Zero-Rated Supply Under GST – Exports And SEZ Supplies

If you have ever exported goods from India or supplied to a unit inside a Special Economic Zone you would have come across the term zero-rated supply. This term sounds straightforward. It is actually not that simple. The way it works and the recent changes in the law are things that every exporter and SEZ supplier needs to understand. If you do not understand it you can get into trouble. You might not get your refunds. You could even face lawsuits. This can also put a lot of pressure on your cash flow.

Zero-Rated vs Exempt – The Distinction That Matters Most

The thing you need to know is what zero-rated actually means. A lot of people get it mixed up with exempted supply. This can be very costly.

When a supply is exempt the supplier does not charge GST on the output. However the supplier also loses the right to claim Input Tax Credit on the inputs used. The tax paid on materials, services and overheads becomes part of the product cost.

Zero-rated is different from exempt. In this case the output is taxed at zero. The supplier can still claim Input Tax Credit on all inputs and input services used in making that supply. This means there is no hidden tax burden on the product. The main purpose of zero-rated supply is to ensure that Indian goods and services can compete in the market without any embedded tax cost.

Section 16 of the IGST Act 2017 covers both categories of zero-rated supply: exports of goods or services out of India and supplies made to SEZ units or developers for operations.

Exports – How It Works in Practice

Let us say a manufacturer in Ludhiana exports sports equipment to a buyer in the UK. To make these goods the manufacturer has paid GST on steel, fabric, packaging and freight services. All of this is sitting as Input Tax Credit in his credit ledger. When he exports the law gives him two options.

The first option is to pay IGST on the export invoice at the rate and then claim a refund of that IGST. This option is relatively simple to process especially since export data is shared electronically between GSTN and ICEGATE making refunds largely automated. However it requires the manufacturer to pay tax upfront, which can strain his working capital.

The second option is to file a Letter of Undertaking at the start of the year and then export without charging any IGST at all. Over time Input Tax Credit accumulates in the credit ledger because inputs attract GST but there is no output tax to offset it against. The exporter then files a refund claim for this accumulated Input Tax Credit through Form RFD-01.

Most exporters prefer the Letter of Undertaking route. It avoids locking up capital in tax payments. Keeps the refund cycle cleaner. The Letter of Undertaking must be filed fresh every year on the GST portal and must be active at the time of each export. If the exporter fails to file the Letter of Undertaking it can lead to refund disputes.

From November 2025 the GST Council started a risk-based refund system where 90% of a valid refund claim is sanctioned upfront without detailed scrutiny. Only high-risk cases are held back for examination. This has improved the refund cycle for exporters.

However there is one restriction that exporters must be aware of: from 1 November 2024 if the exported goods are subject to export duty under the Customs Tariff no refund of Input Tax Credit or IGST is allowed on those goods. This is now codified in Section 16(5) of the IGST Act. Goods like tobacco products and pan masala fall into this category. Exporters in these segments cannot treat GST as a cost – it has to go into product pricing from day one.

SEZ Supplies – What Changed After October 2023

SEZs are treated as territories outside Indias customs territory for GST purposes. A supplier in the Domestic Tariff Area sending goods or providing services to an SEZ unit or developer is effectively making an export. The supply is zero-rated Input Tax Credit is available. The refund mechanism works identically to export refunds.

For example a software firm in Chennai providing development services to an IT company inside a Noida SEZ is a zero-rated supply. The Chennai firm can supply under Letter of Undertaking without IGST. Claim a refund of Input Tax Credit accumulated on its rent, internet, software subscriptions and other business inputs.

However a critical amendment changed the landscape from 1 October 2023. The Finance Act, 2021 had inserted the words "for operations" in Section 16(1)(b) and this was brought into force two years later. From October 2023 zero-rating applies to SEZ supplies when the goods or services are used for the authorised operations of the SEZ entity – operations that are specifically approved under the SEZ Act and linked to its export objectives.

What this means practically is that not every supply to an SEZ unit qualifies automatically. A supplier must confirm that what is being supplied maps to the SEZs approved activity list.. More importantly the invoice or the Letter of Undertaking endorsement must carry a certification from the SEZ unit confirming that the supply is for authorised operations. Without this endorsement refund claims have been rejected by GST officers. This has become a major compliance checkpoint.

For supplies made before October 2023 the broad interpretation applied – courts had consistently held that all supplies to SEZ units were zero-rated. The amendment essentially codified that thinking while tightening it for supplies.

What You Cannot Afford to Miss on Documentation

The refund process is only as strong as the paperwork behind it. For exporters that means GSTR-1 reporting of export supplies in Table 6A timely GSTR-3B filings, valid shipping bills and an active Letter of Undertaking. For SEZ suppliers the endorsement from the SEZ unit is now non-negotiable.

Reconciliation across GSTR-1 GSTR-3B, shipping bills and e-way bills must be clean. A single mismatch can trigger notice delay the refund or in cases lead to rejection.

In Summary

Zero-rated supply is not a concession – it is a design choice in GST to ensure Indian exports remain competitive and SEZ-based economic activity flourishes without hidden tax costs. The mechanism is sound. The compliance requirements around it have grown sharper over the last two years. The October 2023 SEZ amendment, the November 2024 restriction on export duty goods and the November 2025 provisional refund system represent a more refined but more demanding framework. Understanding where you stand within these rules – and maintaining the documentation to support it – is not optional anymore. Zero-rated supply under GST is a concept that you must understand if you are an exporter or an SEZ supplier. You must know how it works and what the recent changes in the law are. You must also ensure that your documentation is in order to avoid any problems, with your refunds.