A zero-rated supply under GST is a supply where the output attracts no tax and the supplier can still recover every rupee of GST paid on inputs. Section 16 of the Integrated Goods and Services Tax (IGST) Act reserves this treatment for two categories only: exports of goods or services, and supplies to Special Economic Zone (SEZ) developers or units for their authorized operations. That input recovery is the whole point. It is what makes zero-rating financially different from a plain exemption, and it is why exporters treat the classification as a cash-flow issue, not just a tax label.
Zero-Rated Is Not the Same as Exempt
Both zero-rated and exempt supplies result in no GST being charged on the final transaction. That is where the similarity ends.
An exempt supply attracts no output tax, and no input tax credit can be claimed on the purchases that went into making it. The GST paid on raw materials, logistics, and services becomes part of the cost. A zero-rated supply also carries no output tax, but the supplier keeps the full right to claim back every rupee of GST paid on inputs.1Central Board of Indirect Taxes and Customs. Zero Rating of Supplies Section 16(2) of the IGST Act states this directly: input tax credit may be claimed for making zero-rated supplies even though such supply may otherwise be an exempt supply.2Central Board of Indirect Taxes and Customs. Integrated Goods and Services Tax Act 2017 – Section 16 – Zero Rated Supply
A worked example makes the difference concrete. An exporter buys steel at 18% GST and ships finished goods abroad. It pays zero GST on the export and recovers the 18% paid on the steel. A business making an exempt domestic supply, such as unprocessed agricultural produce, pays GST on its inputs and absorbs that cost into its pricing. Same output tax on paper. Very different balance sheets.
What Actually Qualifies
Section 16(1) of the IGST Act limits zero-rating to two categories:2Central Board of Indirect Taxes and Customs. Integrated Goods and Services Tax Act 2017 – Section 16 – Zero Rated Supply
- Export of goods or services. For goods, the items must physically leave India. For services, five separate conditions must be met.
- Supplies to SEZ developers or units for authorized operations. An SEZ is treated as outside the domestic customs area, so supplies into it get the same treatment as an international export.
Nothing else qualifies. Domestic sales between regular businesses, supplies to government entities, and sales within India that happen to involve a foreign counterparty do not become zero-rated just because a foreign party is somewhere in the picture.
Five Conditions for Export of Services
Goods are easy to prove exported. Customs records the departure and the shipping bill documents it. Services are harder. Section 2(6) of the IGST Act requires all five of the following to be satisfied at the same time for a service to count as an export:3Central Board of Indirect Taxes and Customs. Integrated Goods and Services Tax Act 2017 – Section 2
- The supplier is located in India.
- The recipient is located outside India.
- The place of supply, determined under Sections 12 and 13 of the IGST Act, is outside India. This is where service providers most often trip up. Services tied to Indian immovable property, for instance, have their place of supply in India regardless of who the client is.
- Payment is received in convertible foreign exchange, or in Indian rupees where the Reserve Bank of India has specifically permitted it.
- The supplier and recipient are not merely establishments of the same person. An Indian subsidiary billing a foreign parent is fine. An Indian branch billing its own head office abroad is not.
Miss one condition and the service is treated as a domestic taxable supply carrying full GST. The place-of-supply determination and the same-entity test are the two most common failure points, especially for multinationals with Indian branches.
Intermediary Services After March 2026
A significant amendment took effect on 30 March 2026. The Finance Act 2026 deleted Section 13(8)(b) of the IGST Act, which had fixed the place of supply for intermediary services at the location of the supplier. Under the old rule, an Indian intermediary serving a foreign client had its place of supply stuck in India and could not qualify for zero-rating. With that clause removed, intermediary services now fall under the default in Section 13(2), which places supply at the location of the recipient. Indian intermediaries serving foreign clients can now satisfy the place-of-supply condition and, if the other four conditions are met, qualify as zero-rated exports.
Two Ways to Recover the Tax
Qualifying as zero-rated is only the first half. The business then has to actually recover the input tax. Section 16(3) of the IGST Act offers two routes.2Central Board of Indirect Taxes and Customs. Integrated Goods and Services Tax Act 2017 – Section 16 – Zero Rated Supply
Supply Under LUT Without Paying IGST
The business files a Letter of Undertaking (LUT) on the GST portal before making the export or SEZ supply, then ships the goods or provides the services without charging or paying integrated tax. Accumulated input tax credit is later refunded through Form GST RFD-01.4Goods and Services Tax. Furnishing of Letter of Undertaking for Export of Goods or Services
The LUT is electronic, valid for one financial year, and must be renewed before 31 March. Most exporters are eligible. A business that has been prosecuted for tax evasion of ₹2.5 crore or more under the CGST Act, IGST Act, or any predecessor law must furnish a bond backed by a bank guarantee instead.4Goods and Services Tax. Furnishing of Letter of Undertaking for Export of Goods or Services
This route preserves cash because no tax leaves the business at export. The tradeoff is that the ITC refund runs through a manual application and officer review.
Pay IGST and Claim a Refund
The business pays integrated tax on the export at the applicable rate and then claims that IGST back. For goods, Rule 96 of the CGST Rules makes this largely automatic. The shipping bill itself is treated as the refund application. Once the exporter files GSTR-1 with export invoice details and GSTR-3B, the customs system cross-checks the data and credits the refund directly to the exporter’s bank account.5Central Board of Indirect Taxes and Customs. CGST Rules – Rule 96 – Refund of Integrated Tax Paid on Goods or Services Exported Out of India
Any mismatch between the shipping bill and GSTR-1 details will hold up the refund until the exporter fixes it. Invoice numbers, taxable values, and IGST amounts have to align across both platforms.
Following a 2024 amendment, Section 16(4) now restricts the IGST-payment option to classes of persons, goods, or services that the government specifically notifies. The LUT route is the default. Paying IGST upfront is available only where a notification permits it.2Central Board of Indirect Taxes and Customs. Integrated Goods and Services Tax Act 2017 – Section 16 – Zero Rated Supply
How the Refund Application Runs
For the LUT route, the refund of accumulated ITC begins with Form GST RFD-01 on the GST portal. The claimed amount is automatically debited from the electronic credit ledger when the application is filed, which prevents the same credit being used again against domestic liabilities. The portal issues an Acknowledgement Receipt Number (ARN) for tracking.6Goods and Services Tax. Application for Refund
A refund officer reviews the application within 15 days. A clean application moves to final processing on acknowledgment in Form GST RFD-02. If the officer finds errors or missing documents, a deficiency memo issues in Form GST RFD-03, the debited amount is re-credited to the electronic ledger, and the applicant must file a fresh application after fixing the issues.7Goods and Services Tax. File Reply FAQ
The 90% Provisional Refund
Section 54(6) of the CGST Act requires the officer to release a provisional refund of 90% of the claimed amount within seven days of the acknowledgment date, using Form GST RFD-04.8Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Act 2017 – Section 54 The remaining 10% is paid after full scrutiny and the final order. The provision exists specifically to keep exporter cash flow alive while verification runs its course.
The 60-Day Clock
Section 54(7) gives the officer 60 days from the date of receipt of a complete application to issue the final refund order.8Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Act 2017 – Section 54 The phrase “complete in all respects” matters. The clock starts when the application passes the RFD-02 acknowledgment stage, not from initial filing, and it resets with the fresh application if a deficiency memo intervenes.
Interest When the Refund Is Late
If the government misses the 60-day window, interest is due. Section 56 of the CGST Act sets the rate at up to 6% per annum, running from the 61st day after receipt of the application until the refund actually hits the applicant’s bank account.9Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Act 2017 – Section 56
A higher rate of up to 9% per annum applies when the refund arises from a final order passed by an adjudicating authority, appellate authority, tribunal, or court.9Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Act 2017 – Section 56 The interest is a statutory right. It accrues whether or not the applicant asks for it.
Deadlines That Can Cost You the Zero Rating
Under Rule 96A of the CGST Rules, goods exported under LUT must physically leave India within three months of the invoice date. If they do not, the exporter must pay the applicable IGST plus interest within 15 days of the three-month window closing.10Central Board of Indirect Taxes and Customs. Circular No. 37/11/2018-GST
For services, payment must be received in convertible foreign exchange within one year of the invoice date. Miss the window and the LUT protection falls away for that transaction. The exporter has to pay IGST and pursue a refund afterward.
CBIC Circular No. 37/11/2018 does soften the goods rule. If the goods have genuinely been exported, just late, the jurisdictional Commissioner can grant extensions case by case, and officers are instructed not to insist on IGST payment where physical export has occurred.10Central Board of Indirect Taxes and Customs. Circular No. 37/11/2018-GST Relying on that discretion is uncomfortable, though. Building buffer into export timelines is simpler than applying for extensions.
The LUT renewal deadline is the other one to mark. If the LUT expires on 31 March and a fresh LUT has not been filed before the next export, that supply is treated as made without a valid LUT. The consequence is IGST liability plus 18% annual interest from the invoice date.
Goods Subject to Export Duty
Section 16(5) of the IGST Act blocks refunds of both accumulated ITC and IGST paid on zero-rated goods that are subject to export duty. If the government imposes an export duty on a commodity, the exporter still ships at zero GST but cannot recover the input tax credit or the IGST paid.2Central Board of Indirect Taxes and Customs. Integrated Goods and Services Tax Act 2017 – Section 16 – Zero Rated Supply The restriction affects relatively few exporters, but anyone shipping commodities like iron ore or certain leather products should confirm the export duty position before planning a refund claim.
Deemed Exports Are a Separate Category
Some domestic supplies receive refund treatment that resembles zero-rating but sits in a different bucket under Section 147 of the CGST Act, called deemed exports.11Central Board of Indirect Taxes and Customs. Central Goods and Services Tax Act 2017 – Section 147 Goods are manufactured in India and do not physically leave the country, but the government has notified specific categories for refund. Notified deemed exports include supplies against Advance Authorisation, supplies against Export Promotion Capital Goods (EPCG) Authorisation, supplies to Export Oriented Units (EOUs), and certain gold supplies by specified banks against Advance Authorisation.12GST Council. Deemed Exports in GST
The differences from zero-rated supplies matter:
- Tax is charged upfront on deemed exports. There is no LUT option. Full GST is paid at the point of sale, and the refund follows.
- Under Rule 89(1) of the CGST Rules, either the supplier or the recipient may file the refund application, but not both for the same transaction.12GST Council. Deemed Exports in GST
- Payment can be received in Indian rupees. There is no convertible foreign exchange requirement.
Deemed exports are most relevant to manufacturers supplying EOUs and to businesses operating under advance authorisation schemes. If a domestic buyer holds one of the notified authorisations, the GST charged on the sale can be recovered, but only through the deemed-export refund process, not the zero-rating framework.