Zero-Rated Supplies explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Exports are inter-State supplies treated as zero-rated supplies under GST, relieving the entire value chain of tax. The exporter either ships under a bond or LUT and claims a refund of unutilised ITC, or pays IGST and claims it back — with a 0.10% concessional rate for merchant export procurement.
The two definitions that start the chapter
Under section 2(5) of the IGST Act, 2017, export of goods means taking goods out of India to a place outside India. Short, physical, and easy to apply.
Export of services under section 2(6) is harder, because it is cumulative — every one of the conditions must hold:
- The supplier of services is located in India;
- The recipient of services is located outside India;
- The place of supply of service is outside India;
- Payment has been received by the supplier in convertible foreign exchange; and
- Under Explanation 1 to section 8, the supplier and the recipient are not merely establishments of a distinct person.
The handbook draws the obvious conclusion: "the place of supply of service becomes significant to constitute export of services." A service billed to an overseas client but with a place of supply in India is not an export, and therefore is not among the zero-rated supplies — a distinction that turns entirely on the place-of-supply rules, not on where the invoice is addressed.
The last condition catches captive service centres. An Indian branch billing its own foreign head office is supplying between establishments of a distinct person, and the transaction fails the export test however the money moves.
What zero-rated actually means
Exports of goods and services are deemed inter-State supplies and are treated as zero-rated supplies. The handbook's definition is the one to hold on to: "Zero-rated means that the entire value chain of the supply is exempt from tax."
This is achieved by two mechanisms working together:
- Taxes paid on the supplies which are zero-rated are refunded;
- Tax credit of input goods or services is allowed or refunded where already paid.
That second limb is what separates a zero-rated supply from an exempt supply. An exempt supply blocks input credit; zero-rated supplies preserve it. The whole design is captured in the handbook's closing line on the point: "exports shall be relieved of GST levied upon them either at the input stage or at the final product stage."
The exporter's two options
| Option | Mechanism | What is refunded |
|---|---|---|
| Option 1 — without payment | Export under bond or Letter of Undertaking, no tax paid on the export | Unutilised input tax credit |
| Option 2 — with payment | Pay IGST at the time of export, by utilising ITC or in cash | The IGST paid |
Both routes reach the same destination; they differ in working-capital profile and in refund timing. The LUT route never puts the tax out of pocket but leaves the exporter claiming an ITC refund that accumulates. The IGST route pays first and recovers a single, easily-identified sum. For an exporter with a large domestic output liability, Option 2 lets accumulated credit be discharged against IGST on zero-rated supplies rather than sitting idle.
The merchant exporter
A merchant exporter is a trader-exporter and not a manufacturer-exporter. The handbook is careful about the GST consequence: merchant exporters are liable to GST, "as they are located in India and make the supplies outside India", and they must compulsorily obtain GST registration.
Three procurement scenarios follow, and they are the operative content of the chapter:
1. Procurement at 0.10%, export without payment of tax
Where a merchant exporter exports goods without payment of tax but procures goods at 0.10% tax, he can claim a refund of the unutilised ITC at the end of the tax period, in the case of zero-rated goods or goods with an inverted duty structure.
2. Procurement at the regular rate, export with payment of IGST
Where the supplier supplies at a regular rate and exports are done with payment of IGST, the standard tax regime applies to the supplier — ITC is used for payment of output tax and the balance liability paid in cash. The merchant exporter can then claim a refund of both unutilised ITC and the IGST paid against zero-rated supplies.
3. The supplier's own supplier
Where a supplier to a merchant exporter procures goods from another supplier, that second supplier can claim a refund of ITC under the inverted tax structure, where the input tax rate is more than the output tax rate. This is a direct consequence of the 0.10% concession: it creates an inversion one step up the chain, and the relief for it has to be claimed there.
The 0.10% concession and its 90-day condition
Under the scheme, a domestic supplier is allowed to charge 0.10% while supplying goods to a registered merchant exporter, but only if specific conditions are met. The handbook singles out the one that matters most:
"Key conditions include a clause that the merchant exporter must export the goods within 90 days from the date of the supplier's invoice."
The clock runs from the supplier's invoice date, not from the date the merchant exporter receives the goods, raises its own invoice, or books the shipment. A delayed vessel, a rejected inspection or a redrawn letter of credit does not extend it. Where the 90 days lapse, the concession fails and the difference between 0.10% and the applicable rate becomes payable — which is why the concession should be diarised against the supplier's invoice on the day it is received.
The handbook records the rate as 0.10% throughout. In practice the notification structure is 0.05% CGST plus 0.05% SGST on an intra-State procurement, or 0.10% IGST on an inter-State one; the aggregate is the same 0.10%, and the conditions attach identically.
Duty drawback survives
Under GST, duty drawback can still be claimed for:
- Customs duty paid on imported inputs; and
- Central excise paid on certain petroleum products used as fuel for captive power plants.
That is a narrower drawback than the pre-GST regime, and the two heads should be read as the limits of it. Everything else that used to come through drawback now comes through the credit and refund mechanism on zero-rated supplies.
A practitioner's checklist
- Is it an export at all? For services, test all five conditions of section 2(6), especially place of supply and the distinct-person exclusion.
- Is the LUT in place for the current financial year, if Option 1 is being used?
- Which option better suits the client's credit position — and is it applied consistently across shipments?
- For merchant exports, is the 0.10% procurement matched to a shipping bill within 90 days of the supplier's invoice?
- Is the supplier's own inversion being claimed one step up the chain?
- Is convertible foreign exchange actually received, and evidenced, for service exports?
Common mistakes
- Treating an overseas billing address as an export of services without testing the place of supply.
- Branch-to-head-office billing claimed as export, when Explanation 1 to section 8 excludes it.
- Letting the LUT lapse at the start of a financial year and shipping without payment anyway.
- Counting the 90 days from receipt of goods rather than from the supplier's invoice date.
- Confusing exempt with zero-rated and reversing input credit that need not have been reversed.
- Forgetting the inverted-duty refund available to the supplier who sold at 0.10%.