Indirect Tax Laws and Practice · GST Refunds - Inverted Duty Structure and Zero Rated Supplies

Zero Rated Supplies under IGST Act: Exports and SEZ Supplies

Updated 11 October 2026 · Fact-checked

A zero rated supply is an export of goods or services, or a supply to an SEZ developer or SEZ unit. No tax stays in the price. You either supply under bond or LUT without paying IGST and claim a refund of unutilised input tax credit, or pay IGST and claim a refund of that IGST.

Understand Zero Rated Supplies: Exports and SEZ Supplies

GST is a destination-based tax. Goods and services consumed outside India should leave India free of tax. To do this, the law does more than exempt the supply. It zero rates it. The supplier charges no tax to the buyer, yet keeps the right to input tax credit on what it bought. The tax paid on inputs is then given back as a refund.

Section 16 of the IGST Act defines zero rated supply as two things: (1) export of goods or services or both, and (2) supply of goods or services or both to an SEZ developer or an SEZ unit. Supplies to an SEZ are treated like exports even though the goods may not leave India, because the SEZ is treated as a territory outside the domestic tariff area for these purposes.

A registered person making a zero rated supply has two options. Option 1: supply under a bond or Letter of Undertaking (LUT) without paying IGST, and claim a refund of unutilised input tax credit. Option 2: supply on payment of IGST and claim a refund of the IGST paid. Credit of input tax can be taken for making zero rated supplies even if the supply would otherwise be an exempt supply. The refund is claimed under the refund provisions of the CGST Act. The Government can also restrict these options for specified supplies or classes of taxable persons by notification, so watch for such conditions.

Compare this with an exempt supply. Exempt supply carries no tax too, but the supplier gets no credit for inputs, and credit attributable to exempt supplies has to be reversed. In a zero rated supply the tax on inputs is refunded, so the output is truly tax-free. That is the main difference examiners test.

Credit used for zero rated supplies must itself be valid. Under Section 16 of the CGST Act, you need a tax invoice or debit note, receipt of goods or services, tax actually paid to the Government by the supplier, and a return filed under section 39. Credit cannot be taken after 30 November following the end of the financial year of the invoice, or the filing of the annual return, whichever is earlier.

Key rules to remember

Meaning of zero rated supply: Zero rated supply = export of goods or services or both + supply of goods or services or both to an SEZ developer or SEZ unit; Taken from Section 16 of the IGST Act. Both limbs must be remembered.
Export of services (conditions): Supplier in India + recipient outside India + place of supply outside India + payment in convertible foreign exchange (or Indian rupees where RBI permits) + supplier and recipient are not merely establishments of a distinct person; All conditions must be met. If one fails, it is not an export of services.
Two options for the supplier: (a) Supply under bond/LUT without IGST → refund of unutilised ITC; (b) Supply with IGST paid → refund of IGST paid; Option (a) needs no IGST cash outflow. Option (b) blocks funds until refund.
Refund of unutilised ITC (supply without payment of tax): Refund = Turnover of zero rated supply of goods and services × Net ITC ÷ Adjusted total turnover; Net ITC is credit on inputs and input services, not capital goods. Turnover of zero rated goods is the lower of FOB value and invoice value.
Exempt versus zero rated: Exempt: no tax, no ITC (reversal needed). Zero rated: no tax, ITC available and refundable; Use this as the one-line answer to the difference question.
Time limit for refund claim: Claim within two years from the relevant date; The relevant date depends on the case, such as the date goods leave India or the date of receipt of foreign exchange for services.

How to solve Zero Rated Supplies: Exports and SEZ Supplies questions

Use this order for any question on zero rated supplies, whether it is a theory note, a classification question or a refund working.

1Identify the supply. Is it an export of goods, an export of services, or a supply to an SEZ developer or unit? If none, it is not zero rated.
2For services, test every export condition one by one: supplier location, recipient location, place of supply, payment in convertible foreign exchange, and distinct person status.
3Check the supplier is registered and whether the Government has put any restriction on the option chosen.
4Choose the route: bond or LUT without IGST, or payment of IGST. State the effect on cash flow and on the refund claimed.
5Check the input tax credit is valid under Section 16 of the CGST Act: invoice, receipt, tax paid by supplier, return filed, and the 30 November cut-off.
6If a refund is asked, apply the formula. Compute net ITC, zero rated turnover and adjusted total turnover, then multiply and divide.
7Compare with exempt supply if asked, and finish with a clear conclusion on tax, credit and refund.

Quickest way: Three-question check for zero rated status

When to use it: Use in MCQs and short case questions where you have under two minutes.

Is the recipient abroad or an SEZ developer or unit? If not, stop: not zero rated.
If it is a service, are all export conditions met, especially payment in convertible foreign exchange and place of supply outside India?
Is the question about LUT or about IGST paid? LUT means refund of ITC by formula. IGST paid means refund of the IGST itself.

Common mistakes in Zero Rated Supplies: Exports and SEZ Supplies

Treating zero rated supply and exempt supply as the same
Both carry no tax in the invoice, so they look alike.
Fix: Ask about input credit. Zero rated keeps ITC and gets a refund. Exempt gives no ITC and needs reversal.
Treating supply to an SEZ as a domestic supply
The goods never cross the Indian border, so students assume no export.
Fix: Remember the second limb of the definition. Supply to an SEZ developer or unit is zero rated by law.
Calling a service an export when payment is received in rupees
Students check only the recipient's location.
Fix: Check the payment condition: convertible foreign exchange, or rupees only where RBI permits.
Thinking an exporter under LUT pays IGST and then recovers it
Mixing up the two options.
Fix: Under LUT or bond no IGST is paid. The refund is of unutilised ITC. Under the other option, IGST is paid and refunded.
Including capital goods credit in net ITC for the refund formula
Students use total ITC from the books.
Fix: Use ITC on inputs and input services only. Exclude capital goods.
Ignoring invalid or time-barred credit
Students focus on the export and forget Section 16 of the CGST Act.
Fix: Check invoice, receipt, tax paid, return filed and the 30 November limit before counting ITC.

Worked examples

Example 1

Bharat Textiles Ltd, Tiruppur, exports garments worth ₹20,00,000 to a buyer in Germany. The applicable IGST rate is 12%. It has enough ITC in its electronic credit ledger. Explain the two options available and the tax effect of each.

Show the solution

The supply is an export of goods, so it is a zero rated supply under Section 16 of the IGST Act.
Option 1: Bharat Textiles supplies under bond or LUT without paying IGST. IGST that would have been payable is ₹20,00,000 × 12% = ₹2,40,000, but none is paid.
Under option 1 the unutilised ITC on inputs and input services is claimed as a refund using the formula.
Option 2: it pays IGST of ₹2,40,000, using ITC from the credit ledger. It then claims a refund of the ₹2,40,000 IGST paid.
Under option 2, ITC of ₹2,40,000 is consumed first and returned later as a refund, so funds are blocked until the refund is received.

Answer: Both options are open. Under bond or LUT, no IGST is paid and the unutilised ITC is refunded. If IGST is paid, it is ₹2,40,000, and that amount is refunded. Option 1 avoids blocking credit.

Example 2

Kaveri Components Pvt Ltd exports goods under LUT. In a month: zero rated turnover (FOB value equals invoice value) ₹60,00,000; domestic taxable turnover ₹40,00,000; no other turnover. Net ITC (inputs and input services) ₹9,00,000. Compute the maximum refund of unutilised ITC.

Show the solution

Adjusted total turnover = ₹60,00,000 + ₹40,00,000 = ₹1,00,00,000.
Formula: Refund = Zero rated turnover × Net ITC ÷ Adjusted total turnover.
Refund = 60,00,000 × 9,00,000 ÷ 1,00,00,000.
60,00,000 ÷ 1,00,00,000 = 0.6.
0.6 × ₹9,00,000 = ₹5,40,000.

Answer: The maximum refund of unutilised ITC is ₹5,40,000. The balance ITC of ₹3,60,000 relates to domestic supplies and is used against output tax.

Exam tips

Write the definition of zero rated supply with both limbs, exports and SEZ supplies, before anything else. It earns the first marks.
In a services question, list each export condition and tick it against the facts. Missing one condition changes the answer.
For difference between exempt and zero rated supply, answer on three points: tax, ITC and refund.
In refund workings, show net ITC, zero rated turnover and adjusted total turnover separately, then the final figure. Method marks are awarded.
In MCQs, watch for traps such as payment in rupees, a distinct person recipient, or capital goods credit in the formula.

Practice questions from GST Refunds - Inverted Duty Structure and Zero Rated Supplies

Zero Rated Supplies: Exports and SEZ Supplies in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Zero Rated Supplies: Exports and SEZ Supplies: frequently asked questions

What is zero rated supply under Section 16 of the IGST Act?

It is the export of goods or services or both, and the supply of goods or services or both to an SEZ developer or SEZ unit. The supplier can claim a refund of the tax paid on inputs or of IGST paid on the output.

What is the difference between exempt supply and zero rated supply?

Both have no tax charged to the customer. In an exempt supply, no ITC is allowed and credit attributable to it must be reversed. In a zero rated supply, ITC is allowed and the unutilised credit or the IGST paid is refunded.

Do I have to pay IGST on exports?

No. You can export under a bond or LUT without paying IGST and claim a refund of unutilised ITC. You may also pay IGST and claim a refund of it. The Government can restrict the option for specified supplies by notification.

Is a supply to an SEZ unit an export?

For GST, it is a zero rated supply even though the goods may not leave India. The same two options apply: supply without payment of tax under bond or LUT, or supply with payment of IGST and claim a refund.