Zero Rated Supply Under GST: Meaning, Rules & Refunds

If you export software, run an IT services company, or supply to an SEZ, your invoices carry 0% GST but you still keep the input tax credit on everything you bought to deliver them. That combination is what makes a supply "zero-rated", and it is the single most valuable relief the GST law gives an exporter. It is also where most working capital gets stuck, because the benefit is not automatic. You have to claim it, and you have to prove the money came in.

In brief: A zero-rated supply under GST is a supply taxed at 0% on which you can still claim input tax credit (ITC) and a refund. Under Section 16 of the IGST Act, only two things qualify: export of goods or services, and supply to a Special Economic Zone (SEZ) developer or unit for authorised operations. You claim the benefit through one of two routes, a Letter of Undertaking (LUT) without paying tax, or paying IGST and claiming it back. Since the Finance Act 2021 changes took effect on 1 October 2023, the refund also depends on you realising the export proceeds in foreign currency.

A zero-rated supply is a taxable supply on which the GST rate is set to zero, while the input tax credit on the inputs used to make that supply stays fully available. In plain terms, you charge nothing to your overseas client, and the government does not want the embedded domestic taxes to travel out with your export either, so it lets you recover them.

The concept is defined in Section 16 of the IGST Act. Two categories, and only these two, count as zero-rated:

• Export of goods or services, or both.
• Supply to an SEZ developer or SEZ unit, for its authorised operations.

The "authorised operations" wording matters. The Finance Act 2021 amended Section 16, and from 1 October 2023 a supply to an SEZ is zero-rated only when it is for the unit's authorised operations, not for anything else it happens to buy.

For a services business, whether your invoice qualifies as an export at all turns on a five-part test in the GST law (supplier in India, recipient outside India, place of supply outside India, payment in convertible foreign exchange, and the two parties not being mere establishments of one person). We cover that test in detail in our guide to export of services under GST.

This is the distinction that trips up most first-time exporters, and getting it wrong quietly costs you money. All four can show a 0% or no-tax outcome, but only one lets you keep your input tax credit.

The takeaway: an exempt supply and a zero-rated supply both look tax-free on the invoice, but only the zero-rated exporter gets the input taxes back. Treating an export as merely "exempt" is how businesses forfeit refunds they were entitled to.

Under Section 16(2), a registered person can claim ITC on inputs used for zero-rated supplies even though the output is untaxed. Section 16(3) then lets you turn that credit into cash.

Consider a service exporter. You invoice a US client USD 10,000. You charge no GST. But through the year you paid GST on cloud hosting, laptops, office rent, and professional fees, say ₹1,80,000 of input tax. Because your output is zero-rated, that ₹1,80,000 does not sit dead on your books. You can claim it back as a refund instead of letting it accumulate. For a bootstrapped IT services company, that is real working capital returned to the business.

Section 16(3) gives you a choice between two routes. Both reach the same place, a zero tax cost on the export, but the cash-flow timing differs.

Most regular service exporters file an annual LUT and export tax-free, then claim the accumulated ITC. It avoids parking cash with the government and waiting for it back. Our breakdown of LUT vs IGST refund works through which route suits which kind of business.

A worked comparison on that same USD 10,000 invoice, at an illustrative rate of ₹95 to the dollar:

• LUT route: You collect ₹9,50,000 from the client, charge no IGST, and separately claim your ₹1,80,000 of input credit as a refund. Nothing extra leaves your bank.
• IGST route: You would pay IGST on the export value up front and reclaim it later, tying up that cash until the refund lands.

Here is the part the Finance Act 2021 tightened, and the part that turns a clean refund into a clawback. Since 1 October 2023, your export refund is linked to actually receiving the money.

For export of services, the refund is available only if the payment is received in convertible foreign exchange (or in INR where the RBI permits). For export of goods under the with-payment route, Rule 96B allows the department to recover a refund already paid if the sale proceeds are not realised within the period allowed under FEMA, along with interest.

This is why how you get paid matters as much as how you invoice. A payment trail that clearly maps each inward remittance to an invoice, with a bank-issued realisation certificate to back it, is what keeps a zero-rated claim intact if it is ever questioned.

• Register and file an LUT for the year (if using the without-payment route) on the GST portal.
• Report the zero-rated supplies in your GST returns, including in GSTR-1 for export of services.
• File the refund application in Form GST RFD-01 for unutilised ITC, or let the shipping-bill data drive the automatic IGST refund for goods.
• Compute the eligible ITC using the prescribed formula (turnover of zero-rated supply divided by adjusted total turnover, applied to net ITC).
• Keep your realisation proof ready: the bank certificate and remittance advice tying each payment to its invoice. See FIRC for GST refund for what the department expects.

For eligible claims, the law provides a provisional refund of 90% within seven days of acknowledgement, with the balance after verification. The mechanics of recovering the credit itself are covered in our guide on how to claim ITC in GST.

Zero-rating solves the tax side. The other half, receiving the export payment cleanly and proving it, is where a cross-border payments platform earns its place. cross-border payments for service exporters is built for exactly this: Indian businesses receiving money from overseas clients, settled in INR, with the compliance documents produced automatically.

When a client pays, Xflow issues the electronic Foreign Inward Remittance Advice (eFIRA) and payment advice for each transaction, so your realisation trail is ready when you file. The FIRC itself is still issued by the Indian bank, and your downstream compliance workflow does not change. Xflow holds final Payment Aggregator, Cross Border (PA-CB) authorisation from the Reserve Bank of India for both exports and imports (as of February 2026), is ISO 27001 and SOC 2 certified, and settles funds to your registered Indian account, typically on the next business day (T+1). Because conversions run on the live mid-market rate, exporters can save up to 50% on FX costs versus a typical bank wire.

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A zero-rated supply is the GST system working in an exporter's favour: no tax on the export, and full recovery of the tax you paid to produce it. The value is real, but it is conditional. Pick your route, LUT or refund, file the returns, and above all keep a clean realisation trail, because since October 2023 the refund follows the money. Handle the invoicing and the getting-paid side with the same care you give the tax filing, and the working capital stays where it belongs, in your business.