assume that Star-SEZ of Chennai supplies goods to Ajay Ltd.(Non-SEZ) in Mumbai, after approval obtained by SEZ officer. 
The supply by SEZ to Non-SEZ is governed under Customs Act. Hence even though it is treated as inter-state supply, SEZ being the supplier is not required to pay taxes, but the Non-SEZ recipient is liable to pay IGST on reverse charge basis, at the time of assessment of bill of entry. Below is the process to be followed.

·         Star-SEZ will issue invoice to Ajay Ltd. excluding IGST
·         Ajay Ltd. will file Bill of Entry for import of goods from SEZ to Non-SEZ
·         Bill of Entry will be assessed for Basic customs duty and IGST
·         Ajay Ltd. can claim IGST paid on reverse charge and utilise the IGST credit


Note:
1.      All refunds are subject to ‘due process’ as per section 54 of CGST Act including verification of unjust enrichment.
2.      Ensure that refundable amount is not included in the price charged to overseas customer or SEZ.

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