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Zero Rated Supply: An unsolved Mystery

By Siddartha Bhatt, Advocate

Much awaited GST has been implemented from 01-07-2017. As promised, GST has made fundamental changes in the understanding of concepts of indirect taxation in India, traversing from manufacture / sale / service to Supply. It has also cleared various statutes levying various taxes on the same leg of transaction and unified everything into one tax known as GST.

1. Problem Statement

Zero Rated Supply

1.1. In terms of Section 16 of the IGST Act, 2017, supplies which are made to a Special Economic Zone (SEZ) or physical exports are treated as Zero Rated Supplies. Central Board of Excise and Customs (CBEC) has issued a Circular No. 26/2017-Customs dated 01-07-2017 under the powers of IGST Act, which explains the export procedures. Neither Section 16 of IGST Act nor the Circular dated 01-07-2017 explains the procedures for making Zero Rated Supply .

Section 16 of the IGST Act, 2017

1.2. Zero Rated supply is defined under Section 16 of the IGST Act, 2017 as follows:

16. (1) "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.

(2) Subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act, credit of input tax may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply.

(3) A registered person making zero rated supply shall be eligible to 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 Central Goods and Services Tax Act or the rules made thereunder.

1.3. Section 16(1) supra identifies what supplies are treated as Zero Rated Supplies. Section 16(2) provides three aspects:

i. Restrictions for taking ITC would apply to zero rated supplies as well;

ii. Credit of ITC may be availed against a zero rated supply;

iii. Credit of ITC may be availed against a zero rated supply even though such supply is exempts supply;

1.4. Exempt supply is defined under Section 2(47) of CGST Act, 2017 to mean supplies attracting nil rate of tax or supplies which are wholly exempt from tax or non-taxable supplies.

1.5. Section 16(3) provides method of refunds against zero-rated supplies.

2. Analysis of the Problem

2.1. Let us understand where is the problem in the arrangement of Section 16 and scenarios of supplies.

2.2. Section 16(1) says supply made to SEZ and physical exports qualify as zero-rated supply. Section 16(2) says supplier can take ITC on zero-rated supplies even though such supplies are exempted. Section 16(3) provides two ways of claiming refund against a zero rated supply.

2.3. Section 16(3) starts with expression "A registered person making zero rated supply shall be eligible to claim refund under either of the following options". Hence the scope of Section 16 (3) is only towards how a registered person can claim refund against a zerorated supply. Section 16(3) provides two methods for claiming refund:

i. supply under bond or Letter of Undertaking, without payment of IGST and claim refund of unutilised input tax credit OR

ii. supply on payment of IGST and claim refund of such tax paid as per Section 54 of CGST Act or the Rules made thereunder.

2.4. Conversely, if a zero rated supplier does not intend to claim refund of ITC or output IGST, he need not refer to Section 16(3), as the same deals only with methodology of making zero rated supply by a registered person intending to claim refund.

2.5. Therefore, what remains is Section 16 (1) and 16(2). Section 16 (1) only identifies what are zero rated supplies. What is left is only Section 16(2) which provides that a zero rated supplier can take credit of ITC notwithstanding such supply is an exempt supply.

2.6. Hence the supplier is left with only one option, viz., exploring the possibility of making a zero-rated supply under Sec. 16(2).

3. Circular No. 26/2017-Customs

3.1. In the meanwhile, CBEC has issued a Circular No. 26/2017-Cus., dated 01-07-2017 detailing the export procedures. The said Circular, in its opening paragraph reads as follows:

Goods and Service Tax has become operational from 01-07-2017 in the GST regime, the governing provisions related to exports are contained in section 16 of the Integrated Goods and Service Tax Act, 2017 (IGST Act). Supplies of goods and services for exports have been categorized as 'Zero Rated Supply' implying that goods could be exported under bond or Letter of Undertaking without payment of integrated tax followed by claim of refund of unutilized input tax credit or on payment of integrated tax with provision for refund of the tax paid.

[Emphasis supplied]

3.2. The Circular states that it implies the supplier has only two options to undertake a zero rated supply which are as per Sec. 16(3) (a) and (b). However, the Circular is conveniently silent about the basic and fundamental aspect of Sec. 16(3) which is only meant for claiming refund by a registered supplier and not the method of making zero rated supply.

3.3. The question that remains is "can a supplier make a zero rated supply without payment of IGST and without issuing bond / LuT while taking the ITC in terms of Sec. 16(2) and not seeking refund?" If not, why? Where does the GST law compel that a zero rated supply shall be made only in terms of Sec. 16(3) of the IGST Act?

4. Impact on the Trade

4.1. Small time exporters or suppliers to SEZ units/ developers will get affected if the Board does not provide an option to make zero rated supply without payment of IGST and without bond/LuT while taking ITC and not seeking refund.

4.2. Though, neither Sec. 16 nor Rule 96A of CGST Rules, 2017 providing any specific provision for execution of bank guarantee against bond or LuT, the Bond / LuT and Form GST RFD-11 declaration issued by the Board (CBEC) wants the supplier to provide details of bank guarantee.

4.3. It is to be noted that such procedural requirements would bring cash crunch to an exporter or a supplier making zero rated supplies. In addition, the procedural compliance and documentation makes the zero rated supplies less attractive.

5. Conclusion

In the light of the aforesaid discussions,I am of the view that the trading community should represent to the Board to issue a Circular clarifying that in case of a zero rated supply made without claim of refund, while ITC has been availed on the inputs and without charging IGST should be allowed without the hassles of Bond/LuT backed with Bank Guarantee. Alternatively, a simple Form like ARE-1 can be prescribed by which the supplier can close the loop by providing proof of export (shipping bills) or bill of export for SEZ supplies.

(The author is Joint Partner, Lakshmi kumaran & Sridharan, Bangalore and the views expressed are strictly personal.)

(DISCLAIMER : The views expressed are strictly of the author and doesn't necessarily subscribe to the same. Pvt. Ltd. is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the articles being hosted on the site)

Sub: Invoice for supply to SEZ

DTA supplier supplying goods to SEZ, which invoice he has prepared, Tax Invoice or Export Invoice?

Sub: Zero Rated Supply- An unsolved Mystery

Dear Siddartha,
You have very well highlighted the issues related to supply to SEZ specially faced by small business.
Infact there are so many vendors who do not want to fall into compliance formalities related export on their small supplies to SEZ.
Hence government should also make provision where SEZ unit has procured material or Services on payment of IGST after matching of invoice in GSTN the amount of IGST will be refunded to SEZ unit.

With Regards,
Vikas Agarwal

Posted by Vikas Ji Agarwal