Zero Rated Supplies under GST
INTRODUCTION 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/utilization 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: ––
- export of goods or services or both; or
- 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:
The taxes paid on the supplies which are zero rated are refunded;
The credit of inputs/ input services is allowed;
cWherever 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 unutilized input tax credit is refunded.
GST REFUND FOR ZERO RATED SUPPLY
The provisions for the refund of unutilized 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 unutilized 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 as provided under sub-section (2).
A registered person making zero rated supply can claim refund under either of the following options, namely:
- 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 unutilized input tax credit; or
- 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.
REFUND PROCEDURES FOR EXPORT OF GOODS
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. The shipping bill filed by the exporter is a refund claim in itself. The law specifies that shipping bill is to be considered as a refund claim on satisfying following two conditions:
- A person carrying the export goods should file an export manifest; and
- Applicant should have filed the returns GSTR-3 or GSTR-3B appropriately.
Once the above two documents are filed appropriately, the refund is processed by the department.
REFUND PROCEDURES FOR EXPORT OF SERVICES AND SUPPLIES TO SEZ
The option to pay IGST and claim a refund is always available. In this case, the refund claim has to be filed in Form GST RFD-01. For exporters of services, the following are also required to be filed along with the refund claim:
- A Statement containing Number and Date of Invoices; and
- Bank Realization Certificates / Foreign Inward Remittance Certificates
The supplier of goods or services to SEZ are required to file the following along with the refund claim:
- A Statement containing Number and Date of Invoices; and
- Proof of Receipt of goods or services which is authorized by the specified officer of SEZ
- Details of payment made
- The declaration that the SEZ or developer of SEZ has not claimed the input tax credit of the taxes paid by the supplier
EXPORT AND REALIZATION OF CONSIDERATION
Actual receipt of consideration (in any form whether in INR, Convertible foreign currency or any other currency) is not necessary for treating a supply of goods as export of goods. This equally applies on supply of goods to SEZ Unit/developer.
However actual receipt of consideration and that too in convertible foreign exchange is necessary to treat supply of service as export of service and thereby necessary for refund in case of export of services. This equally applies on supply of services to SEZ Unit/developer.
As per Section 54(3) of the CGST Act, 2017, any unutilized 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 section16 of CGST Act. |
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 5of 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 unutilized 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 |
PROVISIONAL REFUND
As per section 54(6) of the CGST Act, 2017, ninety per cent of the total amount of refund claimed, on account of zero-rated supply of goods or services or both made by registered persons, may be sanctioned on a provisional basis. The remaining ten percent can be refunded later after due verification of documents furnished by the applicant.
There is a condition attached to provisional refunds. The provisional refund is not granted if the applicant has been prosecuted for any offense under the GST law or earlier law within past five (5) years. The amount of tax evaded in such prosecution shall be more than Rupees Two Hundred and Fifty Lakhs (Rs. 2.5 Crores).
NON-APPLICABILITY OF PRINCIPLE OF UNJUST ENRICHMENT
The principle of unjust enrichment shall not be applicable in case of refund of taxes paid wherever such refund is on accounts of zero-rated supplies. As per section 54 (8) of the CGST Act, 2017, the refundable amount, if such amount is relatable to 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, shall instead of being credited to the Fund, be paid to the applicant.
CASE LAWS
1. Vserv Global (P.) Ltd. (AAR-Maharashtra) [2018]
Back office support services provided by applicant, an Indian company, to overseas clients do not qualify as ‘export of services’, as place of supply of service is in India and, accordingly, not a ‘zero rated supply’ as per section 16(1). 2. Vserv Global (P.) Ltd. (AAAR-Maharashtra) [2019]
Where appellant, an Indian company, is providing back office support services to overseas companies (clients) and client identifies potential buyers and the appellant provides back office support after finalization of purchase/sale order, the appellant is acting as an intermediary and place of supply is location of the appellant which is in India and, thus, services provided by the appellant are not zero rated supply.
3. Garuda Power (P.) Ltd. (AAR- West Bengal) [2018]
Supplies made to SEZ units are zero rated supplies.
4. Merit Hospitality Services (P.) Ltd. (AAAR-Maharashtra) [2018]
Service of supplying food by applicant to employees of unit located in Special Economic Zone is not covered under zero rated supplies in terms of section16(1)(b).
5. Sapthagiri Hospitality (P.) Ltd. (AAAR – Gujarat) [2019]
Where the appellant is providing hospitality service from its hotel in non-processing zone of Dahez SEZ (Special Economic Zone), supplies made by the appellant, a SEZ Co-developer, from its hotel located in non-processing zone of Dahez Special Economic Zone to clients located in Special Economic Zone for authorized operations will be treated as zero rated supplies under provisions of section 16(1).
6. Coffee Day Global Ltd. (AAR-Karnataka) [2018]
Supply of non-alcoholic beverages/ingredients of such beverages to SEZ units using coffee vending machines, not having been certified as an authorized operation by proper officer of SEZ, does not qualify as ‘zero-rated supply’.
7. Aphro Ecommerce Solutions (P.) Ltd. v. Union of India (Delhi) [2018]
Notice issued to Govt. to decide whether there is a necessity to furnish a bond with a bank guarantee in case of ‘zero rated supply’ [Delhi Goods and Services Tax Act, 2017].
CONCLUSION
Zero rating of exports appears to be in line with the avowed policy of the Government that at the time of exports from India taxes should not be exported. Thus, by way of zero rating, the suppliers are recouped with the GST paid by them on the inputs and thereby the cost of the exported supplies does not get affected despite the fact that the exports are not subject to GST.
To conclude, it is undeniable that zero rating has a significant influence on pricing decisions of suppliers and has a direct bearing on the prices consumers pay. Furthermore, it is notable that the consumer cannot know the situation of the supplier because in neither case (i.e. exemption or zero rating) GST is not charged upon the supply received by the consumer.
Nonetheless, even though the consumer cannot directly perceive the effects of zero rating upon the supplier, the indirect impact of zero rating is significant on the consumer as it is very likely that in case of an exemption (unlike zero rating) the impact of unutilized input tax may be built in the price by the supplier.
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