Zero rating supply is defined in Chapter VII, Section 16 of the IGST Act, 2017 as export of goods or services or supply of goods or services to a special economic zone developer or a special economic zone unit. Export of goods and services are defined section 2(5) and section 2(6) of the IGST Act, 2017 respectively. Section 2(19) and 2(20) of the IGST Act, refers to Special Economic Zones Act, 2005 for meaning of “Special Economic Zone” and “Special Economic Zone developer”. The term export is also defined in section 2(m) of the SEZ Act, 2005 including supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer; or supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone.
Export of Goods and Services
Export of goods is defined in section 2(5) of the IGST Act as taking goods out of India to a place outside India. For an export of goods to take place, it is essential that the goods have to moved to place which is physically outside India as held in In re Dolphine Die Cast (P) Ltd (GST AAR Karnataka)[1]. In this case the tribunal noted that though the applicant raised the tax invoice for this die immediately after the manufacture in the name of overseas customer in foreign currency for receipt of payment, the die not physically moved out of India to the place outside India. Hence manufacture and supply of die to the foreign customer when the die is not physically moved outside India, does not amounts to export as per section 2(5) of the IGST Act, 2017.
Export of services is defined in Section 2(6) of the IGST Act as supply of services when the supplier is located in India, the recipient is located outside India, the place of supply of service is outside India, the payment of such service has been received by the supplier of service in convertible foreign exchange or in Indian Rupees wherever permitted by RBI[2] and the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8. It essentially means that where a person has an establishment in Indian and other establishment outside India, then the services supplied to the establishment outside India are not export of service. In Re New Global Specialist Engineering Services Private Limited[3], the tribunal held that the applicant and the client are not the establishments of the same person, even though they are group companies since the shareholding pattern of both the companies prove that the KMP and Board of Directors are different and they do not control each other. In this case administrative and support services provided to a foreign client where payment is received in convertible foreign exchange was held to be export of service and zero rated supply.
Input Tax Credit on Exempt Supply
Section 16(2) provides that credit of input tax may be availed for making the above mentioned supply of goods and services even of such supply is exempt supply. This provision however is subject to section 17(5) which provides for those supply of goods and services where input credit cannot be availed.
Refund of Integrated Tax Paid and Unutilised Input Credit
The input credit can be claimed as refund by two means which are listed in subsection 16(3):
Option (a) The person may supply goods or services without payment of integrated tax. However a person availing this option has to supply such goods or services under bond or letter of undertaking, subject to such conditions, safeguards and procedure as may be prescribed
Option (b) The person may supply goods or services on payment of integrated tax, subject to such conditions as may be prescribed and then claim refund of such taxes paid.
It is to be noted that the ITC is available even in case of exempt supply under Bond/LUT without paying IGST.
Procedure for Claiming Refund
Rule 96 of GST Rules, 2017 provides for the procedure for refund of Integrated Tax paid on goods exported out of India. In this case the shipping bill filed by the exporter shall be deemed to be an application of refund. The application shall be deemed to be filed when the person in charge of conveyance carrying the export goods duly files export manifest or export report. This application has to be furnished with a valid return in Form GSTR 3B. The term valid return in section 2(117) means return furnished under section 39(1) on which self-assessment has been paid in full.
Rule 96A of GST Rules, 2017 provides for procedure for refund of unutilised Input Tax Credit. The person availing the option to supply goods or service fo export without payment of Integrated tax by furnishing a bond or a letter of undertaking in FORM GST RFD-11 which binds him to pay tax along with interest as specified in section 50(1), if the goods are not exported out of India within the period specified in the rule.
The facility of LUT is available to all registered persons who intend to supply goods or services for export without payment of integrated tax except those who have been prosecuted for any offence under the Central Goods and Services Tax Act, 2017 or the Integrated Goods and Services Tax Act, 2017 or any of the existing laws in force in a case where the amount of tax evaded exceeds two hundred and fifty lakh rupees.[4]
In a clarification issued on exports related refund issues via Circular No. 37/11/2018-GST that the substantive benefits of zero rating may not be denied where it has been established that exports in terms of the relevant provisions have been made. The delay in furnishing of LUT in such cases may be condoned and the facility for export under LUT may be allowed on ex post facto basis taking into account the facts and circumstances of each case.
GST Compensation Cess
In a clarification issued regarding applicability of section 16 of the IGST Act, 2017 for the purpose of compensation cess on imports, it was clarified that though such supply where the supplier is located in India and place of supply is outside India, will be treated as inter-state supply, however the basic principle is that the taxes should not be imported. Hence
a) Exporter will be eligible for refund of Compensation Cess paid on goods exported by him
or
b) No Compensation Cess will be charged on goods exported by an exporter under bond and he will be eligible for refund of input tax credit of Compensation Cess relating to goods exported.
Difference between Exempt and Zero rated
Section 2(17) of the CGST Act, 2017 defines “exempt supply” as supply of any goods or services or both which attracts nil rate of tax. The difference lies in the fact that while in zero rate supplies proviso 2 of section 16 allows for availing input credit even when the supply may be an exempt supply but in the case of nil rated or exempt supply the Act does not allow for availment input credit when the output is exempted.
Goods sent / taken out of India for exhibition or on consignment basis for export promotion Zero not zero rated Supply
A clarification was issued vide CBEC – 20/06/03/2019-GST that Goods sent / taken out of India for exhibition or on consignment basis for export promotion is not zero rated Supply as such activity does not constitute “supply” as per the twin tests laid in section section 7 of the CGST Act, Section 7 of the CGST Act lays down twin tests for an activity or transaction to be qualified as supply. First it should be for a consideration by a person; and (ii) it should be in the course or furtherance of business. In the present scenario since the Goods sent / taken out of India for exhibition or on consignment basis for export promotion do not constitute supply and hence the same cannot be considered “Zero rated Supply”. It was further clarifies that the supply supply would be deemed to have taken place, on the expiry of six months from the date of removal, if the specified goods are neither sold abroad nor brought back within the said period.
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