Zero Rated Supply: In economics, zero-rated supply refers to the list of the items subject to a 0 percent VAT tax on the item’s input supplies. The term ‘zero-rated supply’ applies to the list of items that would be taxed under the category of value-added systems and services tax. To understand better about Zero Rated Supply, this article presents you with a compilation of the basics that will help you through your business.
- What is Zero Rated Supply?
- Detailed Account on Zero Rated Supply
- List of Zero-Rated Supply
- Zero Rated vs Exempt Supply
- Refund of Zero Rated Supplies in Goods and Services Tax
- Provisional Refund
Goods and Service Taxes are not applicable in India for exported goods. Hence, all the exported supplies of a taxpayer that are registered under Good and Service Tax (GST) would be classified as a zero-rated supply.
According to IGST Act, Section 16, zero-rated supply is defined as any of the following supplies of goods or services that fall under the following category:
- Export of services or goods or both
- Supply of services or goods or both to a Special Economic Zone developer
- Supply of services or goods or both to a Special Economic Zone unit
Zero Rated Supply is something beyond tax. As per section 2(47) of the CGST Act of 2017, a supply is deemed to be exempted, when the supply attracts nil. rate of duty.
This is applicable even when the supply is also specifically exempted by a notification or kept out of the purview of tax and falls as a non-GST supply.
However, when the supply is exempted from the tax payment, it does not necessarily mean that GST is not included or applicable in the tax price.
The input services and goods that are used for providing such services or goods already hold a tax and therefore such GST is termed as costs to the supplier and is included in the final pricing.
The tax law does not allow the utilization of credit cards on input services or input goods that are used for the supply of such exempted services or goods.
Therefore, a separate concept of zero-rate supply introduced allows the utilization of the input of all services and goods. However, the relevant provisions fall under Section 16(1) of the IGST Act, 2017.
Here is a list of provisions that fall under Section 16(1) of the IGST Act, 2017-
- Agricultural products such as chilled and fresh vegetables, paddy, and certain provisionally preserved vegetables
- Essential food provisions such as oils, salt, flour, and others.
- Livestock and livestock supplies or poultry which includes live animals and unprocessed meat
- Poultry eggs
- Kinds of fishes such as live, fresh, frozen and even dried
- The First 200 units of electricity fall under provisions for domestic use
- Water also falls provisions for domestic uses
- Goods supplied to chosen locations from Malaysia (places like Labuan, Langkawi and Tioman)
- Exported goods
- Exported services also fall under provision; for example, architecture services in connection with land outside Malaysia
- Services in Malaysia fall under provisions; for example, towage, pilotage, or salvage services
- International services also fall under provisional goods; for example, transport of goods or passengers from a location in Malaysia to a location situated outside Malaysia
Supplies and exports to SEZ units or developers are assorted as zero-rated supply. Contrary to this, nil or exempt supplies are those supplied with a zero percent GST rate.
Exempted supply defines the supply of any services or goods or even both which attracts a nil rate of tax. The goods may be wholly exempt from tax under section 11 of the CGST Act or section 6 of the IGST Act. Exempted goods include the non-taxable supply.
The following points enlisted area applies only to the exempted supply-
- GST is not applicable on the outward exempted supplies
- The input tax credit of inputs services and inputs that are incorporated in providing exempted supply is deemed to be not available. This means that no input tax credit is applicable on exempted supplies
- If a person has registered to supply exempted goods or services or even both, they are expected to issue a ‘bill of supply instead of a tax invoice for the goods or services.
Exempted supplies hold no tax on the outward exempted supplies. However, the input supplies used for making exempt supplies will be taxed even though they fall under exempted supply goods. Whereas for zero supply goods no tax is applicable on the outward supplies; Here, even the input supplies are also tax-free.
Refunds are accessible for the suppliers making Zero-rated supplies. The applicable refunds are for the input tax paid on the services and goods. These goods are Zero-rated supplies inclusive of the non-taxable and exempt supplies.
For example, An exporter supplies leather loafers to Dubai and uses soles in the production of such loafers. Here, the exporter has an option of claiming the Input tax credit of GST that was paid while purchasing the soles.
There are two options that every supplier or dealer can use to claim the refunds of zero-rated goods:
- The first option is that the dealer can export under Letter of Undertaking (LUT) or Bond and claim a refund of the gathered Input credit of tax
- The second option is that the dealer can pay IGST while making the supplies and claim a refund of the same
Exporters and suppliers are entitled to about 90 per cent refund on a providential basis claimed on account of zero-rated supply of goods or services or both made by the registered person.
A provisional refund is granted within seven days of the refund claim undertaken by the registered person. The provisional refund amount is credited to the claimant’s bank account directly.
However, there is a condition that comes attached to provisional refunds: The provisional refund is denied if the applicant has been prosecuted for any offence that falls under the GST law or any earlier law within the past five years.
The amount evaded in such prosecution shall be more than Rs. 2.5 Crores and the dealer will be exempted.