Zero-Rated Supplies under GST

What are Zero-Rated Supplies Under GST?

A few important provisions of the GST theory have been brought into being in India, and they are useful for business activity. One such condition is the concept of zero-rated supplies. These are quite important for promoting exports and exempting businesses from an additional tax burden. This article deals with zero-rated supplies under GST, the benefits associated with those zero-rated supplies, other supplies, and how they affect businesses.

What Are Zero-Rated Supplies?

Zero-rated supply implies an event or situation where goods or services are chargeable to tax at 0%. These may seem to resemble exempt supplies, but there is one large distinction between the two terms. Exempt supply means goods and services are excluded from the GST ambit and are not subject to taxation at all. Zero-rated supplies, on the other hand, are GST taxable supplies with a 0% tax rate. The main advantage of zero-rating the supply is that the business can claim a refund of the input tax credit in respect of goods or services purchased for making such supplies.

How Are Zero-Rated Supplies Different?

• Exempt Supplies: These are completely outside the GST and hence not subject to any tax or input tax credit refunds. Examples include healthcare and education.
  
• Nil-Rated Supplies: These supplies shall attract GST at a rate of zero, but input tax credit refunds are disallowed. Examples include the sale of fresh fruits and vegetables.
  
• Non-GST Supplies: Included under goods and services not covered under GST are those regulated under other tax regimes, for example, petroleum products and alcohol for human consumption. 

Zero rating is, however, peculiar in providing the advantage of both tax saving and refund of input tax credits. This is beneficial for businesses that export and businesses in special economic zones.

Types of Zero-Rated Supplies

1. Exports of Goods and Services: Exports are the most common example of a zero-rated supply. The further GST law recognized the need to promote exports by exempting exported goods and services from taxation in India, thus helping maintain export prices at competitive levels in the international market, whereby the additional tax burden does not fall into the cost of production.
2. Supplies to Special Economic Zones (SEZs): According to the GST, the goods and services provided are subject to certain SEZ units. Economic zones set up under section 2 of the SEZ Act include special areas of deemed business zoning, which may provide specific tax exemptions for the promotion of economic growth in that area. Such goods and services provided will be treated as zero-rated by the GST.

Benefits of Zero-Rated Supplies

1. Boost to Exports: Removes a lot of the tax burdens and sets the stage for competitive pricing, thereby creating more opportunities for growth in this field.
2. Refund of Input Tax Credit: Businesses can have a refund against GST paid on their inputs, thus reducing operational costs.
3. Encouragement of Investment in SEZs: Increases internal and external business investments to SEZs due to reduced business costs.
4. Simplified Compliance: Exports and SEZ supplies have clear treatment in terms of taxes, thus avoiding a lot of administrative hassles in compliance with GST.

Refund Process for Zero-Rated Supplies

1. Supply Without Payment of Tax (LUT)

• Furnish LUT: Submit Letter of Undertaking (LUT) in Form GST RFD-11.
• File Refund Application: After making the supply, file Form GST RFD-01.
• Provide Details & Upload Documents: This may include turnover details, export invoices, shipping bills, and BRC or FIRC.

2. Supply With Payment of IGST

• Pay IGST: Pay IGST on exported goods/services.
• Automatic Refund: Customs processes a refund based on the shipping bill and GST return details.

3. Refund Calculation: Refund = (Turnover of zero-rated supplies × Net ITC) ÷ Adjusted Total Turnover.
   
4. Filing the Refund Application

• Log in to the GST Portal and select “Application for Refund.”
• Fill in the details and upload documents.
• Submit using DSC or EVC.

5. Processing of Refund

• Review: The application is reviewed by GST officials. 
• Sanction: If it is approved, the refund gets transferred to the bank account.

Challenges with Zero-Rated Supplies

Zero-rated supplies provide several benefits to businesses, but they also present certain challenges:

1. Complex Refund Process: The refund process is quite complicated for businesses that are still new to GST or lack enough taxation expertise.
2. Delay in Refunds: Delayed processing time for the input tax credit refund can adversely hit the cash flow of businesses, making it tough to smooth the operation.
3. Misclassification of Supplies: Misclassification of an item, even when it is not within the ambit, may lead to penalties and/or interest charges.

Conclusion

As a significant category in the GST legislation, zero-rated supplies are essential for entities involved in export trade or those in Special Economic Zones. Under this system, a 0% tax rate coupled with reimbursement of input tax credits lowers the cost of doing business, thereby enhancing the domestic and international marketability of goods and services exported from India. Well-understood zero-rated supplies coupled with effective tax management will bring growth and success for businesses in a competitive environment. Reach out to TaxDunia to avail of the best opportunities provided by the government.