Zero-rated is not the same as exempt, and the difference is the whole point.
An exempt supply carries no output tax and blocks the credit attributable to it. A zero-rated supply carries no output tax and leaves the credit fully available. That is why exports do not carry embedded Indian tax, and it is why the mechanics of getting the credit back matter so much.
Section 16 of the IGST Act covers two categories: export of goods or services, and supply to a special economic zone developer or unit.
The two routes
Section 16(3) gives you a choice, and it is a genuine choice with different cash flow consequences.
Route one: under a letter of undertaking, without paying tax
You furnish a letter of undertaking in FORM GST RFD-11, export without charging IGST, and claim a refund of the unutilised input tax credit accumulated on your inputs.
The LUT is filed on the portal, is valid for a financial year, and must be renewed each year. Renewal is easy to forget in April, and exporting without a valid LUT in place means the export should have carried tax. It is the most common administrative failure in this area and it is entirely avoidable with a diary entry.
Refund is under Rule 89, applied for in FORM GST RFD-01, and the amount is governed by a formula: turnover of zero-rated supply of goods and services, divided by adjusted total turnover, applied to net input tax credit.
The two things to know about the formula are that net ITC covers inputs and input services but not capital goods, and that adjusted total turnover is a defined figure rather than your accounting turnover. Credit relating to capital goods used for exports does not come back through this route, which is a real cost for a capital-intensive exporter and an argument for considering route two.
Route two: on payment of integrated tax
You pay IGST on the export and claim a refund of the tax paid.
For goods, this route is largely automatic. The shipping bill is treated as the refund application under Rule 96. Once the export general manifest is filed and the GSTR-1 and GSTR-3B for the period are furnished, and the data matches across the GST portal and ICEGATE, the refund is processed and credited without a separate application.
That automation is the attraction, and the matching requirement is the catch. The invoice number, the value, the port code and the shipping bill details have to agree across systems. A mismatch stops the refund silently, and there is no rejection letter to prompt you. The recourse is to check the transmission status on the portal, which is a step nobody performs unless the money is already late.
For services, there is no shipping bill, so a refund application under Rule 89 is required in either case, along with the foreign inward remittance certificates or bank realisation certificates evidencing receipt in convertible foreign exchange.
Choosing between them
The trade-off is straightforward once stated.
| LUT route | Payment route | |
|---|---|---|
| Cash out at export | None | IGST on every export |
| Refund of | Unutilised credit, formula-based | Tax paid, actual |
| Capital goods credit | Not recovered through the formula | Effectively recovered, since credit offsets the IGST payable |
| Process | Application under Rule 89 | Automatic for goods via shipping bill |
| Suits | Exporters with modest capital goods credit and tight cash | Capital-intensive exporters, and those with large credit balances to absorb |
An exporter with a large accumulated credit balance and significant capital goods credit is often better off on the payment route, because the IGST payable is discharged out of the existing credit balance, which puts that credit to use, and the refund that comes back is the actual tax rather than a formula outcome.
An exporter with little credit balance who would have to fund the IGST in cash is usually better off on the LUT route.
It is worth actually computing this rather than defaulting to the LUT because it is the familiar option.
Inverted duty structure refunds
The other main refund head under Section 54(3) is inverted duty structure, where the rate on inputs exceeds the rate on outputs and credit accumulates with no way to use it.
The September 2025 rate restructuring cut both ways here. It corrected inversion in fertilisers and fabrics, which was one of its stated purposes. It also created inversion elsewhere, most notably by moving coal, lignite and peat from 5 per cent to 18 per cent while many outputs sit at 5 per cent. Coal-intensive manufacturers who never had an inverted structure now have one.
The restriction to know is that refund under this head is confined to credit on inputs. Credit on input services and capital goods is not refundable under the inverted duty structure route, whatever the formula in Rule 89(5) produces on the input side. For a service-heavy manufacturer that is a significant limitation, and it means the accumulated credit does not fully come back.
The provisional refund changes from 2025
Refunds have historically been slow, and the September 2025 package addressed it.
From 1 November 2025, CBIC moved to granting 90 per cent provisional refunds on inverted duty structure claims and on zero-rated supplies, based on system-driven data analysis and risk evaluation rather than officer-by-officer scrutiny. Notification 13/2025-Central Tax amended Rule 91(2) so that the provisional refund order in FORM GST RFD-04 issues within seven days, with the officer able to skip the provisional route and proceed under Rule 92 in a risky case, and no revalidation of RFD-04 required.
Notification 14/2025-Central Tax carved out who cannot get a provisional refund: any registered person who has not completed Aadhaar authentication under Rule 10B, and suppliers of specified goods being areca nuts, pan masala, tobacco and manufactured tobacco substitutes, and essential oils. Effective 1 October 2025.
The Aadhaar authentication point deserves attention because it is easy to fix and expensive to ignore. If Rule 10B authentication has not been completed for the authorised signatory, provisional refunds are off the table entirely, and the claim waits for full processing. It is a fifteen-minute task on the portal that can be worth weeks of cash flow.
The 56th Council also recommended removing the threshold limit for refunds on exports made with payment of tax, which mattered for exporters shipping small consignments by post and courier, for whom the threshold had made refunds uneconomic.
Timing, and the traps in it
Refund must be claimed within two years from the relevant date under Section 54. The relevant date differs by refund type, and for export of services it is generally tied to receipt of payment in convertible foreign exchange rather than the invoice date.
Two practical points.
For export of services, remittance drives the clock. An invoice raised long before payment is received does not start the two years. Track the remittance, not the invoice.
Realisation matters. Where export proceeds are not realised within the period allowed under foreign exchange law, a refund already granted can be recovered. Unrealised export receivables are therefore a GST exposure as well as a foreign exchange one.
Supplies to special economic zones
SEZ supplies are zero-rated on the same basis, with two additional requirements. The supply must be for authorised operations of the unit or developer, and an endorsement by the specified officer of the zone is required for the refund claim.
The authorised operations condition is where claims fail. A supply to an SEZ unit that falls outside its list of authorised operations is not zero-rated, and the endorsement will not be given. Confirming the authorised operations position before supplying, rather than at refund stage, avoids an argument that is very difficult to win afterwards.
The summary
Zero-rated means no output tax and full credit, which is what separates it from exempt. Choose between the LUT route and the payment route on cash flow and capital goods, not on habit, and renew the LUT every April. For goods on the payment route the shipping bill is the application, so the failure mode is a silent data mismatch rather than a rejection. Inverted duty refunds cover inputs only. Complete Rule 10B Aadhaar authentication or forgo provisional refunds entirely. And for services, the two-year clock runs from remittance.
