Zero-Rated, Not Zero-Work: A Practical Masterclass on Section 16 of the IGST Act, 2017 (Exports & SEZ Supplies)

When GST was introduced, one policy promise was non-negotiable: India's exports should not carry embedded domestic taxes. Section 16 of the IGST Act, 2017 is the legal engine behind that promise. It creates the concept of "zero-rated supply"-a special category where the outward supply is treated as taxable for credit purposes, but the tax burden is neutralised through ITC availability + refund mechanisms. In practice, Section 16 is less about a "0% rate" and more about keeping the input tax chain alive and ensuring that exports/SEZ supplies remain globally competitive.

1) What does Section 16 actually cover?

A. Meaning of "Zero-rated supply" (Section 16(1))

Section 16(1) declares the following as zero-rated supplies:

1. Export of goods or services or both, and

2. Supply of goods or services or both for authorised operations to an SEZ developer or SEZ unit.

That small phrase-"for authorised operations"-is a major compliance pivot. It is not merely descriptive; it narrows the benefit so that SEZ zero-rating and refunds align with SEZ-authorised activity (and not every procurement under the sun).

B. SEZ supplies: inter-State by default (practical consequence)

CBIC has clarified that supplies to SEZ developer/unit are treated as inter-State supplies under IGST, even where place-of-supply logic might otherwise suggest intra-State (e.g., hotel/banquet services).

2) Zero-rated vs exempt: the "ITC differentiator"

This is where many people mentally mix up concepts.

Section 16(2) expressly states that input tax credit may be availed for making zero-rated supplies, notwithstanding that such supply may be an exempt supply-but it remains subject to blocked credits under Section 17(5) of the CGST Act.

Takeaway: Zero-rated is GST's way of saying: "We won't tax your export/SEZ supply output, but we also won't break your credit chain-subject to the standard blocked-credit rules."

3) The refund architecture under Section 16: two routes (and how they changed)

Route 1: Export/SEZ supply without payment of IGST (Bond/LUT route)

Section 16(3) now positions the default mechanism as:

This route is central to exporters who accumulate credit due to:

Special compliance trigger: non-realisation of export proceeds (goods)

Section 16(3) contains a hard deterrent: if export sale proceeds are not realised within FEMA timelines, the exporter must deposit the refund received along with applicable interest within the prescribed time.

So, the refund is not "free money"; it is linked to genuine export realisation.

Route 2: Zero-rated supply on payment of IGST and claim refund of tax paid

Historically, exporters commonly used "pay IGST and claim refund" (especially for goods, where shipping bill refunds were smoother).

But post amendments, Section 16(4) now says: the Government may, by notification, specify:

What did the Government notify?

A major notification framework (captured in the CBIC Customs circular) effectively made this rule:

This is a policy response to risk-prone categories where IGST refund route was vulnerable to misuse, and the system now enforces it through shipping bill validations.

Extension to SEZ supplies (IGST-paid route)

Subsequent changes expanded the IGST-paid option to supplies to SEZ developer/unit for authorised operations, while keeping exclusions for the risk-prone commodities.

4) The 2024 "export duty" bar: Section 16(5)

A crucial newer restriction is Section 16(5):

No refund of unutilised ITC (or IGST paid) shall be allowed for zero-rated supply of goods where such goods are subjected to export duty.

This is significant for sectors where export duty can apply (often policy-sensitive commodities). The message is clear: zero-rating is not meant to subsidise exports of goods where the Government simultaneously levies export duty.

5) Procedural reality: how refunds actually move on the ground

Section 16 creates entitlement; the CGST Rules create the plumbing.

A. IGST-paid refund on export of goods (Rule 96 "shipping bill route")

Rule 96 provides that the shipping bill is deemed to be the refund application for IGST paid on exported goods-subject to triggers like export manifest filing and filing of valid returns (GSTR-3B), and data matching between shipping bill and GSTR-1.

Practical implication:

Even a small mismatch between invoice data reported and shipping bill data can delay the "deemed filing" date until rectified.

B. System restrictions for "notified goods"

CBIC's Customs circular explains that the DG Systems backend blocks shipping bills under the IGST-paid refund route if the shipping bill contains a restricted item-even if only one invoice line item is restricted.

Exporter lesson: Never mix restricted and unrestricted goods in a single IGST-paid shipping bill expecting a partial refund. The system won't permit it.

C. SEZ supplies: endorsement is not optional

CBIC has clarified that for SEZ refunds/zero-rating, benefits are available only if the supply is for authorised operations and backed by an endorsement by the specified officer (goods admitted / services received for authorised operations).

This is one of the most litigated and most practically failed checkpoints: paperwork.

6) Common pitfalls (and how to avoid them)

Pitfall 1: Treating every supply to SEZ as zero-rated

Reality: zero-rating/refund hinges on authorised operations + specified officer endorsement. Without it, the Department can challenge refund eligibility.

Fix: build an SEZ file for each supply: PO/approval, endorsement, proof of receipt, invoice markings, and contract linkage.

Pitfall 2: Choosing the wrong route without cashflow math

Fix: choose route based on: working capital, time-to-refund patterns, and category restrictions notified under Section 16(4).

Pitfall 3: Export proceeds not realised (goods)

If you took refund under Section 16(3) and proceeds are not realised within FEMA timelines, you face refund reversal with interest.

Fix: put an internal compliance alert aligned to FEMA timelines for every export invoice linked to LUT refunds.

Pitfall 4: Shipping bill & return mismatches

Rule 96 ties refund eligibility to return filing and data matching.

Fix: reconcile (Shipping Bill ↔ GSTR-1 ↔ GSTR-3B) before export refund cycles peak.

7) Quick illustrations to make Section 16 "stick"

1. Software exporter (services): Export is zero-rated; ITC on rent, cloud tools, professional services may be claimed (subject to blocked credits), and refund is sought typically via LUT route and RFD processes.

2. Supplier to SEZ unit: Zero-rated only if supply is for authorised operations, backed by endorsement; refund depends on compliant documentation.

3. Exporter of notified "risk goods" (e.g., certain tobacco/pan masala lines): IGST-paid refund route restricted; export must be under LUT, and systems block IGST-paid shipping bills.

4. Export of goods with export duty: even though export is zero-rated, Section 16(5) denies refund of unutilised ITC/IGST paid.

Section 16 is a privilege-earn it with process

Section 16 is one of GST's most exporter-friendly provisions, but it is also one of the most compliance-sensitive. The law grants the benefit (zero-rating + credit + refunds), and then builds guardrails: authorised operations for SEZ, notification-based IGST payment route, system-enforced restrictions for high-risk exports, FEMA-linked refund reversals, and export-duty based denial of refunds.

If you treat Section 16 as a "refund provision", you'll face friction. If you treat it as a complete export/SEZ tax framework, design documentation around it, and pick the right route strategically, it becomes what it was meant to be: a clean zero-tax footprint for India's outward trade.

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.