Criteria For Zero Rated Supply, Goods and Services Tax - GST

[KASTURI SETHI]

Dear Experts,

Zero rated supply, NIL rated supply, Exempt supply, Non-taxable supply, NON-GST supply are altogether different terms.

NIL rate is also a rate of duty (Supreme Court). Zero rated is also rate of duty/tax.

Although export benefits may be available to exempt supply, non-taxable supply & Non-GST supply in different Acts, yet these supplies cannot be categorized as ZERO rated inasmuch as these are already tax free.

Q.1 What is zero rated supply under GST?

Ans. Under GST, exports and supplies to SEZ are zero-rated as per Section 16 of the IGST Act, 2017. By zero-rating, it is meant that the entire supply chain of a particular supply is tax free, i.e., there is no burden of tax either on the input side or output side.

Views of experts please. Thanks a lot.

Posts / Replies

[Raveendran PM]

My understanding :

Exempt supply once fall into the Category of export, it be considered as zero rated , to the extent of export benefits , not for any other purpose.

Otherwise denying the export benefit to certain category may lead to injustice.

However the refund on accumulated ITC was not available pertaining to capital Goods on export of exempted goods, as it debar for export with payment , which is as intended by statue.

[Amit Agrawal]

Section 16 (2) of the IGST Act, 2017 reads as follows:

"Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply"

First, even for zero-rates supplies, supplier is not eligible for ITC against goods / services which are blocked u/s 17 (5). So, chain of ITC is blocked to that extent even while exporting goods / services.

Second, while other ITC (i.e. ITC other than blocked u/s 17 (5)) is indeed available to supplier of zero-rated supplies even when such supply is an exempt supply, this benefit does not go down downwards in a manufacturing-chain.

For example, a supplier, say ABC, is manufacturing product 'X' using raw material / components 'Y' & 'Z'. 'X' is nil rated goods which is exported by the supplier and Z (i.e. raw material / component to manufacture X) is also nil rated product which is manufactured by another supplier, say DEF, by using raw material / components which are taxable / non-exempted goods . Ý' is a taxable goods.

So, DEF is not entitled for ITC against goods / services used to manufacture 'Z' (being NIL rated supply of goods, which is not exported as such) and supplied to ABC. And thereby, supply-chain is broken (for Z) as far as burden of ITC gets inbuilt on cost of goods ultimately exported (X, using Z is one of raw material / component). However, XYX is entitled to avail ITC against Y even though ultimate goods exported (i.e. X) is otherwise exempt supply.

Third, one is not eligible for ITC (i.e. taxes paid other than GST ... say VAT) against goods namely 'petroleum crude, high speed diesel, motor spirit (commonly known as petrol), natural gas and aviation turbine fuel' used at every stage of manufacturing / supply-chain till the export of goods / services.

Lastly, there are many other taxes / duties which are levied in India where ITC is not available for example: Stamp duty, electricity duty, local municipal taxes & so on. Every such costs gets ultimately added on cost of goods / services exported.

In view of above, I will be reluctant to say / agree that "By zero-rating, it is meant that the entire supply chain of a particular supply is tax free, i.e., there is no burden of tax either on the input side or output side".

However, benefits given under above-said Section 16 (2) is indeed helpful for an exporter (though this benefit was also available under erstwhile excise regime).

These are ex facie views of mine, the same should not be construed as professional advice / suggestion.

[Alkesh Jani]

Sire Shri Kasturiji,

On going through query raised, I am of the view that this not just the query but a good topic for an article.

Before proceeding with the reply, it is pertinent to reproduce the definitions given at Section 2 of CGST & IGST Act, 2017

(47) "exempt supply" means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply;

(78) "non-taxable supply" means a supply of goods or services or both which is not leviable to tax under this Act or under the Integrated Goods and Services Tax Act;

Now, Non-GST means the activity which is neither supply of goods or services as given in Schedule-III of the Act.

(23) "zero-rated supply" shall have the meaning assigned to it in section 16;

The sub-section (1) of section 16 is given below:-

(1) "zero rated supply" means any of the following 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 for authorised operations to a Special Economic Zone developer or a Special Economic Zone unit.

Now coming to the query, for zero rated supply, the section ends with -namely, means only those mentioned will be termed as zero-rated supply. The law maker in their craftsmanship has beautifully expressed (a) as export of goods or service or both, here the word supply is not mentioned means export of goods or service which are exempted or nil rated etc. are included.

While at (b) it is clearly mentions ‘supply’ of goods or services or both to SEZ unit or developer for authorised operation.

On conjoint reading we can infer that for purpose of (a) although not falling with the ambit of supply and if exported will be termed as zero rated supply, which is not the case with subsection (b).

As this can be lengthy, concludingly, as the tax under the act cannot go outside India, refund of tax on input is provided and also duty draw back is extended.

Thanks

With Regards,

[KASTURI SETHI]

Sh. Ravindeeran P.M.Ji,, Sh.Amit Agrawal Ji,, Sh.Alkesh Jani Ji,

Dear Sirs, I am very thankful to all of you for your comprehensive replies and thus devoting your precious time for me.

[Sadanand Bulbule]

Dear all

A. In any economy, the government tries to increase its exports as much as possible. This helps the government in maintaining the country’s economic growth, employment and balance of payments. To boost exports, the government provides certain reliefs and benefits to business houses. One such relief provided under the GST regime is called Zero Rated Supplies in GST.

B. In terms of Section 16 of the IGST Act, 2017,any supplies made by a registered dealer as an export (both goods and services) or supply to an SEZ qualifies for Zero Rated Supplies in GST. The rate of tax on such supplies is ‘Zero’ or we can say the supplies are tax-free. The supply to a developer of an SEZ is also covered under Zero-Rated Supplies in GST as no tax is levied on these supplies as well. There are certain supplies on which there is no incidence of GST. It is important to understand the underlying difference among all such supply criterions:

C.NIL Rated Supplies, on-Taxable Supplies, Exempt Supplies and Zero-Rated Supplies

Meaning: Goods and services on which 0% GST is applicable. Goods and services on which GST is not levied at all. Supplies which are exempt from payment of GST. Goods or services which are exported or supplied to SEZ respectively.

D. There are two options available with a dealer to claim refunds:

i. The dealer can export under Bond or LUT (Letter of Undertaking) and claim a refund of the accumulated Input credit of tax; or

ii. The dealer can pay IGST while making the supplies and claim refund of the same.

E. Therefore, the dealers are provided with a flexibility to choose between any two options as per their convenience. Under GST laws, the process of claiming refund has been made easy for the export dealers. For Zero-Rated Supplies, there is no need to file refund application (GST RFD-01) separately.

Out of box:

With highest respect to all the esteemed members of TMI, I submit following couple of lines for private information:

There is a time tested saying: “Clarity is the fruit of concentration.” This concept is wonderful and the philosophy is mind-blowing. This is achieved only when a person has purity in his thoughts and feelings.

With all the apparent clarity of law & facts placed on records, many a times the real question is what the quasi-judicial authority wants to drive at? So like the quasi-judicial authority, the professionals too have to drive only one point. That’s just to open up its mind especially when it is blind to adverse possibilities, respect the law the way it is framed by the lawmakers in their best wisdom.

Every aspirant who is desirous of spectacular transformation needs “Horizontal Exposure with Vertical Expertise”. The best example is “dragonfly,” which symbolises dramatic change during its lifetime in terms of its source in mental/ emotional maturity and understanding the deeper meaning of life [for the current purpose, the taxation principle]. To have this kind of transformation, the right time, right thought process and divine patience are essential factors to lose what is no more needed and to achieve what is to be achieved very silently like sunrise and moonrise. Every human being is expected to undergo such silent transformation and quasi-judicial authority is no exception to this philosophy.

Meaningful churning of thoughts produces the best of the best results. TMI Discussion Forum is the illustrated example. We being tax professionals sail in the same ship sitting at different windows. Naturally the sailing experience varies but the destination is prefixed; one and only to reduce the litigation. We can inter-change our sitting positions but can not change the ship in the midsea. That’s not practical and safe too. Let’s take every opinion in the right spirit. Every drop of water makes a great sea.

Since the experts have given their opinion based on their own perception of Section 16 of the IGST Act, further I don't wish to add on as there is no ambiguity.

Hats off to all the wonderful contributors for their great knowledge and selfless efforts for the benefit of others. May their tribe increase.

[KASTURI SETHI]

Sh. Alkesh Jani Ji,

I do not deserve a prefix, 'sire'.

Thanks & regards.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Dear Sir, Thanks a lot for a unique reply. Thought provoking and opening new avenues indeed.

[Amit Agrawal]

I most respectfully disagree with Shri Alkesh Jani Ji for his conclusions in above post at serial No. 3 above that 'On conjoint reading we can infer that for purpose of (a) although not falling with the ambit of supply and if exported will be termed as zero rated supply, which is not the case with subsection (b).'

And my reasoning for disagreement is as follows:

A. As per Section 2 (6) of the IGST Act, 2017, “export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India;

A1. It is clear that for “export of goods”, there need not be a 'supply'. It becomes more clear when one reads Section 2 (7) of same act which starts as follows: “export of services” means the supply of any service when,–– ..............

B. Section 2 (23) of IGST Act, “zero-rated supply” shall have the meaning assigned to it in section 16.

C. And section 16 (1) reads as follows:

“zero rated supply” means any of the following 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 ¹[for authorised operations] to a Special Economic Zone developer or a Special Economic Zone unit.

C1. First line of Section 16 (1) - defining what is 'zero rated supply - states very clearly that any of following supplies falls under 'zero rated supply' and then gives clause (a) & clause (b) below.

D. In my view, for falling under “export of goods” u/s 2 (6), there need not be a 'supply' BUT for falling any 'export of goods' under 'zero rated supply' u/s 16 (1), it must be 'supply' of goods which are taking out of India to a place outside India

E. Same principals will apply for 'Export of Services', when 16 (1) defines it as one of specified 'supplies' falling under 'zero rate supplies'.

E1. Moreover & as far as 'Export of Services' are considered (i.e. a term used u/s 16 (1) (a)), even section 2 (7) means it as the supply of any service........'

F. Summarising above, I hold a view that for falling anything under 'zero rate supplies' u/s 16, same needs to be 'supply' first.

These are ex facie views of mine, the same should not be construed as professional advice / suggestion. & I respect contrary views.

[KASTURI SETHI]

Dear Sir,

When we talk of export of goods or services, the element of 'supply' is inherent . Export cannot take place without 'supply'. It is intrinsic. In other words, we can say it is but natural.

Our main issue is whether the supply is zero rated or not in the scenario detailed in the query. The existence of supply is not in question here.

[Shilpi Jain]

Zero-rated is just a terminology that is used. In fact these zero rated supplies are goods liable at various rates of tax. Just because they are exported or supplied to SEZ they get eligible for a special procedure i.e. supply under LuT with refund or supply with payment of tax with refund.

By this the Govt. strives to keep them free from both input and output taxes. Though, considering the provisions presently, the same is not achieved in most of the cases.

When comparing this with exempt supplies, only output is being kept nil rated. Input taxes in many cases are still to be borne.

[KASTURI SETHI]

The replies of all experts have broadened my horizon of thinking on the issue. Every reply has contributed to enrichment of my knowledge on the subject. Once again thanks to all experts.

[KASTURI SETHI]

Respected Experts,

When we talk about non-GST supply, rate of tax/duty is not present.

When we talk about non-taxable supply, rate of tax/duty is not present.

When we talk about zero-rated supply, rate of tax/duty is present.

When we talk about NIL rated or nil duty, rate of tax/duty is present.

When we talk about exempt supply, where is rate of tax/duty ? ?

ZERO-rated supply Vs. Non-GST supply

NIL duty/nil rated Non-taxable supply

Exempt supply

Zero-rated supply is not just a matter of terminology. All the above terms have a statutory force and are distinct in its meaning and message and in its characteristics. So each term may have far reaching repercussions either on refund/rebate claim or on availment of ITC.

All experts are humbly requested to comment upon the above. The purpose is to enrich my knowledge on the subject. I am flexible.

[Raveendran PM]

Refer what shilpa madam mentioned. "When comparing this with exempt supplies, only output is being kept nil rated. Input taxes in many cases are still to be borne."

So making the transcation as Zero Tax effect , the govenrment allowed to claim the refund on accumualted ITC , on such exports.

Only negative impact if no refund on ITC paid on capital goods, as no export with payment option possible on exempted goods.

Hope that it is clarified.

[Alkesh Jani]

Shri Kasturiji sir,

In respect to query at Sl.No.12, I am of the view that Non-GST activity is given at schedule III of the CGST Act, 2017, further, Nil rated supply, non-taxable supply is included in exempted supply.

If export of goods or services which are exempted will be termed (for better understanding it will identified as) Zero rated supply. In fact, it is export of goods and/or services and it shall be treated as “Supply”. As there are many factors playing their role for export such as BG, Letter of credit which can be at sight or usance etc. and there is possibilities that no payment may be received due to fraud etc. therefore, consideration which is important element for supply may not come into the role and hence, it is termed as “supply”, in such case exporter needs to approach RBI for waiver of such exports.

In simple words exempted goods or services can be “zero rate supply” but zero-rated supply cannot be termed as “exempted supply”.

By THE CONSTITUTION (ONE HUNDRED AND FIRST AMENDMENT) ACT, 2016, by Section 246A was introduced with reads as under:-

“2. After Article 246 of the Constitution, the following article shall be inserted, namely:—

"246A. (1) Notwithstanding anything contained in articles 246 and 254, Parliament, and, subject to clause (2), the Legislature of every State, have power to make laws with respect to goods and services tax imposed by the Union or by such State. …”

The SEZ Act, 2005, was enacted in the year 2005 which is in the list of Union List.

The article 246A starts with “Notwithstanding anything contained in article 246”, this nullifies the overriding effect of SEZ Act, over GST Act. Therefore, special provisions are required to make either in SEZ Act or GST Act.

The supply to SEZ unit or developer, shall be treated as export of goods or services as section 51 of SEZ Act, having over riding effect to other act, but on implementation of GST this overriding effect is nullified, hence, supply to SEZ unit or developer is mentioned at sub-section (b).

In a nutshell, all the terminology used in the Act, is to identify the activity and classify such activity for purpose of levy of tax.

Thanks

With Regards.

[Sadanand Bulbule]

Dear all

After carefully reading all the comments, I wish to put the on-going discussion in a single line, it is like this:

“The real voyage of discovery consists not in seeking new landscapes, but in having new eyes”.

This is what the law precisely expects from all the stakeholders to achieve what is to be achieved and the way it is to be achieved with legal heart and soul. Every innovative comment is clearly and cleanly widening the path of knowledge and the right knowledge.

Keep commenting to throw floodlight to dispel the inner darkness. Who knows what lies ahead?

[KASTURI SETHI]

Dear Experts,

An extract from GST Manual (Chapter 24) January, 2019 on TMI Website

Sharing for further discussion on the issue

What is the need for Zero Rating?

As per section 2(47) of the CGST Act, 2017, a supply is said to be exempt, when it attracts nil rate of duty or is specifically exempted by a notification or kept out of the purview of tax (i.e. a non-GST supply). But if a good or service is exempted from payment of tax, it cannot be said that it is zero rated. The reason is not hard to find. The inputs and input services which go into the making of the good or provision of service has already suffered tax and only the final product is exempted. Moreover, when the output is exempted, tax laws do not allow availment/utilisation of credit on the inputs and input services used for supply of the exempted output. Thus, in a true sense the entire supply is not zero rated. Though the output suffers no tax, the inputs and input services have suffered tax and since availment of tax credit on input side is not permitted, it becomes a cost for the supplier. The concept of zero rating of supplies aims to correct this anomaly.

What is Zero Rating?

By zero rating it is meant that the entire value chain of the supply is exempt from tax. This means that in case of zero rating, not only is the output exempt from payment of tax, there is no bar on taking/availing credit of taxes paid on the input side for making/providing the output supply. Such an approach would in true sense make the goods or services zero rated.

All supplies need not be zero-rated. As per the GST Law exports are meant to be zero rated the zero rating principle is applied in letter and spirit for exports and supplies to SEZ. The relevant provisions are contained in Section 16(1) of the IGST Act, 2017, which states that “zero rated supply” means any of the following 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.

As already seen, the concept of zero rating of supplies requires the supplies as well as the inputs or input services used in supplying the supplies to be free of GST. This is done by employing the following means:

a) The taxes paid on the supplies which are zero rated are refunded;

b) The credit of inputs/ input services is allowed;

c) Wherever the supplies are exempted, or the supplies are made without payment of tax, the taxes paid on the inputs or input services i.e. the unutilised input tax credit is refunded.

The provisions for the refund of unutilised input credit are contained in the explanation to Section 54 of the CGST Act, 2017, which defines refund as below:

“refund” includes refund of tax paid on zero-rated supplies of goods or services or both or on inputs or input services used in making such zero-rated supplies, or refund of tax on the supply of goods regarded as deemed exports, or refund of unutilised input tax credit as provided under sub-section (3).

Thus, even if a supply is exempted, the credit of input tax may be availed for making zero-rated supplies. A registered person making zero rated supply can claim refund under either of the following options, namely: ––

a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or

b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the CGST Act, 2017 or the rules made thereunder.

As per Section 54(3) of the CGST Act, 2017, any unutilised input tax credit in zero rated supplies can be refunded, wherever such supplies are made by using the option of Bond/ LUT. The difference between zero rated supplies and exempted supplies is tabulated as below:

Exempted Supplies	Zero rated Supplies
“exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11 of CGST Act or under section 6 of the IGST Act, and includes non-taxable supply	“zero-rated supply” shall have the meaning assigned to it in section 16
No tax on the outward exempted supplies, however, the input supplies used for making exempt supplies to be taxed	No tax on the outward supplies; Input supplies also to be tax free
Credit of input tax needs to be reversed, if taken; No ITC on the exempted supplies	Credit of input tax may be availed for making zero-rated supplies, even if such supply is an exempt supply ITC allowed on zero-rated supplies
Value of exempt supplies, for apportionment of ITC, shall include supplies on which the recipient is liable to pay tax on reverse charge basis, transactions in securities, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.	Value of zero rated supplies shall be added along with the taxable supplies for apportionment of ITC
Any person engaged exclusively in the business of supplying goods or services or both that are not liable to tax or wholly exempt from tax under the CGST or IGST Act shall not be liable to registration	A person exclusively making zero rated supplies may have to register as refunds of unutilised ITC or integrated tax paid shall have to be claimed
A registered person supplying exempted goods or services or both shall issue, instead of a tax invoice, a bill of supply	Normal tax invoice shall be issued

[Sadanand Bulbule]

Respected Kasturi Sir

This is cherry on the cake.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Dear Sir,

I am all praise for your unique style of appreciation and appraisal. Your style of expression is really moral boosting for me. Thanks a lot, Sir.

[SHRI GST]

Section 54(8) "Refund of tax paid on export of goods or services or both or on inputs or input services used in making such exports". In the case of exports / zero rated supplies, can a taxpayer claim refund of taxes paid to their suppliers, (which are common inputs / input services attributable to domestic supplies & exports) but are restricted for availment as ITC under Section 17(5) of the CGST Act, 2017 by filing claim under "Others" category, wherein there is no question of debiting the ECrL? Please enlighten.