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 and affordable. By not charging GST registration on exports, the cost of the goods or services is reduced, making them more affordable for foreign buyers.

Generally, we can observe that a country and its government promote exports to a greater extent. This is done to enhance the economy and promote its growth, increase employment opportunities, and also balance the payments. As part of this process to boost exports, the government provides certain reliefs and benefits to business entities engaged in the export process. Zero-rated supply in GST can be understood as one of the benefits provided 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 following supplies 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 supplier that has done to the Special Economic Zone (SEZ) Unit.

The Zero-Rated supply would allow business entities to avail of the input tax credit (ITC) of the GST paid by them on any purchase for making the supply of zero-rated goods, services, or both possible. However, to avail of this, the business entity supplying the zero-rated supplies must be registered under the GST Act. This would make them eligible to claim a refund of the GST paid on the purchase, as the Input Tax Credit (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 an interstate 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 a zero-rated supply. Still, the credit of input tax shall be made available, and for availing of this, the business entity should obtain registration under GST. The business entity, when computing the total turnover, shall add the zero-rated supplies to the taxable turnover and also register to avail of the Input Tax Credit (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. The remaining 10% of the refund shall be made after due verification of the documents 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:

1. Export of goods and services
2. Supply of goods and services to a Special Economic Zone (SEZ) developer or SEZ unit
3. Services provided to an SEZ developer or SEZ unit
4. Supply of goods and services to a person outside India
5. Supply of goods and services to a merchant exporter
6. 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)
7. 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), two types of services can be classified as zero-rated services:

1. 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 and filing relevant returns.
2. 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, certain conditions must be fulfilled by the service supplier, such as obtaining an SEZ registration number and filing relevant returns.

Potential drawbacks of registering for GST for zero-rated services

Registering for a GST (Goods and Services Tax) for zero-rated services can have several potential disadvantages or limitations, including:

1. 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.
2. 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 it.
3. 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.
4. 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.
5. 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 companies that supply zero-rated goods or services under GST (Goods and Services Tax):

1. 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.
2. 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 improve their cash flow, as they can use the refunded amount to invest in their business or pay off debts.
3. 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.
4. 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.
5. 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 company remain profitable in a competitive market.

Conclusion

Thus, we can now conclude that the zero-rated supply shall be made by a supplier without the collection of tax, as there is no tax applicable on the same. However, the supplier shall be entitled to claim a refund of the Input Tax Credit (ITC) available to them based on the tax paid on the purchase. For this, the supplier shall register under the GST Act and file GSTR-3 B and GSTR-1, furnishing all details of the supplies made by them, including exports, 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 over 10 years of experience.

We can assist businesses in timely registration for GST, as well as guide 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.

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