CHAPTER XXIV

Zero Rating of Supplies in GST

Introduction

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.

Meaning of 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, with- out payment of integrated tax and claim refund of un-
utilised input tax credit; or

b) he may supply goods or services or both, subject to such conditions,
safeguards and procedure as may be pre- scribed, 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:

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.

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.