By Sharda Associates | CA Firm, Bhopal
You are an exporter. Or you supply goods to a special economic zone. Your customer does not pay GST on what you supply. But you are still paying GST on the raw materials and inputs you purchase to make those goods.
You want to know can you claim back the GST you paid on your inputs? And what exactly does zero rated supply mean under GST?
This guide explains zero rated supply in GST in the simplest possible language. What it means, who it applies to, how it works in practice, and what benefits it gives you as a supplier.
At Sharda Associates, A CA firm based in Bhopal, Madhya Pradesh, we help exporters and businesses supplying to SEZ units with their complete bank loan documentation needs. Our CA team has helped over 45,500 businesses across India with their financial documentation and we understand the specific cash flow characteristics of zero rated supply businesses.
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What is zero-rated supply in GST?
Zero rated supply is a term used in the GST regime to describe a supply of goods or services that are subject to zero percent GST. This means that the supplier does not charge any GST on the supply to the customer. But — and this is the most important part — the supplier can still claim a full refund of the input tax credit paid on all inputs used to make that supply.
In plain language zero rated supply means you charge zero GST to your customer. But unlike exempt supplies you still get to claim back all the GST you paid on your raw materials, components, packaging, and input services.
Zero rating means the entire value chain of the supply is free from GST. It is done by keeping the GST rate on outward supplies at zero while allowing full ITC recovery on the inward side.
This is what makes zero rated supply so powerful for exporters and SEZ suppliers. Your product leaves India or enters an SEZ with zero GST charged. And every rupee of GST you paid while making that product comes back to you as a refund.
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What supplies are zero-rated under GST?
According to Section 16 of the Integrated Goods and Services Tax Act 2017 zero rated supply covers exactly two categories.
The first category is export of goods or services or both from India to outside India. Any supply that leaves India as an export is treated as zero rated supply regardless of what the product is. Textiles, machinery, software services, food products, IT services if it leaves India as an export the GST on that supply is zero.
The second category is supply of goods or services or both to a Special Economic Zone developer or an SEZ unit for authorised operations. SEZs are specifically designated areas that are treated as outside India’s domestic tariff area for GST purposes. Even if an SEZ is located within India all transactions in and out of the SEZ are treated as zero rated supply.
This means if you supply goods or services to a business operating inside an SEZ for authorised operations even if you are both located in the same city that supply is zero rated under GST.
Zero rated GST in India applies to exports and supplies to Special Economic Zones for authorized operations and not to specific products. The same goods can be normally rated in India but become zero-rated when supplied as exports or to SEZ for authorised operations.
Zero-Rated Supply vs Exempt Supply —The Most Important Difference
This is where most businesses make a costly mistake. Zero rated supply and exempt supply both result in zero GST being charged to the customer. But they are fundamentally different in one critical way.
Zero rated supply allows you to claim full Input Tax Credit on all your inputs and get a refund. Exempt supply does not allow you to claim any ITC at all.
Here is the practical difference explained with a simple example.
You manufacture garments and you export them. Your export is zero rated. You paid GST on the fabric, thread, and packaging you used to make those garments. Because your supply is zero rated you can claim a full refund of all that GST you paid on your inputs. Your effective GST cost is zero throughout the entire value chain.
Now suppose your garments are exempt supplies sold in India. You still charge zero GST to your customer. But you cannot claim back any of the GST you paid on your inputs. That GST becomes a permanent business cost that you must absorb in your pricing.
The table below makes this difference clear.
| Feature | Zero Rated Supply | Exempt Supply |
| GST charged to customer | Zero | Zero |
| Input Tax Credit available | Yes — full ITC claimable | No ITC available |
| Refund available | Yes | No |
| Who it applies to | Exporters and SEZ suppliers | Specific goods and services listed in GST |
| Impact on working capital | Lower — ITC refund received | Higher — GST cost permanently absorbed |
This is why zero rated supply is significantly more beneficial than exempt supply for businesses involved in exports and SEZ operations.
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Two Ways to Make Zero-Rated Supplies and Claim Refund
A supplier of zero-rated supply has two options for how to handle the tax on their supply and claim their refund. You choose based on your ITC balance and your cash flow situation.
Option 1 — Supply Without Paying IGST Using LUT
Under this option you supply goods or services to your export customer or SEZ unit without charging any IGST on the invoice. You then apply for a refund of the accumulated unused ITC sitting in your GST credit ledger.
This is the most popular option among exporters because it does not require upfront cash payment of IGST and avoids working capital blockage.
A practical example makes this clear. A textile manufacturer in Surat exports fabric worth Rs.50 lakh to a buyer in UAE. They have a valid LUT for the financial year. Their export invoice shows zero IGST. But they paid Rs.3.5 lakh in GST on yarn, dyes, and packaging. They claim that Rs.3.5 lakh as an ITC refund on the GST portal. No upfront tax payment and no blocked working capital.
To use this option you must file a Letter of Undertaking—LUT—on the GST portal before making your first zero rated supply of the financial year.
Option 2 — Supply With Payment of IGST and Claim Refund
Under this option you charge IGST on your export invoice or SEZ supply invoice at the applicable rate. You then apply for a refund of the IGST you paid—either from the GST portal for SEZ supplies or through the customs ICEGATE system for goods exports.
This option may suit businesses that do not have sufficient ITC accumulated in their credit ledger. Paying IGST and claiming a refund may be faster than waiting for ITC to accumulate when your input purchases are low relative to your output value.
The supplier can choose either option depending on the availability of ITC and cash flow at the time of making the supply.
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What is LUT — Letter of Undertaking
A Letter of Undertaking is a declaration filed on the GST portal that allows exporters and SEZ suppliers to supply without paying IGST upfront. It is valid for one financial year only. A new LUT must be filed every year before April 1.
If you do not file your LUT before making zero rated supplies you will be required to pay IGST upfront and later claim a refund. This leads to working capital blockage, longer refund cycles, and unnecessary procedural delays.
Filing your LUT on time before April 1 of each financial year is one of the most important compliance steps for any exporter or SEZ supplier. Missing this deadline causes immediate cash flow disruption that could have been completely avoided.
The same LUT covers both export of goods or services and supplies to SEZ units. One filing covers both types of zero rated supply for the entire financial year.
How ITC Works for Zero Rated Supply
You can claim ITC on all the GST you paid on raw materials, components, packaging, and input services used to produce your zero rated supply. This includes both domestic purchases and imports where GST or customs duty was paid.
The only exception is blocked credits under Section 17(5) of the CGST Act. These include personal consumption items like food and beverages for employees, outdoor catering, club memberships, and a few other specifically listed items. These blocked credits cannot be claimed regardless of whether your supply is zero rated or otherwise.
For all other inputs used in making your zero rated supply the ITC is fully available and fully refundable.
Supplies of goods or services from any part of India to a place outside India are considered as exports and hence zero rated. The exporters are eligible for a refund of the unutilised input tax credit of GST on inputs pertaining to such zero rated supplies.
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SEZ Supplies — Key Rules Every Supplier Must Know
Even if your business and the SEZ unit you supply are in the same state the transaction is treated as an interstate supply under GST. This means IGST applies — not CGST and SGST. This surprises many first-time SEZ suppliers who assume same-state transactions attract CGST and SGST.
Supplies from one SEZ unit to another SEZ unit are also treated as zero rated since both entities fall outside the domestic tariff area for GST purposes.
However when goods move from an SEZ back into the domestic Indian market the supply is treated as an interstate supply and IGST applies. For goods this movement is also treated like an import and customs duties may apply. This is an important compliance point for businesses that source goods from SEZ units for use in domestic production.
Common Mistakes in Zero Rated Supply Compliance
Based on our experience helping businesses at Sharda Associates these are the most common mistakes exporters and SEZ suppliers make.
LUT not renewed on time is the most common and most costly mistake. Your LUT expires on March 31 every year. Exporting without a valid LUT means your invoice is technically taxable — a costly compliance gap that triggers IGST liability.
Mismatch between GSTR-1, GSTR-3B, and the shipping bill causes automatic refund blocks. Even small discrepancies in invoice numbers or values across these three documents can trigger an ICEGATE error that stops your refund from being processed automatically.
Using the wrong invoice declaration. Export invoices must clearly state the correct declaration — Supply Meant for Export Under LUT Without Payment of IGST. Missing or incorrectly worded declarations create compliance risk.
Confusing zero rated with exempt supply and not claiming ITC that you are entitled to. This leaves real money on the table every month.
Not filing for ITC refund within 2 years of the relevant date. Missing this deadline results in permanently losing the refund amount — there is no extension available.
How Zero Rated Supply Affects Your Bank Loan Application
If you are an exporter or SEZ supplier applying for a working capital loan or term loan your zero rated supply activity has specific implications for your loan documentation.
Your CMA Report working capital assessment must correctly reflect your operating cycle as an exporter. This includes the ITC refund cycle as a genuine source of working capital inflow, the longer debtor collection period typical for export receivables compared to domestic sales, and export-specific costs like freight, insurance, and bank charges.
Your Project Report market analysis must clearly explain your export market and the demand basis for your projected revenue from zero rated export sales. Banks need to understand who your buyers are, what contracts or purchase orders exist, and how realistic your export revenue projections are.
Your Detailed Project Report for larger export businesses must include sensitivity analysis showing your financial performance under different exchange rate and export demand scenarios.
For businesses with significant export turnover the ITC refund mechanism means your effective GST cash outflow is significantly lower than the headline GST paid on inputs. This correctly reduces your net working capital requirement and must be reflected in your Feasibility Report economic feasibility calculations.
At Sharda Associates our CA team prepares export business loan documentation that correctly accounts for all these zero rated supply specific characteristics — giving the bank’s credit team a complete and accurate picture of your business’s working capital cycle and repayment capacity.
Zero Rated Supply Under GST — Quick Summary
| Particulars | Details |
| Legal Provision | Section 16 of IGST Act 2017 |
| Two Categories | Exports from India and SEZ supplies |
| GST Rate on Supply | Zero percent |
| ITC Available | Yes — full input tax credit claimable |
| Refund Option 1 | LUT route — supply without IGST then claim ITC refund |
| Refund Option 2 | Pay IGST then claim IGST refund |
| LUT Validity | One financial year — must renew before April 1 |
| Type of GST | IGST only — not CGST or SGST |
| Key Difference from Exempt | ITC available in zero rated. No ITC in exempt |
Conclusion
Zero rated supply under GST is one of the most important and beneficial provisions for Indian exporters and SEZ suppliers. It ensures that Indian goods and services reach global markets without carrying any GST burden making Indian products more competitive internationally.
The two key actions every exporter must take are filing a fresh LUT before April 1 every financial year and claiming ITC refunds on time. Missing either of these steps creates unnecessary working capital blockage that directly hurts your business cash flow.
For exporters and SEZ suppliers applying for bank loans, your zero rated supply activity must be correctly reflected in your CMA Report and Project Report documentation. At Sharda Associates, our CA team prepares complete loan documentation for export businesses—accounting for ITC refund cycles, export debtor periods, and all zero-rated supply-specific financial characteristics.
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Frequently Asked Questions
1. What is zero rated supply in GST in simple terms? Zero rated supply means you charge zero GST to your customer but you can still claim a full refund of all the GST you paid on your inputs and raw materials. It covers two situations — exports from India and supplies to SEZ units or developers.
2. What are the two categories of zero rated supply in GST? According to Section 16 of the IGST Act the two categories are export of goods or services or both from India and supply of goods or services or both to a Special Economic Zone developer or SEZ unit for authorised operations.
3. What is the main difference between zero rated and exempt supply? Both have zero GST on the output. But in zero rated supply you can claim full ITC and get a refund. In exempt supply you cannot claim any ITC and that GST cost is permanently absorbed by your business.
4. What is LUT in GST and why is it important? LUT stands for Letter of Undertaking. It is filed on the GST portal and allows you to supply exports or SEZ goods without paying IGST upfront. It is valid for one year and must be renewed before April 1 every year. Without a valid LUT you must pay IGST upfront and wait for a refund.
5. Can I claim ITC refund on zero rated supplies? Yes. Exporters and SEZ suppliers can claim a full refund of the input tax credit accumulated on inputs used for zero rated supplies. You can either claim ITC refund under the LUT route or pay IGST and claim that IGST back as a refund.
6. Is supply to SEZ always treated as zero rated? Yes — supply to SEZ units or developers for authorised operations is always zero rated under GST. Even if you and the SEZ unit are in the same city or state the supply is treated as interstate and IGST applies. However goods moving from SEZ back to the domestic Indian market are taxable.