Zero-Rated Supply Under GST —
Exports, SEZ & Full ITC Refund
Zero-rated supply means exports and SEZ supplies are taxed at 0% and the supplier still gets every rupee of input tax credit back — the most tax-efficient category in GST. Here is how it works, and how it differs from exempt supply.
A zero-rated supply under Section 16 of the IGST Act, 2017 is a taxable supply charged at 0% where the supplier can still claim a full refund of input tax credit (ITC). Only two things qualify: export of goods/services and supply to an SEZ unit or developer. This is very different from an exempt supply, where the rate is also 0% but ITC is blocked and there is nothing to refund.
Zero-Rated vs Exempt vs Nil-Rated
The word "0%" appears in three different GST categories, but the ITC treatment is completely different. Getting this wrong is the most common export-GST mistake — see our input tax credit rules.
| Feature | Zero-Rated (Sec 16 IGST) | Exempt (Sec 2(47) CGST) | Nil-Rated |
|---|---|---|---|
| GST on the supply | 0% | 0% | 0% |
| ITC on inputs | Full + refundable | Blocked · 17(2) | Blocked · 17(2) |
| Refund available? | Yes · RFD-01 / auto | No | No |
| Typical examples | Export of IT services, goods shipped abroad, SEZ supply | Healthcare, education, residential rent to individuals | Fresh fruit, grains, eggs |
| Reported in GSTR-1 as | Zero-rated | Exempt | Nil-rated |
Zero-rating is the only 0% category that lets the supplier recover input GST. The GST 2.0 two-slab reform (eff 22 Sep 2025) did not change the zero-rating mechanism.
A company exporting goods is zero-rated and gets all its ITC back. A company making exempt supplies (e.g. healthcare) cannot recover ITC on its equipment or consumables at all. Before assuming "0% GST = no tax cost", check whether the supply is zero-rated or exempt — the cash impact is enormous.
What Counts as a Zero-Rated Supply?
Section 16(1) of the IGST Act lists exactly two categories. Nothing else is zero-rated.
- (a) Export of goods or services — goods physically exported out of India under a shipping bill, or services meeting all five export-of-service conditions (supplier in India, recipient outside India, place of supply outside India, payment in convertible foreign exchange, and the two parties not merely establishments of the same person).
- (b) Supply to an SEZ unit or SEZ developer for authorised operations — treated as inter-state supply, so IGST applies but the supply is zero-rated and ITC is refundable.
| Supply type | Legal basis | Key document | Refund route | IGST auto? |
|---|---|---|---|---|
| Export of goods | Sec 2(5) IGST Act | Shipping bill + tax invoice | Automatic via ICEGATE (RFD-01 if mismatch) | Yes |
| Export of services | Sec 2(6) IGST Act | Tax invoice + FIRC/BRC + LUT ARN | Manual RFD-01 | No |
| Supply to SEZ unit/developer | Sec 16(1)(b) IGST Act | Endorsed invoice/challan + SEZ endorsement + LUT | Manual RFD-01 | No |
A supply to an SEZ must be for authorised operations and endorsed by the Specified Officer of the SEZ. See our guides on the Letter of Undertaking and GST on export of services.
Exports and SEZ supplies are inter-state supplies, and a composition dealer cannot make inter-state outward supplies of goods and cannot claim ITC. To export, first withdraw from composition (Form CMP-04) and move to regular registration.
Two Ways to Make a Zero-Rated Supply
Under Section 16(3) of the IGST Act, a registered exporter chooses between two options for the financial year:
Option A — LUT / bond (no IGST)
- Export without paying IGST on the invoice
- File a Letter of Undertaking (Form RFD-11) once a year
- Claim refund of accumulated ITC via RFD-01
- No cash locked up in tax — the preferred route
- Best when you have unutilised input credit
Option B — pay IGST, claim it back
- Pay IGST on the export invoice at the applicable rate
- Claim a cash refund of the IGST paid
- Automatic for goods (ICEGATE); RFD-01 for services/SEZ
- Useful when LUT was not filed in time
- Ties up working capital until refund lands
Not sure whether to file an LUT or pay IGST and claim it back?
Talk to a GST Expert →Claiming Your Refund (RFD-01)
For export of goods with IGST paid, the refund is largely automatic: the shipping bill itself is treated as the refund application, and the IGST is credited once GSTR-1 and GSTR-3B data match the shipping bill on ICEGATE. For export of services, SEZ supplies, and all LUT-route ITC refunds, you file Form RFD-01 on the portal.
| Parameter | Rule / detail |
|---|---|
| Form to file | RFD-01 on the GST portal (RFD-11 for the LUT itself) |
| Relevant date — goods | Date of the "Let Export Order" on the shipping bill |
| Relevant date — services | Date of receipt of payment in foreign exchange (FIRC date) |
| Relevant date — SEZ | Date of endorsement by the SEZ Specified Officer |
| Time limit | 2 years from the relevant date |
| Provisional refund | 90% may be sanctioned provisionally (Form RFD-04) |
| Final order | Within 60 days of a complete RFD-01 application |
| ITC refund formula (LUT) | Refund = (Zero-rated turnover ÷ Adjusted total turnover) × Net ITC |
The Finance Act (No. 4), 2026 removed the ₹1,000 minimum-refund threshold for IGST paid on export of goods. Interest under Section 56 runs if the refund is delayed beyond 60 days.
How the ITC Refund Adds Up
LUT Exporter — refund of ITC
Pay-IGST Exporter — refund of tax
Auto IGST refunds on goods get stuck (SB005-type errors) when the invoice number, GSTIN, or IGST amount on the shipping bill does not match GSTR-1 — often because the shipping bill was filed before GSTR-1. Reconcile before filing, or the refund needs manual intervention on ICEGATE.
Export refund stuck in a mismatch? We reconcile shipping bills with your GST returns.
Get Refund Help →Zero-Rated Supply Compliance Checklist
- Regular GST registration (not composition)
- LUT (Form RFD-11) filed for the year
- Correct export-of-service conditions met
- Convertible foreign exchange (FIRC/BRC) for services
- SEZ endorsement for authorised operations
- Shipping bill matches GSTR-1 (goods)
- GSTR-1 with zero-rated invoices
- GSTR-3B with correct zero-rated values
- RFD-01 within 2 years of relevant date
- Net ITC / refund formula computed correctly
Zero-rating is a cash-flow tool, not just a tax label. Choosing the LUT route keeps working capital free, but only if your GSTR-1, GSTR-3B and RFD-01 are perfectly reconciled every month. A single mismatch can freeze a large refund for weeks.
Frequently Asked Questions
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