A zero-rated supply under GST is a supply that is taxed at 0%, yet the supplier can still claim input tax credit on the inputs used to make it and can claim a refund of that credit.
This is what separates it from an ordinary exemption, because an exempt supply blocks the credit while a zero-rated one preserves it.
Under Section 16 of the IGST Act 2017, zero-rated supply covers exports of goods and services, and supplies to a Special Economic Zone (SEZ) developer or unit for authorised operations.
For an Indian software or export of services under GST exporter, this is the mechanism that keeps GST from becoming a stranded cost.
You still need proof that the money arrived, so keep your bank realisation record, the FIRC, for every invoice.
What is zero-rated supply and what is its definition under GST?
The idea is that exports should leave India tax-free. If GST stuck to an export invoice, Indian services and goods would carry Indian tax into a foreign market and lose on price.
So the law charges 0% on the output and, crucially, refunds the tax already paid on inputs.
The definition of zero-rated supply under GST sits in Section 16(1) of the IGST Act, which names two categories:
- Export of goods or services, or both, out of India.
- Supply to an SEZ developer or SEZ unit for authorised operations.
Because the rate is zero but credit stays alive, the exporter neither charges tax to the overseas buyer nor absorbs the GST paid to Indian vendors. That combination is the whole point of the status.
Zero-rated supply meaning in plain terms
The zero-rated supply meaning is easiest to grasp against its opposite. When a supply is exempt, the government simply does not tax the output, but it also refuses you the credit for the tax you paid on your inputs.
That input tax then sinks into your cost base. When a supply is zero-rated, the output is untaxed and the input credit stays refundable, so the tax genuinely leaves the transaction.
Think of two taps. An exempt supply closes the output tap but leaves your input tax trapped in the tank. A zero-rated supply opens both taps, so nothing pools inside your business.
For an exporter, only the second design protects margin.
Zero-rated vs exempt vs nil-rated vs non-taxable supply
These four terms look similar and get mixed up constantly, but they behave very differently on the credit and refund side.
Understanding zero-rated vs exempt vs nil-rated supply is the single most useful thing an exporter can learn, because misclassifying costs real cash. The table below is the quickest way to keep them straight.
| Type of supply | GST charged | ITC available | Refund of ITC | What it means |
|---|---|---|---|---|
| Zero-rated | 0% | Yes | Yes | Exports and SEZ supplies for authorised operations under Section 16, IGST Act |
| Exempt | Nil (exemption notification) | No | No | Notified exempt goods/services, e.g. certain healthcare and education |
| Nil-rated | 0% (in the tariff) | No | No | Items placed at a 0% rate in the GST schedule, e.g. some grains |
| Non-taxable | Outside GST | No | No | Supplies GST does not apply to at all, e.g. petrol, alcohol for human consumption |
The single line worth memorising: Only zero-rated supply lets you both keep the credit and get it back as cash.
Nil-rated and exempt look generous on the surface because nothing is charged, but they quietly bury your input tax inside your prices.
Is ITC available on zero-rated supply?
Yes, and this is the defining feature. Even though your output tax is 0%, the GST you paid on rent, software subscriptions, laptops, consultancy and other business inputs is not lost.
You can claim ITC in GST and then recover the unutilised portion through a refund.
Contrast that with an exempt supply, where the input tax simply becomes a cost you carry. For a services exporter running on largely input-taxed overheads, the difference across a year can be several lakh rupees of working capital.
The credit is what turns a 0% rate into a genuine benefit rather than a trap.
What is the zero-rated supply under GST items list?
There is no long catalogue of "zero-rated items" the way there is for nil-rated goods. The zero-rated supply under GST items list is defined by the nature of the transaction, not by a product schedule.
A supply is zero-rated when it falls into one of these buckets:
- Export of goods physically taken out of India.
- Export of services where the recipient is abroad and payment arrives in convertible foreign exchange.
- Supply of goods to an SEZ unit or developer for authorised operations.
- Supply of services to an SEZ unit or developer for authorised operations.
So a laptop sold in Chennai is taxable, but the same laptop shipped to a buyer in Dubai is zero-rated. The item did not change; the destination and the paperwork did.
This is why exporters focus on evidence of export rather than on product codes when they defend a zero-rated position.
What is a zero-rated supply example you can picture?
A concrete zero-rated supply example makes the rule stick. Meet Priya, who runs a 6-person software services studio in Bengaluru that builds custom web applications for a US client.
She invoices the client USD 12,000 a month and receives the money in her Indian account in foreign currency.
Her supply is zero-rated because the recipient is outside India, the place of supply is outside India, and the payment arrives in convertible foreign exchange. She charges the US client no GST.
Meanwhile she keeps paying 18% GST on her office rent, cloud hosting and design tools. That input GST is not gone; because the export is zero-rated, she can reclaim it.
That single mechanism is the difference between a healthy margin and a slow bleed.
How to claim a refund on zero-rated supply: the two routes
Section 16(3) gives an exporter two options for how to claim a refund on zero-rated supply. You pick one per financial year for a given class of supply, so decide deliberately.
Route 1: Export under LUT or bond, without paying IGST
You file a Letter of Undertaking (LUT) at the start of the year, invoice the foreign buyer with no IGST, and then claim a refund of the unutilised input tax credit accumulated on your inputs.
This is the common choice for services exporters because it avoids blocking cash in output tax you would only get back later.
Route 2: Pay IGST, then claim it back
You charge IGST on the export invoice, pay it, and claim a refund of the IGST paid. The credit flows more automatically here, but you fund the tax up front.
The table below sums up the trade-off so you can pick the right route for your cash position.
| Factor | Route 1: LUT, no IGST | Route 2: Pay IGST, refund it |
|---|---|---|
| Cash blocked upfront | Only your input GST | Full IGST on the export value |
| What you get refunded | Unutilised ITC (Rule 89(4)) | The IGST you paid |
| Refund speed | Depends on ITC accumulation | Often faster, tied to shipping/return data |
| Best for | Services exporters, tight cash | Exporters with large refundable IGST balances |
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How is the refund calculated under Rule 89(4)?
When you export under LUT without paying tax (Route 1), the refund of unutilised ITC is not simply your whole credit balance. It is apportioned by a formula in Rule 89(4) of the CGST Rules:
Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) × Net ITC ÷ Adjusted Total Turnover
The terms mean:
- Net ITC: Input tax credit availed on inputs and input services during the period (excluding credit for which a separate refund is claimed).
- Turnover of zero-rated supply: Your export turnover for the period. For goods, this value is generally capped at 1.5 times the like domestic supply value.
- Adjusted Total Turnover: Total turnover in the state, excluding exempt supplies other than zero-rated ones.
The formula prevents you from over-claiming when only part of your business is exports. If you sold nothing domestically, the export turnover and adjusted total turnover converge and you recover nearly all of the Net ITC.
Worked example: ₹10 lakh software export under LUT
Return to Priya's Bengaluru studio and put numbers to a full quarter under LUT.
- Export (zero-rated) turnover: ₹10,00,000
- Domestic taxable turnover: ₹2,00,000
- Adjusted Total Turnover: ₹12,00,000
- Net ITC for the period (GST on rent, cloud, hardware, consultancy): ₹1,80,000
Apply Rule 89(4):
Refund = (10,00,000 × 1,80,000) ÷ 12,00,000 = ₹1,50,000
So ₹1,50,000 of the ₹1,80,000 credit is refundable as cash, and the remaining ₹30,000 stays in the credit ledger to offset the domestic output tax.
Getting the split right matters, which is why gst on software services and the correct SAC classification feed directly into a clean refund claim.
Now flip the mix. Suppose Priya lands a second US client and her exports jump to ₹11,50,000 while domestic work drops to ₹50,000 in a quarter, on the same ₹1,80,000 Net ITC.
Refund = (11,50,000 × 1,80,000) ÷ 12,00,000 = ₹1,72,500
Almost the whole credit now comes back as cash, because the export share of turnover rose. The lesson is direct: The more of your turnover is genuine zero-rated export, the more of your input tax you recover.
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How to file the refund via RFD-01, step by step
The refund is claimed online, and the return data must agree with the application. A typical sequence:
- File GSTR-1 for the period, reporting the export invoices in Table 6A with the correct shipping or LUT details.
- File GSTR-3B, declaring the zero-rated turnover and the ITC availed.
- File RFD-01 on the GST portal, selecting "Refund of ITC on account of exports without payment of tax", and attach Statement 3.
- Upload supporting documents: Invoices, LUT reference, bank realisation proof (BRC/FIRC), and the computation as per Rule 89(4).
- Track the acknowledgement (RFD-02) and respond to any deficiency memo (RFD-03) promptly.
Accurate invoicing upstream makes this smoother, so if you raise B2B tax invoices through the e invoicing under gst system, the export data flows in cleanly and reduces mismatch queries.
The invoice reference number generated on the irp portal gst is the same figure the officer reconciles against your GSTR-1, so a clean upload saves a round of clarifications.
Worked example: a goods exporter who pays IGST and claims it back
Not every exporter uses the LUT route. Consider Rakesh, who exports handloom textiles from Panipat to a buyer in the UK and prefers Route 2 because his refund then tracks his shipping data automatically.
- Export invoice value: ₹8,00,000
- IGST charged and paid at 18%: ₹1,44,000
- Shipping bill filed with the correct invoice and port details
Rakesh pays the ₹1,44,000 IGST out of his ledger.
Once his shipping bill and GSTR-1 export data match on the portal, the ₹1,44,000 is refunded to his bank account, often without a separate RFD-01 because the shipping bill itself acts as the refund application for exports of goods with tax paid.
The trade-off is plain. Rakesh funds ₹1,44,000 for a few weeks, but he avoids the Rule 89(4) apportionment entirely and gets the exact tax back.
For a goods exporter with steady shipments and comfortable cash, that certainty is often worth the temporary outlay.
How does zero-rated supply work for an SEZ unit?
Supplies to an SEZ unit or developer are zero-rated too, but the rule tightened.
As of 01/10/2023, Section 16 was amended so that only supplies made to an SEZ developer or unit for authorised operations are zero-rated (via the Finance Act amendment notified by Notification No. 27/2023-Central Tax).
If the supply is not tied to the SEZ's authorised operations, the zero-rating benefit can be lost.
Picture an SEZ scenario. Meridian Analytics is an IT unit inside a Bengaluru SEZ that buys ₹6,00,000 of managed cloud services from a domestic vendor in the tariff area.
Because Meridian's data-analytics work is on its list of authorised operations, that domestic vendor can supply to the SEZ unit at 0% under a LUT, treating it as a zero-rated supply. The vendor still keeps its input credit.
But if the same vendor supplied, say, catering for a private staff party unrelated to authorised operations, that portion would not qualify.
Practically, a supplier to an SEZ should confirm the supply falls within the recipient's list of authorised operations before treating it as zero-rated. When in doubt, take an endorsement from the SEZ authorities.
The treatment of gst on international transactions should still be confirmed with your CA for edge cases.
Is a freelancer's export zero-rated? A common doubt
Many independent professionals are unsure whether their work even counts. Take Aditya, a freelance UX designer in Pune who bills a Berlin startup EUR 3,000 a month and worries he should be adding GST.
His supply is a zero-rated export of services, provided the recipient is abroad, the place of supply is outside India, and the euros arrive in convertible foreign exchange. He does not charge the German client GST.
If his turnover crosses the registration threshold, or if he registers voluntarily to claim refunds, he files under LUT and reclaims the input GST on his software and co-working seat.
The same logic that applies to a large studio applies to a solo freelancer; scale does not change the status.
The gst for freelancers treatment mirrors this closely, and the withholding tax a foreign client may deduct is a separate income-tax question, not a GST one.
Why realisation proof decides your zero-rated status
Here is the part that quietly derails refunds: the tax rules treat an export of services as complete only when you have actually realised and repatriated the payment in convertible foreign exchange (or in INR where the RBI permits).
No proof of realisation, no valid zero-rated export of services.
That proof is your Foreign Inward Remittance Certificate. When you apply for the refund, the officer expects the bank realisation evidence to match the invoices in your claim.
Keeping a clean FIRC for GST refund trail for every remittance is therefore not optional paperwork, it is the evidence that the supply qualified as zero-rated at all.
This also links to how gst on foreign exchange is treated on the conversion itself.
How Xflow makes the refund trail cleaner
Xflow is a cross-border payments platform for Indian businesses, not a tax or CA service, so it does not file your GST refund. What it does is remove the weakest link in the chain: realisation proof.
When you receive export payments through Xflow, you get automatic eFIRA for each remittance, the electronic Foreign Inward Remittance Advice that evidences you realised and repatriated the proceeds.
That is the exact document a refund officer wants to see against your export invoices. With Xflow you also receive at the mid-market rate through vBAN receiving accounts, so more of each invoice reaches you before the refund even starts.
This is not tax advice, so confirm the finer points of your claim with a CA, but the payment evidence is one thing you can lock down cleanly.
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Frequently asked questions
Exporting software development services to a US client, or supplying goods to an SEZ unit for its authorised operations. Both are taxed at 0% but let you claim input tax credit and a refund.
Yes. Unlike exempt supplies, zero-rated supplies keep your ITC alive. You can use it against other output tax or claim a refund of the unutilised portion under Rule 89(4).
Nil-rated supply is charged at 0% in the tariff but carries no ITC and no refund. Zero-rated supply is also 0% but does allow ITC and a refund, which is the key advantage for exporters.
Two categories under Section 16 of the IGST Act: exports of goods or services out of India, and supplies to SEZ developers or units for authorised operations.
Yes, but as of 01/10/2023 only when the supply is for the SEZ's authorised operations. Supplies outside authorised operations may lose the benefit, so confirm before invoicing.
Generally yes. An export of services is treated as complete only on realisation of foreign payment, and the refund officer expects bank realisation proof such as a FIRC or eFIRA against the invoices claimed.
LUT suits services exporters who want to avoid blocking cash in output tax. Paying IGST and claiming it back suits goods exporters with steady shipments who prefer refunds that track shipping-bill data.
