Section 16 is what makes exports and SEZ supplies tax-free without breaking the credit chain. Unlike an exempt supply, a zero-rated supply keeps its input tax credit, and the credit — or the IGST paid on the supply — is refunded.
Key points
- Under section 16(1) of the IGST Act, 2017 a zero-rated supply is an export of goods or services, or a supply to an SEZ developer or SEZ unit for authorised operations.
- Input tax credit may be taken for making zero-rated supplies even though they may be exempt (section 16(2)), subject to the blocked credits in section 17(5) of the CGST Act.
- From 01.10.2023, zero-rated supplies are made under bond or LUT without IGST with refund of unutilised credit (section 16(3)); exporting on payment of IGST and claiming refund of that IGST is available only to notified persons or for notified goods or services (section 16(4)).
- From 01.11.2024, no refund of credit or of IGST is allowed on zero-rated supplies of goods that are subject to export duty (section 16(5)).
- An exporter of goods who received a refund under LUT must repay it with interest if the sale proceeds are not realised within the FEMA time limit (proviso to section 16(3)).
The provisions
16(1)What is a zero-rated supply
Statutory text
(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 1[for authorised operations] to a Special Economic Zone developer or a Special Economic Zone unit.
1. Inserted vide s. 123(a) of the Finance Act, 2021 dated 28th March, 2021- Brought into force w.e.f. 01st October, 2023 vide Notification No. 27/2023-C.T., dated 31st July, 2023.
16(2)Credit allowed on zero-rated supplies
Statutory text
(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.
What it means
Ordinarily an exempt supply carries no credit. Sub-section (2) displaces that for zero-rated supplies: credit may be taken "notwithstanding that such supply may be an exempt supply" — the difference between zero-rating and exemption. The blocked credits in section 17(5) of the CGST Act still apply.
16(3)–(4)Refund routes
Statutory text
2[(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 3[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 3[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].]
2. Substituted vide s. 123(b) of the Finance Act, 2021 dated 28th March, 2021- Brought into force w.e.f. 01st October, 2023 vide Notification No. 27/2023-C.T., dated 31st July, 2023; for:
"(3) A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely:-
(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit; or
(b) he may supply goods or services or both, subject to such conditions, safeguards and procedure as may be prescribed, on payment of integrated tax and claim refund of such tax paid on goods or services or both supplied, in accordance with the provisions of section 54 of the Central Goods and Services Tax Actor the rules made thereunder."
3. Inserted by section 153 of The Finance Act (No. 2) Act, 2024 No. 15 of 2024 dated 16.08.2024.
What it means
Before 01.10.2023 every exporter could choose: supply under bond or LUT without IGST and claim refund of unutilised credit, or pay IGST and claim refund of the IGST. The Finance Act, 2021 (in force from 01.10.2023) narrowed this.
- Sub-section (3) — the default. Supply under bond or Letter of Undertaking without paying IGST, and claim refund of unutilised credit under section 54 of the CGST Act. If export proceeds of goods are not realised within the FEMA time limit, the refund must be repaid with interest under section 50 within thirty days after that limit.
- Sub-section (4) — by notification only. Paying IGST on the zero-rated supply and claiming refund of that IGST is open only to a class of persons, or for a class of goods or services, notified by the Government on the Council's recommendation.
Rule 96(10) CGST Rules — omitted from 08.10.2024— The bar on IGST-paid export refunds for exporters using duty-free input schemes is gone.
Rule 96(10) denied refund of IGST paid on exports to exporters who had imported inputs under certain duty-exemption schemes, such as Advance Authorisation, without paying IGST. Notification 20/2024-Central Tax omitted it from 08.10.2024, without a saving clause.
Union of India v Cosmo Films Ltd — Supreme Court, 28.04.2023— The "pre-import condition" for IGST exemption on Advance Authorisation imports upheld.
Reversing the Gujarat High Court, the Supreme Court upheld the requirement that inputs be imported before export to enjoy exemption from IGST and compensation cess under Advance Authorisation. Relevant where exporters relied on that exemption while claiming refunds of IGST on exports.
16(5)No refund where export duty applies
Statutory text
3[(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.]
What it means
From 01.11.2024 (Finance (No. 2) Act, 2024, brought into force by Notification 17/2024-Central Tax), no refund — neither of unutilised credit nor of IGST paid — is allowed on zero-rated supplies of goods that are subject to export duty. It overrides sub-sections (3) and (4). Services are not affected.
CBIC note 3 gives only the date of the Finance (No. 2) Act, 2024 (16.08.2024). Sub-section (5) took effect from 01.11.2024.
Statutory text as published on the CBIC tax information portal, as on 03.10.2026; the numbered notes record each amendment. Official source
Common questions
- What is a zero-rated supply under GST?
- Under section 16 of the IGST Act, an export of goods or services, or a supply to an SEZ developer or unit for authorised operations. Credit is allowed and refunded.
- Can an exporter still pay IGST and claim refund?
- From 01.10.2023, only if the exporter or the goods or services fall in a class notified under section 16(4). Otherwise exports are made under bond or LUT with refund of unutilised credit.
- Is refund available on exports subject to export duty?
- No. From 01.11.2024 section 16(5) bars refund of credit and of IGST on zero-rated supplies of goods subject to export duty.
- What happens if export proceeds are not realised?
- The refund received under LUT must be repaid with interest within thirty days after the FEMA time limit for realisation (proviso to section 16(3)).
Commentary and case notes checked against the judgments and CBIC sources on 04.10.2026.
What it means
Two kinds: (a) exports of goods or services — as defined in section 2(5) and (6); and (b) supplies to an SEZ developer or SEZ unit. From 01.10.2023 the SEZ limb is confined to supplies "for authorised operations" (Finance Act, 2021), so a supply to an SEZ for anything else is not zero-rated.
A "deemed export" under section 147 of the CGST Act is not a zero-rated supply; it has its own refund route.