Complete Guide to GST Refund Under Section 54 for Zero-Rated Supplies

Under GST, exports and supplies to SEZ for authorised operations are supposed to leave India tax-neutral. But in real business life, taxes first get embedded in inputs, input services, and sometimes even in the outward leg, and then the supplier has to unlock that money through the refund mechanism. That is why Section 54 of the CGST Act is not merely a procedural provision. For exporters and SEZ suppliers, it is a working-capital lifeline. Read with Section 16 of the IGST Act and Rules 89, 96, 96A and 96B of the CGST Rules, it creates the full framework for claiming refund on zero-rated supplies. 

The first thing to understand is the meaning of “zero-rated supply.” Section 16(1) of the IGST Act says it covers two categories only: export of goods or services or both, and supply of goods or services or both for authorised operations to an SEZ developer or SEZ unit. This is very different from a normal exempt supply. In an exempt supply, output tax may be nil but credit is usually blocked or restricted. In a zero-rated supply, the law intentionally preserves the credit chain so that taxes do not stick to exports. CBIC has also clarified that even zero-rated supply of exempted or non-GST goods can still enjoy the zero-rating principle because Section 16(2) allows input tax credit for making zero-rated supplies notwithstanding that such supply may itself be an exempt supply. 

The second important point is the present statutory structure. Earlier, zero-rated suppliers broadly had two routes: export under LUT/bond without payment of IGST and claim refund of unutilised ITC, or export on payment of IGST and claim refund of the tax so paid. After the amendment brought into force from 1 October 2023, Section 16(3) now expressly speaks of refund of unutilised ITC for zero-rated supply made without payment of integrated tax under bond or LUT, while Section 16(4) says the IGST-paid route depends on classes of persons or goods/services being notified by the Government. In practical terms, the universal statutory option of paying IGST and taking refund is no longer available to everyone merely by choice; one has to check whether one falls within the notified framework. 

Section 54 itself is wide enough to support this framework. Its Explanation says “refund” includes refund of tax paid on zero-rated supplies and also refund of tax paid on inputs or input services used in making such zero-rated supplies. Section 54(3) permits refund of unutilised ITC in two situations, one of which is zero-rated supplies made without payment of tax. Section 54(8) ensures that export-related refund and refund of unutilised ITC are paid to the applicant, not diverted to the Consumer Welfare Fund. At the same time, the law has clear restrictions: if the supplier claims drawback of central tax or claims refund of IGST paid on the outward supply, refund of unutilised ITC is barred; and where zero-rated supply of goods is subjected to export duty, refund of unutilised ITC or refund of IGST paid on such goods is not allowed. 

Time limit is where many genuine claims collapse. Section 54(1) requires the application to be filed before the expiry of two years from the relevant date. But the relevant date is not the same for every zero-rated transaction. For export of goods by sea or air, it is the date on which the vessel or aircraft leaves India; for land exports, the date when goods cross the frontier; for postal exports, the date of despatch by post. For export of services, the relevant date is the date of receipt of payment in convertible foreign exchange, or in INR where RBI permits, if the service was completed before payment; if the payment came in advance, then the invoice date becomes relevant. For zero-rated supplies to SEZ developer or SEZ unit, the law specifically treats the due date for furnishing the Section 39 return in respect of such supplies as the relevant date. 

Who files the refund and what documents are needed depends on the nature of supply. Under Rule 89, refund is generally filed electronically in FORM GST RFD-01. For export of goods, the claimant furnishes the statement containing shipping bill or bill of export details and export invoices. For export of services, invoice details and the relevant BRC/FIRC details are required. In SEZ cases, the supplier files the claim, but only after the goods are admitted in full into the SEZ for authorised operations or the services are endorsed by the specified officer of the Zone as received for authorised operations. Rule 89 also requires invoice statements, proof of payment in service-to-SEZ cases, and a declaration that tax has not been collected from the SEZ unit or developer. This is where many refund claims fail: the transaction may be commercially real, but the endorsement trail is incomplete. 

For most taxpayers today, the classic and safer zero-rated refund path is: furnish LUT or bond, export without payment of IGST, and then claim refund of the accumulated input tax credit under Section 54 read with Rule 89(4). Rule 96A says that a registered person choosing this route must furnish bond or LUT in FORM GST RFD-11 before export. The refund claim is then filed in RFD-01. Rule 89(4) prescribes the formula: Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) × Net ITC ÷ Adjusted Total Turnover. “Net ITC” for this purpose includes input tax credit availed on inputs and input services during the relevant period. 

The formula sounds simple, but the definitions matter. For goods, Rule 89 caps “turnover of zero-rated supply of goods” at the lower of actual zero-rated turnover and 1.5 times the value of like goods domestically supplied by the same or similarly placed supplier. For services, the turnover is linked to payments received during the relevant period, adjusted for advances and completion of supply. The export value of goods is also not left to free drafting. Rule 89 explains that the value of goods exported out of India shall be taken as the lower of the FOB value declared in the shipping bill/bill of export and the value declared in the tax invoice or bill of supply. So, exaggerated invoice values do not automatically enlarge the refund entitlement. 

The IGST-paid route still survives, but it must now be read carefully. Rule 96 continues to provide the machinery for refund of integrated tax paid on exported goods and services. In export of goods, the shipping bill is treated as the refund application once the export manifest is filed, the relevant GSTR-3B is furnished, and required validations are satisfied. If there is a mismatch between shipping bill data and GSTR-1 data, the claim is deemed to be filed only when the mismatch is rectified. Export of services, however, does not ride on the shipping-bill mechanism; its refund application has to be filed in FORM GST RFD-01 and is then processed under Rule 89. A useful recent development is that Rule 96(10), which earlier restricted certain IGST-paid refunds where specified benefits were availed on inputs, stands omitted vide Notification No. 20/2024-CT dated 8 October 2024. The GST Council had also announced this simplification prospectively. For current periods, that is a relief; for old periods, one must still apply the law as it stood then. 

Section 54 also builds in a time-bound refund discipline. Under Section 54(6), in zero-rated refund cases, the proper officer may grant provisional refund of 90% of the claim on a provisional basis, subject to the prescribed safeguards. Section 54(7) says the final order should be issued within 60 days from the date of receipt of a complete application. Section 56 then adds teeth by providing interest on delayed refunds beyond that period. CBIC’s master refund circular further clarifies that if the officer is fully satisfied on a zero-rated claim, there is no legal bar to bypassing the provisional stage and issuing the final refund order in FORM GST RFD-06 within 7 days of acknowledgement itself. 

Refund litigation often starts not with law but with defective filing. Circular No. 125/44/2019 clarifies that within 15 days of ARN generation, the officer should issue either an acknowledgement or a deficiency memo. Once acknowledgement has been issued, no deficiency memo can later be issued for the same application on any ground. But if a deficiency memo is issued, the original application is not processed further; the debited amount is re-credited, and the taxpayer has to file a fresh RFD-01. Crucially, that fresh application is still subject to the original two-year limitation from the relevant date. So a weak first filing near limitation can become fatal if the corrected filing slips beyond time

Taxpayers should also remember that refund is not an automatic release of cash merely because export has happened. Section 54(10) allows the officer to withhold or deduct the refund if returns are pending or if tax, interest, penalty, fee or other dues remain unpaid and are not stayed. Section 54(11) separately allows withholding where appeal or other proceedings are pending and grant of refund is likely to adversely affect revenue on account of fraud or malfeasance. On top of that, Rule 96B deals with export proceeds not realised. Where refund of unutilised ITC or IGST paid on export of goods has already been granted but sale proceeds are not realised within the FEMA period, the taxpayer must repay the refund, to the extent of non-realisation, along with interest within the prescribed window, failing which recovery follows. The statute now also places similar non-realisation consequence in the proviso to Section 16(3) for zero-rated supply of goods. 

A practical refund strategy under Section 54 therefore has to be document-heavy and reconciliation-driven. Keep invoice data, shipping bill data, export manifest details, GSTR-1, GSTR-3B, LUT/bond records, BRC/FIRC, SEZ endorsements, and bank realisation trail perfectly aligned. For export of goods under Rule 96, even a mismatch between shipping bill and GSTR-1 can postpone the deemed filing date of the refund claim. For SEZ supplies, “authorised operations” and endorsement are not decorative phrases; they are statutory conditions. For export of services, payment trail is central. Also note that Rule 89 is expressly subject to Rule 10B, and Rule 96 now requires Aadhaar authentication for the exporter before the shipping-bill refund mechanism becomes effective. 

The real lesson is this: Section 54 is generous in concept but unforgiving in execution. It recognizes that taxes should not be exported and that zero-rated suppliers must get back the tax cost embedded in the supply chain. But the refund comes only if the claimant chooses the correct route, files within the correct limitation period, computes the amount with the correct Rule 89 formula, and backs the claim with the exact documents the rules demand. For exporters and SEZ suppliers, the smartest approach is to treat refund compliance not as a post-export formality, but as part of transaction design itself. Done correctly, Section 54 converts GST from a cash-flow burden into a recoverable credit. Done casually, it converts a legitimate refund into a preventable dispute.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.