Concessional GST on Supplies to Merchant Exporters: Comprehensive Practical Guide
Supplies made to a merchant exporter under GST need not always bear the full applicable tax rate. In certain cases, the law permits the supplier to charge GST at a sharply reduced rate—0.05% CGST plus 0.05% SGST/UTGST for intra-State transactions, and 0.1% IGST for inter-State transactions—provided the strict conditions prescribed in Notification 40/2017-CT (Rate) and Notification 41/2017-IGST (Rate), both dated 23.10.2017, are fully complied with.
This concessional levy is not automatic and is distinctly different from the concept of “zero-rated supply”. It is a conditional partial exemption framework that depends on the export performance and documentation maintained by the merchant exporter, while the primary tax risk sits with the supplier.
This guide explains:
- The legal character of Notification 40/2017-CT (Rate) and Notification 41/2017-IGST (Rate)
- Eligibility checks for suppliers and merchant exporters
- Detailed breakdown of each condition (i)–(ix) and its practical application
- Key risks for suppliers and why many still prefer charging normal GST
- Step-wise SOP for suppliers to safely use the concessional route
- Impact on Input Tax Credit (ITC) build-up and possible refund planning
1. Core Concept: Why a Separate Concessional Route Was Needed
Under the GST framework, a domestic supply does not become “zero-rated” merely because the recipient intends to export the goods. Section 16 of the IGST Act treats only the following as “zero-rated supplies”:
- Export of goods or services, and
- Supplies to SEZ developer or SEZ unit
A regular registered supplier within India, making supplies to a merchant exporter (who then exports), is still making a domestic supply. Therefore, the supplier cannot issue an invoice with “Nil” GST just because the buyer will later export the goods.
To ease working capital pressure on merchant exporters, the Government introduced a special mechanism:
- Intra-State supplies: Concessional tax of 0.05% CGST + 0.05% SGST/UTGST under Notification 40/2017–Central Tax (Rate)
- Inter-State supplies: Concessional tax of 0.1% IGST under Notification 41/2017–Integrated Tax (Rate)
This is a conditional partial exemption, not a blanket benefit. If any condition fails—particularly the 90-day export requirement—the concession collapses, exposing the supplier to demand for differential tax, interest, and possibly penalty.
An alternative, always available route is:
- Supplier charges normal applicable GST rate, and
- Merchant exporter claims ITC and then applies for refund of tax paid on exports as per the regular GST refund framework.
2. Legal Nature of Notification 40/2017 and 41/2017
2.1 What Notification 40/2017-CT (Rate) Does
Notification 40/2017-CT (Rate):
- Applies to intra-State supplies of taxable goods made to merchant exporters
- Exempts CGST to the extent it exceeds 0.05%, subject to conditions (i) to (ix)
- Clearly states that if export is not completed within 90 days from the date of invoice, the supplier is not entitled to this exemption
2.2 What Notification 41/2017-IGST (Rate) Does
Notification 41/2017-IGST (Rate):
- Applies to inter-State supplies of taxable goods to merchant exporters
- Exempts IGST to the extent it exceeds 0.1%, again linked to the same conditions (i) to (ix)
- Similarly denies exemption if export is not completed within 90 days from the tax invoice date
Key Understanding
These notifications create a concessional-rate procurement mechanism for merchant exporters. They do not convert the supplier’s domestic supply into a “zero-rated” export. The benefit depends on:
- Export within 90 days, and
- Strong documentation trail linking the concessional domestic supply to the subsequent export.
3. Initial Eligibility Filters Before Applying the Scheme
Before a supplier even considers charging tax at 0.05% / 0.1%, two basic “gate checks” must be passed.
3.1 Supplier-Side Requirements
The supplier must:
- Be a registered person under GST
- Make taxable supply of goods (the scheme is not intended for exempt goods)
3.2 Merchant Exporter’s Requirements
The recipient (merchant exporter) must:
- Be a registered person under GST
- Be registered with an Export Promotion Council (EPC) / Commodity Board recognized by the Department of Commerce (e.g., holding a valid RCMC or equivalent registration).
Suppliers should insist on obtaining documentary proof of EPC/Commodity Board registration before proceeding.
4. Conditions (i)–(ix): Detailed Compliance Interpretation
The wording of conditions (i) to (ix) is almost identical across both notifications. Below is a consolidated, practical explanation of each condition.
4.1 Condition (i): Supply Must Be Under a Tax Invoice
- Goods must be supplied under a tax invoice, not a bill of supply.
- The invoice must clearly show:
- GST charged at 0.05% CGST + 0.05% SGST/UTGST (for intra-State) or 0.1% IGST (for inter-State), and
- All particulars required under GST invoice rules.
Practical Insight
Incomplete or non-compliant invoices weaken the defence of concessional supply. The concessional rate itself should be visibly stated.