GST (GOODS AND SERVICES TAX) Zero Rating of supplies
GST (GOODS AND SERVICES TAX)
Zero Rating of supplies
Introduction
What is the need for Zero Rating?
As per section 2(47) of the CGST Act, 2017, a supply is said to
be exempt, when it attracts nil rate of duty or is specifically
exempted by a notification or kept out of the purview of tax
(i.e. a non-GST supply). But if a good or service is exempted
from payment of tax, it cannot be said that it is zero rated. The
reason is not hard to find. The inputs and input services which go
into the making of the good or provision of service has already
suffered tax and only the final product is exempted. Moreover,
when the output is exempted, tax laws do not allow availment/
utilisation of credit on the inputs and input services used for
supply of the exempted output. Thus, in a true sense the entire
supply is not zero rated. Though the output suffers no tax, the
inputs and input services have suffered tax and since availment
of tax on input side is not permitted, that becomes a cost for the
supplier. The concept of zero rating of supplies aims to correct
this anomaly
What is Zero Rating?
By zero rating it is meant that the entire value chain of the supply
is exempt from tax. This means that in case of zero rating, not
only is the output exempt from payment of tax, there is no
bar on taking/availing credit of taxes paid on the input side for
making/providing the output supply. Such an approach would in
true sense make the goods or services zero rated.
All supplies need not be zero-rated. As per the GST Law exports
are meant to be zero rated the zero rating principle is applied
in letter and spirit for exports and supplies to SEZ. The relevant
provisions are contained in Section 16(1) of the IGST Act, 2017,
which states that “zero rated supply” means any of the following
supplies of goods or services or both, namely: ––
(a) export of goods or services or both; or
(b) supply of goods or services or both to a Special Economic
Zone developer or a Special Economic Zone unit.
As already seen, the concept of zero rating of supplies requires
the supplies as well as the inputs or input services used in
supplying the supplies to be free of GST. This is done by
employing the following means:
a) The taxes paid on the supplies which are zero rated are
refunded;
b) The credit of inputs/ input services is allowed;
c) Wherever the supplies are exempted, or the supplies are
made without payment of tax, the taxes paid on the inputs or
input services i.e. the unutilised input tax credit is refunded.
The provisions for the refund of unutilised input credit are
contained in the explanation to Section 54 of the CGST Act, 2017,
which defines refund as below:
“refund” includes refund of tax paid on zero-rated supplies of
goods or services or both or on inputs or input services used in
making such zero-rated supplies, or refund of tax on the supply
of goods regarded as deemed exports, or refund of unutilised
input tax credit as provided under sub-section (3).
Thus, even if a supply is exempted, the credit of input tax may
be availed for making zero-rated supplies. A registered person
making zero rated supply can claim refund under either of the
following options, namely: ––
a) he may supply goods or services or both under bond or Letter
of Undertaking, subject to such conditions, safeguards and
procedure as may be prescribed, without payment of integrated
tax and claim refund of unutilised input tax credit; or
b) he may supply goods or services or both, subject to such
conditions, safeguards and procedure as may be prescribed,
on payment of integrated tax and claim refund of such tax paid
on goods or services or both supplied, in accordance with the
provisions of section 54 of the CGST Act, 2017 or the rules made
thereunder.
As per Section 54(3) of the CGST Act, 2017, any unutilised input
tax credit in zero rated supplies can be refunded, wherever
such supplies are made by using the option of Bond/ LUT. The
difference between zero rated supplies and exempted supplies
is tabulated as below:
Exempted Supplies Zero rated Supplies
“exempt supply” means supply
of any goods or services or both
which attracts nil rate of tax or
which may be wholly exempt
from tax under section 11 of CGST
Act or under section 6 of the IGST
Act, and includes non-taxable
supply
“zero-rated supply” shall have the
meaning assigned to it in section 16
No tax on the outward exempted
supplies, however, the input
supplies used for making exempt
supplies to be taxed
No tax on the outward supplies;
Input supplies also to be tax free
Credit of input tax needs to be
reversed, if taken; No ITC on the
exempted supplies
Credit of input tax may be availed
for making zero-rated supplies,
even if such supply is an exempt
supplyITC allowed on zero-rated
supplies
Value of exempt supplies, for
apportionment of ITC, shall
include supplies on which
the recipient is liable to pay
tax on reverse charge basis,
transactions in securities, sale of
land and, subject to clause (b) of
paragraph 5 of Schedule II, sale
of building.
Value of zero rated supplies shall
be added along with the taxable
supplies for apportionment of ITC
Any person engaged exclusively
in the business of supplying
goods or services or both that
are not liable to tax or wholly
exempt from tax under the CGST
or IGST Act shall not be liable to
registration
A person exclusively making zero
rated supplies may have to register
as refunds of unutilised ITC or
integrated tax paid shall have to be
claimed
A registered person supplying
exempted goods or services or
both shall issue, instead of a tax
invoice, a bill of supply
Normal tax invoice shall be issued
Provisional refund:
As per section 54(6) of the CGST Act, 2017, ninety per cent of the total
amount of refund claimed, on account of zero-rated supply of goods
or services or both made by registered persons, may be sanctioned
on a provisional basis. The remaining ten percent can be refunded
later after due verification of documents furnished by the applicant.
INTEGERATED
TAX
Non-applicability of Principle of Unjust Enrichment:
The principle of unjust enrichment shall not be applicable in case
of refund of taxes paid wherever such refund is on accounts of
zero rated supplies. As per section 54 (8) of the CGST Act, 2017,
the refundable amount, if such amount is relatable to refund
of tax paid on zero-rated supplies of goods or services or both
or on inputs or input services used in making such zero-rated
supplies, shall instead of being credited to the Fund, be paid to
the applicant.
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