GST Registration for Zero Rated Services
In GST (Goods and Services Tax), a “zero-rated supply” refers to a supply of goods or services that is taxable at the rate of 0%. This means that the supplier of the goods or services is not required to charge any GST on the transaction, but they can still claim a credit for any GST paid on their inputs or purchases.
Zero-rated supplies are typically made for export or to Special Economic Zones (SEZs). In other words, if a supplier exports goods or services outside of the country, or supplies them to an SEZ, then the supply is considered to be zero-rated.
The objective of zero-rating is to promote exports and boost the economy by making goods and services more competitive. By not charging GST registration on exports, the cost of the goods or services is reduced, making them more affordable for foreign buyers.
The majority of the time we can see that a country and its government promote exports to a greater extent. This is done for the enhancement of the economy and its growth, increasing employment opportunities, and also balancing the payments. As a part of this process to boost exports, the Government comes up with certain reliefs and benefits for the business entities engaged in the export process. Zero Rated Supply in GST can be understood as a part of benefits given by the GST Authority to these business entities.
What is Zero Rated Supply?
As per section 16 of the GST Act, a zero-rated supply would mean any of the below-given supply of goods or services:
- Export of goods or services or both by business entities
- Supply of goods or services or both by business entities Special Economic Zone (SEZ) Developer
- Supply of goods or services or both to a which has been done by supplier to the Special Economic Zone (SEZ) Unit.
The Zero-Rated supply would allow the business entities to avail the input tax credit (ITC) of the GST paid by them on any purchase for making possible the supply of zero-rated goods or services or both. But for availing this the business entity supplying the zero-rated supplies should be registered under the GST Act. And this would make them eligible to claim a refund of the GST paid on the purchase as the ITC shall be made available.
For availing of the registration, the applicability of GST shall be tested as the aggregate turnover should be computed and the applicability of the threshold exemption shall be checked. It shall be noted that as export is considered as inter-state supply availing of GST registration becomes mandatory for the exporter.
And in case of supply made to SEZ Developer or SEZ Unit, the same shall be considered as zero-rated supply, but the credit of input tax shall be made available and for availing this the business entity should obtain registration under GST. The business entity while computing the total turnover shall add the zero-rated supplies along with the taxable turnover and shall also take registration for availing of the ITC.
And a provisional refund of the claim of ITC made by a supplier engaged in the supply of zero-rated goods or services or both shall be made up to 90% as per section 54(6) of the CGST Act. Now the remaining 10% of the refund shall be made after due verification of the documents that were furnished by the supplier.
Examples of zero-rated services under GST
Zero-rated services under GST (Goods and Services Tax) are services that are exempt from tax. Here are some examples of zero-rated services under GST:
- Export of goods and services
- Supply of goods and services to a Special Economic Zone (SEZ) developer or SEZ unit
- Services provided to an SEZ developer or SEZ unit
- Supply of goods and services to a person outside India
- Supply of goods and services to a merchant exporter
- Supply of goods and services to a person who is authorized to receive goods and services without payment of tax (such as a UN agency)
- Services provided to the Government or a local authority, except certain specified services such as renting of immovable property, services related to transportation of goods, etc.
Types of zero-rated services under GST
Under GST (Goods and Services Tax), there are two types of services that can be classified as zero-rated services:
- Export of services: If the supplier of a service is located in India, and the recipient of the service is located outside India, then the service is considered to be exported. Such services are zero-rated, meaning that no GST is applicable to them. However, the supplier of the service must fulfill certain conditions, such as obtaining an Export of Service certificate, filing relevant returns, etc.
- Supply of services to SEZ units or developers: A Special Economic Zone (SEZ) is a designated geographical area within a country that operates under different economic laws and regulations as compared to the rest of the country. When a supplier provides services to an SEZ unit or SEZ developer, the services are considered to be zero-rated. Again, there are certain conditions that must be fulfilled by the supplier of the service, such as obtaining an SEZ registration number, filing relevant returns, etc.
Potential drawbacks of registering a GST for zero-rated services
Registering a GST (Goods and Services Tax) for zero-rated services can have several potential drawbacks or limitations, including:
- Increased administrative burden: GST registration involves a lot of paperwork and record-keeping, which can be time-consuming and complex. Even if you are not collecting GST on your sales, you still need to keep track of your GST transactions and file regular returns, which can be a burden for small business owners.
- Cash flow issues: If you are providing zero-rated services, you are not charging GST to your customers, which means you cannot claim back any GST you have paid on your business expenses. This can lead to cash flow issues, as you may have to pay GST on your purchases without being able to recover them.
- Pricing pressure: By registering for GST, you may be perceived as a larger, more established business, which could put pressure on you to offer lower prices to compete with other businesses in your industry. This could erode your profit margins and make it harder to sustain your business over the long term.
- Increased competition: Registering for GST may make it easier for other businesses to compete with you, as they can now offer similar services without charging GST. This could lead to a price war and put further pressure on your profit margins.
- Compliance risks: If you make any errors or omissions in your GST returns or fail to comply with other GST regulations, you could face penalties and fines. This could be particularly challenging for small businesses that may not have the resources to hire accounting or legal professionals to help them stay compliant.
Benefits of business for Zero-rated supplies under GST
There are several benefits for businesses that supply zero-rated goods or services under GST (Goods and Services Tax):
- Competitive advantage: By supplying zero-rated goods or services, a business may be able to offer lower prices to its customers compared to businesses that charge GST. This can give the business a competitive advantage in the market.
- Increased cash flow: Businesses that supply zero-rated goods or services can claim a refund on the GST paid on their purchases. This can help increase their cash flow, as they can use the refunded amount to invest in their business or pay off debts.
- Access to larger markets: Zero-rated goods or services are exempt from GST, which means they can be exported without any GST being charged. This makes it easier for businesses to access larger markets and expand their customer base.
- Reduced administrative burden: Businesses that supply zero-rated goods or services do not have to charge or collect GST, which can reduce their administrative burden. This can be particularly beneficial for small businesses that may not have the resources to manage GST compliance.
- Improved profit margins: By not charging GST on their supplies, businesses can increase their profit margins. This can provide more flexibility in pricing strategies and help the business remain profitable in a competitive market.
Thus, we can now conclude that the zero-rated supply shall be made by a supplier without collection of tax as there is no tax applicable on the same. But the supplier shall claim a refund of the ITC available to them based on payment of tax made on purchase. And for this, the supplier shall take registration under GST Act and also file GSTR 3B and 1 furnishing all the details of the supplies made by them in the form of export, and also to the SEZ developer and SEZ unit.
Kanakkupillai is a business consulting firm that provides services related to GST registration and compliance in India with an experience of more than 10 years.
We can assist businesses in timely registration for GST, as well as provide guidance on maintaining compliance with GST regulations to avoid any consequences of non-registration. Their services include GST registration, filing of GST returns, and compliance management.