GST on Exports: Zero-Rated vs Exempt — What Indian Exporters Get Wrong

Ask an Indian exporter whether their exports are taxable under GST and most will say no. That is correct — but for the wrong reason. Exports are not exempt from GST; they are zero-rated. The difference between these two categories is not semantic. It determines whether you can claim input tax credit on every rupee of GST you pay on raw materials, services, and overhead — and whether you can get a refund of that credit from the government. Getting this wrong costs exporters lakhs in unclaimed ITC every year.

Zero-Rated vs Exempt: Why the Distinction Matters

Under India's GST framework:

• Zero-rated supply (Section 16, IGST Act): GST rate is 0%, but the supplier retains the full right to claim input tax credit (ITC) on inputs, input services, and capital goods used in making the supply. The accumulated ITC can be claimed as a cash refund from the government. Exports of goods, exports of services, and supplies to Special Economic Zones qualify as zero-rated supplies.
• Exempt supply: GST rate is also 0%, but the supplier cannot claim ITC on inputs used for exempt supplies. Under Rule 42/43 of the CGST Rules, ITC attributable to exempt supplies must be reversed. Healthcare, education, and certain agricultural commodities are examples of exempt supplies.

If you treat your export transactions as exempt instead of zero-rated, you will reverse ITC that you were legally entitled to keep — and you will not file refund claims that are rightfully yours. For a company spending ₹50 lakh a year on GST-liable inputs and services, treating exports as exempt instead of zero-rated could mean losing the entire ₹50 lakh in ITC that could have been refunded.

Two Routes for Zero-Rated Exports

For exports of goods and services (and supplies to SEZs), GST law provides two mechanisms:

• Route A — Export under Bond/LUT (recommended): File a Letter of Undertaking on the GST portal before exporting. Export without paying any IGST. Claim a refund of accumulated ITC from the GST department. This is the preferred route for most exporters because it avoids the cash flow burden of paying IGST upfront.
• Route B — Export on payment of IGST and claim refund: Pay IGST on the export invoice, export the goods or services, and subsequently claim a refund of the IGST paid. Refund is typically processed faster for goods (linked to shipping bill), but the exporter must fund the IGST payment until the refund arrives — which can take 30-90 days.

How to File a Letter of Undertaking (LUT)

The LUT must be filed on the GST portal (Services > User Services > Furnish Letter of Undertaking) at the start of each financial year, before the first export transaction of that year. It is valid for the entire financial year. Key points:

• Any GST-registered person can file an LUT, with one exception: taxpayers who have been prosecuted for an offence involving tax evasion of ₹2.5 crore or more must pay IGST on exports and claim refund instead.
• The LUT references a bond (actual bond for new or risky exporters, LUT for established exporters with clean track record — CBDT instructions specify the distinction).
• A fresh LUT is mandatory each financial year. Exporters who forget to renew their LUT before April 1 find their early-April exports in a grey area. The workaround: file the new LUT retroactively for the financial year (GSTN accepts this), and in the interim export under IGST payment and claim refund.

Export of Services: The Five Conditions

For software companies, consulting firms, BPOs, and any Indian company billing an overseas client, the zero-rated benefit only applies if all five conditions under Section 2(6) of the IGST Act are simultaneously satisfied:

1. The supplier of the service is located in India
2. The recipient of the service is located outside India
3. The place of supply of the service is outside India
4. The payment for the service is received in convertible foreign exchange — or in Indian rupees where the RBI permits (Nepal, Bhutan)
5. The supplier and recipient are not merely establishments of the same legal entity — i.e., they cannot be the Indian HQ and its foreign branch invoicing each other

Condition 4 trips up the most Indian IT and consulting companies. If payment is received in INR from a foreign client (outside RBI-permitted corridors), the supply does not qualify as export of services — and full GST applies. Ensure your invoices specify USD, EUR, GBP, or another convertible currency, and that the bank credits show the foreign inward remittance clearly with a FIRC or BRC.

ITC Refund Process for Zero-Rated Supplies

The refund cycle for accumulated ITC on exports:

1. Declare exports correctly in GSTR-1 — Table 6A for goods exports and services exports under LUT (without IGST); Table 6B for exports with IGST payment
2. Reflect zero-rated supplies in GSTR-3B
3. File Form RFD-01 on the GST portal within 2 years of the relevant date (for services, the date of receipt of foreign exchange — when the FIRC is issued)
4. Upload supporting documents: LUT, export invoices, bank realization certificate (FIRC/BRC), GSTR-1 and 3B for the relevant periods
5. For goods: provisional refund of 90% within 7 days of acknowledgement
6. For services: refund processed within 60 days of acknowledgement

Common Mistakes Indian Exporters Make

• Treating exports as exempt and reversing ITC — the most expensive mistake, losing all accumulated credit
• Forgetting to file or renew the LUT before the start of the financial year, leaving early exports uncovered
• Not receiving payment in foreign exchange for service exports — invoicing in USD but receiving INR conversion from the bank without a FIRC defeats the condition
• Missing export details in GSTR-1 Table 6A — refund application RFD-01 is rejected or delayed without GSTR-1 matching
• Not filing RFD-01 within 2 years of the relevant date — the claim lapses permanently

If your business exports goods or services and has not claimed a GST refund in the past year, you likely have accumulated ITC sitting unclaimed. Our GST Advisory team can review your returns and file a retroactive refund claim for up to 2 years.