Chapter VII - Zero-rated supply
Section 16
Section 16: Zero-rated supply
Exports and supplies for authorised SEZ operations are zero-rated, with input-credit and refund routes governed by IGST Section 16 and CGST refund law.
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This article is for general information. Refer to the Integrated Goods and Services Tax Act, 2017 official text for the official provisions. If you need professional advice for your situation, contact Bizeneed.
Statutory text
Bare law
(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 for authorised operations 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 of unutilised input tax credit on supply of goods or services or both, without payment of integrated tax, under bond or Letter of Undertaking, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder, subject to such conditions, safeguards and procedure as may be prescribed: Provided that the registered person making zero rated supply of goods shall, in case of non-realisation of sale proceeds, be liable to deposit the refund so received under this sub-section along with the applicable interest under section 50 of the Central Goods and Services Tax Act within thirty days after the expiry of the time limit prescribed under the Foreign Exchange Management Act, 1999 (42 of 1999) for receipt of foreign exchange remittances, in such manner as may be prescribed.
(4) The Government may, on the recommendation of the Council, and subject to such conditions, safeguards and procedures, by notification, specify— (i) a class of persons who may make zero rated supply on payment of integrated tax and claim refund of the tax so paid in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder; (ii) a class of goods or services or both, on zero rated supply of which, the supplier may pay integrated tax and claim the refund of tax so paid, in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder.
(5) Notwithstanding anything contained in sub-sections (3) and (4), no refund of unutilised input tax credit on account of zero rated supply of goods or of integrated tax paid on account of zero rated supply of goods shall be allowed where such zero rated supply of goods are subjected to export duty.
Introduction
Section 16 gives zero-rated treatment to exports and supplies to an SEZ developer or unit for authorised operations. Zero-rating affects the tax and input-credit route; it does not remove the need to establish that the transaction meets the legal definition of an export or qualifying SEZ supply.
The ordinary refund path is supply without payment of integrated tax under a bond or Letter of Undertaking (LUT), followed by a claim for eligible unutilised input tax credit. Payment of IGST followed by refund is restricted to notified classes of persons or supplies.
Key takeaways
Which supplies qualify
Exports of goods or services and supplies for authorised operations to an SEZ developer or unit are zero-rated.
Credit and LUT route
Eligible input credit can support zero-rated supplies despite exempt-supply treatment; the ordinary route is supply without IGST under bond or LUT followed by refund of unutilised credit, subject to conditions.
Payment-of-tax route is conditional
Payment of IGST followed by refund is available only for classes of persons or supplies notified under subsection (4). Export-duty goods face the subsection (5) refund exclusion.
Check whether the supply qualifies
Subsection (1) covers exports of goods or services and supplies to an SEZ developer or unit for authorised operations. For services, apply the IGST Act's export-of-services definition rather than assuming that a foreign customer automatically makes the supply an export.
For an SEZ transaction, retain evidence that the supply is for authorised operations. A supply to an SEZ party for another purpose does not acquire zero-rated status merely from the customer's location.
Input credit and the LUT route
Subsection (2) preserves eligible input-tax credit for zero-rated supplies, subject to the blocked-credit rule in CGST Section 17(5). Zero-rated and exempt supplies therefore do not have identical input-credit consequences.
Under subsection (3), a registered supplier can make a zero-rated supply without paying IGST under a bond or LUT and claim refund of eligible unutilised credit under CGST Section 54 and the refund rules. Check the applicable filing procedure, documents and period before submitting the claim.
When payment of IGST and refund is available
Subsection (4) permits the Government to notify classes of persons or supplies that may pay IGST on a zero-rated supply and then seek refund. The notification and its conditions are part of the eligibility test; this route should not be assumed available to every exporter.
Before invoicing with IGST for a zero-rated supply, identify the applicable notification and confirm the CGST Section 54 refund route.
Export proceeds and export-duty exclusions
The proviso to subsection (3) requires a goods exporter to return a refund received under the LUT route, with applicable interest, if sale proceeds are not realised within the FEMA time limit; the Act specifies payment within thirty days after that limit expires, in the prescribed manner.
Subsection (5) bars both the unutilised-credit refund and refund of IGST paid when the zero-rated goods are subject to export duty. Check export-duty status before choosing a refund path.
Refund file checklist
Build the claim from the export or authorised-SEZ evidence, LUT or bond where used, invoice and shipping or service records, input-credit ledger, and current Rule 89 or other applicable refund procedure. Match the claimed period and turnover to the GST returns.
For goods exports, track receipt of sale proceeds and the FEMA deadline after the refund is sanctioned. For the payment-of-tax route, keep the subsection (4) notification in the working paper.
Practical checklist
Do
- Verify export or authorised SEZ-operation evidence.
- Check LUT/bond, CGST Section 54 and current refund Rules.
- For payment-of-tax refund, identify a live subsection (4) notification.
- Check export-duty exclusion and foreign-exchange realisation conditions for goods refunds.
Glossary
- Zero-rated supply
- An export or qualifying authorised-operations SEZ supply listed in subsection (1), for which the Act provides a credit and refund framework.
- LUT
- Letter of Undertaking used to make an eligible zero-rated supply without payment of IGST, subject to the applicable rules.
- Unutilised input tax credit
- Eligible input credit remaining after tax payments that may be refundable under the statutory zero-rated route.
Frequently asked questions
May every exporter pay IGST and automatically claim it back?
No. The payment-and-refund route under Section 16(4) depends on a Government notification and other conditions.
Need help applying this provision to your situation?
Contact BizeneedLast updated 9 October 2026