Navigating Zero Rating and Export Dynamics in GST : A Comprehensive Analysis

In the intricate landscape of Goods and Services Tax (GST), the concepts of zero-rated supply and export play pivotal roles in shaping the taxation dynamics for businesses. Section 16 of the GST Act delves into the nuances of zero-rated supply, elucidating its implications on the entire value chain. This article aims to unravel the intricacies of zero rating, exploring its necessity, operational mechanisms, and its synergy with the export framework under GST. Understanding the implications of zero-rated supply and the complexities associated with different modes of exports, such as physical exports, deemed exports, and merchant exports, is imperative for tax professionals to navigate the complexities of the contemporary tax regime effectively. In this discourse, we delve into the core principles, regulatory intricacies, and practical considerations that govern zero-rated supply and export of goods and services under the GST framework.

Zero-Rated Supply [Section 16]

What is Zero Rating?

Zero rating, under GST Law, implies that the entire value chain of the supply is exempt from tax. This exemption not only applies to the outward supply but extends to the inputs and input services, allowing the availing of credit for taxes paid on the input side. Notably, exports and supplies to SEZ units/developers fall under the purview of zero-rated supply. This includes supplies to SEZ units/developers for authorized operations, aligning with the treatment accorded to physical exports.

What is the Need for Zero Rating?

Section 2(47) of the CGST Act defines a supply as exempt when it attracts a nil rate of duty or is specifically exempted by a notification or kept outside the purview of tax. However, true zero rating necessitates both the outward supplies and the associated inputs or input services to be free of GST. This rectifies the anomaly where the output is exempted, but the inputs and input services, having suffered tax, cannot avail credit on the input side, thus becoming a cost for the supplier. Simply, zero rating is different from exempt supplies, as if any outward supply is exempted supply, then input on such supplies are not allowed, however, if a supplier makes zero rated supply, he can still avail ITC on inputs or input services used to make such zero rated supply.

How does Zero Rating Work?

Zero rating of outward supplies entails making them without payment of integrated tax, under a bond or Letter of Undertaking (LUT), or exempting them from tax. Refund of unutilized input tax credit on the supply of goods or services used in zero-rated supplies is permissible. Circular No. 01/2017 CC dated 26.07.2017 clarified that zero-rated supply provisions also apply to GST Compensation Cess, allowing exporters to claim a refund of GST Compensation Cess paid on exported goods and also GST Compensation Cess will not be charged on goods exported under bond/LUT.

Export of Goods

Export of goods or services is treated as inter-State supply and is zero-rated. This means that even with full exemption for the supply, Input Tax Credit (ITC) is available to the exporter. The objective is to enhance the competitiveness of Indian exports in the international market.

Physical Exports [Section 2(5)]

Export of goods involves taking them from India to a place outside India, extending beyond the country`s maritime zone. Activities like sending/taking goods out of India for exhibition or on consignment basis for export promotion, unless meeting the criteria in Schedule I of the CGST Act, do not constitute supply. Therefore, they are not considered zero-rated supply, and no bond or LUT is required.

Deemed Exports

Deemed exports pertain to supplies of goods (not services) manufactured in India, notified under section 147 of the CGST Act. These supplies do not physically leave India, and the payment is received either in Indian rupees or convertible foreign exchange. Notable categories notified as deemed exports include:

Merchant Exports Under GST

In the realm of Goods and Services Tax (GST), the facet of merchant exports – transactions facilitated through third parties – presents a distinctive set of challenges and compliance requirements. Despite the absence of a specific provision in the GST law addressing merchant exports, there exists a concessional tax regime, set at a nominal rate of 0.1%, which encompasses both inter-State and intra-State supplies.

Circular No. 125/44/2019 GST, dated 18.11.2019, brings clarity to the concessional rate of tax applicable to merchant exports. Under this provision, an exporter receiving goods at the concessional rate of 0.1% (comprising 0.05% CGST, 0.05% SGST, and 0.1% IGST) becomes eligible to claim a credit for the concessional tax paid. Simultaneously, the supplier, offering goods at the concessional rate, can seek a refund of Input Tax Credit (ITC) due to the inverted tax structure, as stipulated in Section 54(3)(ii) of the CGST Act.

However, it`s imperative to note that exporters availing themselves of this concessional rate must export the goods only under a Letter of Undertaking (LUT) or bond, and not through payment of Integrated Goods and Services Tax (IGST).

Circular No. 08/08/2017, dated 04.10.2017, further dispels any ambiguity by clarifying that the GST regime does not provide for the issuance of the CT-1 Form, traditionally enabling merchant exporters to procure goods from manufacturers without tax payment. The transaction between a manufacturer and a merchant exporter is deemed a supply, subject to GST.

To streamline the process of merchant exports under the concessional rate of 0.1%, Notification Nos. 41/2017 IT(R) and 40/2017 CT(R), both dated 23.10.2017, outline specific conditions:

1. Tax Invoice and Export Timeline:

- The registered supplier (manufacturer) must issue a tax invoice to the registered recipient (merchant exporter).

- The registered recipient must export the goods within 90 days from the date of the tax invoice.

2. Documentation and Registration:

- The registered recipient must indicate the GSTIN of the registered supplier and the tax invoice number on the shipping bill or bill of export.

- The registered recipient should be registered with an Export Promotion Council.

3. Order Placement and Information Sharing:

- The registered recipient must place an order on the registered supplier for procuring goods at the concessional rate.

- The registered recipient must provide a copy of the order to the jurisdictional tax officer of the registered supplier.

4. Goods Movement and Warehouse Utilization:

- The registered recipient can move the goods either directly to the port, Inland Container Depot, Airport, or Land Customs Station for export or to a registered warehouse.

- Registered principal places of business or registered additional places of business are considered registered warehouses.

5. Aggregation and Endorsement:

- In case of aggregating supplies from multiple registered suppliers, the goods from each supplier must move to a registered warehouse. After aggregation, the registered recipient can move the goods for export.

- The registered recipient must endorse the receipt of goods on the tax invoice and obtain acknowledgment from the warehouse operator.

6. Post-Export Procedures:

- After the goods are exported, the registered recipient must provide a copy of the shipping bill or bill of export, including GSTIN and tax invoice details, along with proof of export manifest or export report filing to the registered supplier and the jurisdictional tax officer.

Additionally, Circular No. 42/2017 Cus, dated 07.11.2017, allows merchant exporters to exclude commercially sensitive information when providing copies of shipping bills to registered suppliers.

Conclusion:

In conclusion, comprehending the intricacies of zero-rated supply and export dynamics is paramount for tax professionals navigating the GST terrain. Whether it`s leveraging the benefits of zero rating for exports or understanding the distinctions between physical, deemed, and merchant exports, a nuanced understanding is essential for efficient compliance and strategic decision-making in the complex realm of GST.