Indirect tax in most countries is either known as Value Added Tax (VAT) or Goods and Services Tax (GST). Most VAT/ GST laws across world possess a concept called “Zero-rated”.
Countries with VAT/GST can designate certain goods as zero-rated goods. Zero-rated goods are typically individualized items. Countries often designate goods as zero-rated because the goods are leading contributors to other manufactured goods and thus a leading part of a broader supply chain. Many food items are designated as zero-rated goods; these food items are sold with a 0% value added tax.
Zero-rated supply refers to items that are
– taxable, but the rate of tax is nil on their supplies and
– input tax relating to them can be availed.
Typically, items like books, essential commodities, exports etc are zero-rated. In Indian indirect tax law, no such concept exists. However, proposed GST laws borrows the concept of zero-rated.
As per the proposed GST Law, “zero rated supply” means any of the following taxable supply of goods and/or services, namely –
(a) export of goods and/or services; or
(b) supply of goods and/or services to a SEZ developer or an SEZ unit.
Further proviso to this section read “…credit of input tax may be availed for making zero-rated supplies, notwithstanding that
such supply may be an exempt supply”
It virtually means that if a supplier of goods/ services exports – no tax shall be charged on such supplied. Additionally, credit of input tax paid on service procured for providing such supplies.
However, in case of supplies to SEZ, the concept of Zero rated has been dealt differently. Under the proposed GST Law, a deeming fiction has been created wherein supply to and from SEZ shall be subject to IGST.
On conjoint reading of both the concepts, the only possible outcome is that zero-rating for SEZ has been done by way of refund. In other words, SEZ unit shall claim refund of tax paid on services procured by it. Thus, while there may not be any upfront exemption from tax, refund can be claimed.