Indirect Tax Laws and Practice · Zero Rated Supplies and Deemed Exports

Zero Rated Supply under Section 16 of IGST Act

Updated 11 October 2026 · Fact-checked

A zero rated supply under Section 16 of the IGST Act is an export of goods or services, or a supply for authorised operations to an SEZ developer or SEZ unit. Input tax credit stays available, and you export either under bond/LUT without paying IGST, or pay IGST and claim a refund.

Understand Zero Rated Supplies under Section 16 of IGST Act

Normal GST is charged where goods or services are consumed in India. Exports are consumed abroad, so India does not want to export its taxes. The aim is that the exported product carries no GST at all, including the GST paid on inputs.

Section 16(1) defines zero rated supply as two types: (a) export of goods or services or both, and (b) supply of goods or services or both for authorised operations to a Special Economic Zone developer or a Special Economic Zone unit. Note the words "for authorised operations". A supply to an SEZ unit for something outside its authorised operations is not zero rated under this clause.

The key difference from an exempt supply is credit. For an exempt supply, no tax is charged and input tax credit is generally lost. For a zero rated supply, no tax is borne at the end, and Section 16(2) allows credit of input tax to be availed for making zero rated supplies, even if the supply is otherwise exempt. It is subject to Section 17(5) of the CGST Act, so blocked credits stay blocked.

There are two routes. Under Section 16(3), a registered person can supply without payment of integrated tax, under bond or Letter of Undertaking (LUT) and claim a refund of unutilised input tax credit under Section 54 of the CGST Act. Under Section 16(4), the Government may notify classes of persons, or classes of goods or services, who may supply on payment of IGST and claim a refund of the tax paid.

Two safeguards matter. If sale proceeds for goods exports are not realised, the refund must be deposited back with interest under Section 50 of the CGST Act, within thirty days after the FEMA time limit for receipt of foreign exchange expires. And under Section 16(5), no refund of unutilised ITC or of IGST paid is allowed on zero rated supply of goods that is subject to export duty.

Key rules to remember

Meaning of zero rated supply: Zero rated supply = export of goods/services/both + supply for authorised operations to SEZ developer/unit; Section 16(1). Both limbs must be tested for the exact conditions.
Credit entitlement: ITC may be availed for zero rated supplies, even if the supply is otherwise exempt; Section 16(2). Subject to Section 17(5) of the CGST Act (blocked credits).
Option 1: without payment of tax: Supply under bond or LUT, no IGST; refund of unutilised ITC under Section 54 CGST Act; Section 16(3). Subject to prescribed conditions, safeguards and procedure.
Option 2: with payment of tax: Pay IGST on notified class of persons/goods/services; claim refund of IGST paid; Section 16(4). Works only for classes the Government notifies on Council's recommendation.
Non-realisation of proceeds (goods): Refund received + interest under Section 50 CGST Act, deposited within 30 days after FEMA time limit expires; Proviso to Section 16(3). Applies to zero rated supply of goods.
Export duty bar: No refund (ITC or IGST) on zero rated supply of goods subject to export duty; Section 16(5).

How to solve Zero Rated Supplies under Section 16 of IGST Act questions

Use this order for any question asking whether a supply is zero rated, how it is taxed or what refund follows.

1Identify the supply: goods, services or both, and who the recipient is (foreign buyer, SEZ developer/unit or domestic person).
2Test limb (a): is it an export of goods or services? Check the definition of export in Section 2 of the IGST Act for the facts given.
3Test limb (b): if the recipient is an SEZ developer or unit, check that the supply is for authorised operations.
4Conclude whether it is zero rated under Section 16(1). If not, treat it by the normal rules (taxable, exempt or other).
5Choose the route: bond/LUT without IGST under Section 16(3), or payment of IGST and refund under Section 16(4) where the class is notified.
6Check the restrictions: ITC blocked under Section 17(5), goods subject to export duty under Section 16(5), and non-realisation of sale proceeds.
7State the result: tax payable, ITC position and refund available, with a clear conclusion.

Quickest way: Three-question screen

When to use it: Use for MCQs and short case questions where you must decide quickly whether and how a supply is zero rated.

Who is the recipient: outside India, SEZ or domestic? Domestic and non-SEZ means not zero rated.
If SEZ: is it for authorised operations? If not, not zero rated.
If zero rated: is ITC refund under LUT, or IGST paid and refund? Then check for export duty on goods, which blocks refund.

Common mistakes in Zero Rated Supplies under Section 16 of IGST Act

Treating zero rated and exempt supply as the same
In both cases the customer pays no GST.
Fix: Remember the credit rule: zero rated supply keeps ITC and gets a refund; an exempt supply does not give a refund and credit is generally not available.
Treating every supply to an SEZ as zero rated
Students read only 'SEZ' in Section 16(1)(b).
Fix: Add the words 'for authorised operations' to SEZ developer or unit supplies.
Saying zero rated supplies cannot attract IGST at all
Students remember only the LUT route.
Fix: Section 16(4) allows payment of IGST on notified classes, with a refund of the tax paid.
Allowing refund on goods that bear export duty
Section 16(5) is overlooked.
Fix: Check whether the goods are subject to export duty; if yes, no refund of unutilised ITC or IGST paid on that supply of goods.
Allowing ITC even when blocked under Section 17(5)
Section 16(2) is read as a free credit right.
Fix: Section 16(2) is subject to Section 17(5) of the CGST Act. Blocked credits remain blocked.
Ignoring non-realisation of export proceeds
Students stop at the refund.
Fix: For goods, if sale proceeds are not realised within the FEMA time limit, the refund and interest under Section 50 must be deposited within thirty days after that limit.

Worked examples

Example 1

Bharat Textiles Ltd, a registered person in Surat, exports cotton fabric to a buyer in Dubai. It holds a valid LUT and wants to know whether the supply is zero rated, whether it must pay IGST and how it recovers the GST paid on its inputs. Assume the fabric is not subject to export duty.

Show the solution

Recipient is outside India and the supply is an export of goods, so it is zero rated under Section 16(1)(a).
Section 16(2) allows Bharat Textiles to avail ITC on its inputs for making this zero rated supply, subject to Section 17(5) of the CGST Act.
Under Section 16(3), it may supply without payment of integrated tax under bond or LUT, so no IGST is charged to the buyer.
The unutilised ITC is recovered by claiming a refund under Section 54 of the CGST Act, as per prescribed conditions and procedure.
Section 16(5) does not apply because the fabric is not subject to export duty, so refund is not barred.

Answer: The supply is zero rated. Bharat Textiles can export under LUT without paying IGST, keep its ITC and claim a refund of the unutilised ITC. If the sale proceeds are not realised within the FEMA time limit, it must deposit the refund with Section 50 interest within thirty days after that limit.

Example 2

Kaveri Components Pvt Ltd supplies machinery parts to an SEZ unit. Supply A is for the unit's authorised operations. Supply B is a canteen furniture item that the unit buys for use outside its authorised operations. Which supply is zero rated?

Show the solution

Section 16(1)(b) covers supply to an SEZ developer or unit only when it is 'for authorised operations'.
Supply A is machinery parts for authorised operations, so it is zero rated.
Supply B is not for authorised operations, so it does not fit Section 16(1)(b) and is treated by the normal rules of taxation.
For Supply A, Kaveri may use bond/LUT without IGST under Section 16(3) and claim a refund of unutilised ITC, or, if its class is notified, pay IGST and claim a refund under Section 16(4).

Answer: Only Supply A is a zero rated supply. Supply B is outside Section 16(1)(b) because it is not for authorised operations.

Exam tips

Write the exact limbs of Section 16(1): export, and supply for authorised operations to an SEZ developer or unit.
Always contrast zero rated with exempt supply in one line: refund and ITC for the first, no refund for the second.
In case questions, name both routes (LUT and payment of IGST) and tick the Section 16(5) export duty check.
In MCQs, watch for the words 'authorised operations' and 'notified class'; they are the usual traps.
Cite section numbers only as in the Act: 16(2) for credit, 16(3) for LUT, 16(4) for IGST payment, 16(5) for export duty.

Practice questions from Zero Rated Supplies and Deemed Exports

Zero Rated Supplies under Section 16 of IGST Act 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 under Section 16 of IGST Act: frequently asked questions

What is zero rated supply under GST?

Under Section 16 of the IGST Act, it means export of goods or services or both, and supply of goods or services or both for authorised operations to an SEZ developer or unit. Tax is not borne on such supplies, and input tax credit is preserved.

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

An exempt supply has no tax, but input tax credit is generally lost and no refund arises. A zero rated supply allows input tax credit under Section 16(2) and a refund of unutilised credit or of IGST paid, so the supplier does not bear tax.

Can I export without paying IGST?

Yes. Section 16(3) lets a registered person make zero rated supply without payment of integrated tax under bond or Letter of Undertaking and claim a refund of unutilised ITC under Section 54 of the CGST Act, subject to prescribed conditions.

Can a supplier pay IGST on exports and claim refund?

Yes, in the cases notified by the Government under Section 16(4), for specified classes of persons or of goods or services. The refund of tax paid follows Section 54 of the CGST Act.

Is refund allowed on goods that attract export duty?

No. Section 16(5) bars refund of unutilised ITC or of IGST paid on zero rated supply of goods that are subject to export duty.