Pre-Packaged Rice Supplied to Exporters Prior to Export Is Not Zero-Rated: A Hard Legal Line Between “Domestic Supply” and “Export Supply”

By CA Surekha S Ahuja

Introduction — A GST Misconception Finally Settled

For years, the agri-export ecosystem—especially rice millers, pulses traders, spice processors, and food-grain packers—worked under a deeply embedded assumption:

“If the supply is exclusively meant for export, every leg of the supply chain should also be zero-rated.”

The Gujarat AAR in Olam Agri India delivers a decisive corrective.

The legal position reaffirmed:

Zero-rating under GST applies only to the actual export as defined in Section 2(5) of the IGST Act.
Any supply before the goods physically cross India’s border remains a domestic supply, attracting the applicable GST.

This ruling has far-ranging implications for:

• Rice processors

• Agro-commodity exporters

• Garment exporters (fabric/trim suppliers)

• Diamond and jewellery exporters

• Pharmaceutical exporters

• Third-party exporters

• Job workers & logistics operators

• GST auditors and refund-sanctioning authorities

The AAR essentially draws a bright statutory boundary:

Export begins only when goods cross the customs frontier.
All pre-export supplies remain domestic.

Questions Before the AAR

The applicant sought GST clarity on three supply legs:

1. Export of pre-packaged and labelled rice ≤25 kg

2. Domestic supply on bill-to-ship-to basis to port

3. Supply to exporter’s factory before the export takes place

These required reading:

• Section 2(5) — export of goods

• Section 10 — place of supply

• Section 16 — zero-rated supply

• Notification 1/2017 (5% GST on pre-packaged rice)

• Notifications 40/2017 & 41/2017 (0.1% supplies to exporters)

Legal Framework — Statute vs. Industry Assumptions

3.1 Section 16 — Zero-Rated Supply

Permitted only for:

• Export of goods

• Supply to SEZ

Intention is irrelevant.
The event of export is what triggers zero-rating.

3.2 Section 2(5) — Export of Goods

Requires:

• Customs clearance

• Shipping bill

• EGM filing

• Physical movement outside India

Nothing short of physically crossing India’s territorial border qualifies.

3.3 Section 10 — Place of Supply

If:

• Supplier in India

• Buyer in India

• Delivery in India

→ Always a domestic supply
Later export by buyer is irrelevant.

3.4 Notification 1/2017

GST @ 5% on pre-packaged & labelled rice ≤25 kg.

3.5 Notifications 40/2017 & 41/2017

Concessional 0.1% supply to exporter is allowed only if:

• Exporter furnishes LUT/Bond

• Export occurs within 90 days

• Specific endorsement is made

• Documentary trail is intact

Supplies not meeting these conditions revert to normal GST.

Issue 1 — Export of Pre-Packaged Rice ≤25 kg

AAR Ruling

• Export itself is zero-rated.

• LUT or IGST-paid refund route available.

• Packaging status does not affect zero-rating.

Interpretation

GST is destination-based.

Thus, even taxable goods (pre-packaged rice) become zero-rated once exported.

Supported by:

• Deepak Spinners Ltd.

• AIFTP v. UOI

• All India Federation of Tax Practitioners

Issue 2 — Bill-to Ship-to to Port

Frequent industry misconception

If goods move straight to port, they must be zero-rated.

 AAR rejects this.

AAR Ruling

Supply remains domestic and taxable at 5%.

Legal reasoning

• Under Section 10(1)(b), delivery at an Indian port = delivery in India.

• Supplier’s supply obligation ends domestically.

• Export occurs only after customs clearance by the exporter.

Case Law Support

Case	Principle
Arcelor Mittal Nippon Steel	Movement to port is not export
Phoenix Industries	Export begins only after customs frontier
Mohit Minerals (SC)	Tax attaches to supply event, not intention

Not Deemed Export

Supplies are not covered under Section 147 notifications.
Hence, cannot be classified as deemed export.

Issue 3 — Supply to Exporter’s Factory

AAR Ruling

Taxable @ 5%.
Export intention irrelevant.

Legal foundations

1. Section 2(5)
   Goods have not left India → no export.

2. Two-event doctrine

   • Domestic supply

   • Export supply
     (Agarwal Industries, Bharat Fritz Werner)

3. Tax applies to supplier’s supply, not buyer’s intention

   • Canon India

   • Mohit Minerals (SC)

4. Strict construction of exemptions

   • Dilip Kumar & Co. (SC)

   • Bombay Dyeing

Arguments Typically Raised by Industry — And Why They Fail

Argument 1: “Goods are meant for export, so supply should be zero-rated.”

Fails because:
Purpose or end-use does not override statutory definition of “export”.

Argument 2: “Bill-to ship-to shifts place of supply to foreign destination.”

Fails because:
Place of supply under Section 10 is domestic.

Argument 3: “This is economically part of the export chain.”

Fails because:
GST is legally event-based, not purpose-based.

Argument 4: “Supplier should get deemed export benefit.”

Fails because:
Rice (and most commodities) are not covered in deemed-export notifications.

Broader Impact Beyond Agriculture (Garments, Jewellery, Pharma, Engineering)

The ruling affects:

Garment exporters

Fabrics, linings, lace, lehenga borders, trims supplied to factory before export → domestic supply @ GST
Only exporter can claim zero-rating.

Jewellery exporters

Gold bars supplied to jeweller for export orders → domestic supply until actual export.

Pharma exporters

APIs supplied to formulation units for export → domestic supply.

Engineering exporters

Components supplied to factories for export goods → domestic supply.

This AAR therefore sets a cross-industry precedent.

Applied Illustrations

Scenario Table

Scenario	Supply Type	GST	Zero-Rated?
1	Supplier → Exporter factory	5%	No
2	Supplier → Port (Bill-to exporter)	5%	No
3	Supplier → Foreign buyer (direct export)	LUT/IGST	Yes
4	Supplier → Exporter @ 0.1% under Notif. 40/41	Only if strict conditions met	Conditional

Example with Numbers (Illustrative)

Supplier sells ₹50,00,000 worth of rice:

1. To exporter’s factory → GST @ 5% = ₹2,50,000

2. Exporter exports under LUT → claims ITC refund later.

3. Supplier cannot issue zero-rated invoice.

This avoids wrongful refund claims and protects ITC chain integrity.

Compliance, Documentation & Audit Red Flags

For Suppliers

• Always apply GST @ 5% for pre-export domestic supplies.

• Issue tax invoice, not zero-rated invoice.

• Use 0.1% rate only with documentary evidence (LUT, 90-day export, endorsements).

For Exporters

• Do not insist on zero-rated invoices from suppliers.

• Retain full ITC for refund claims.

• Strongly maintain shipping bills, EGM, BRC, trail of movement.

Audit Red Flags

• Zero-rated invoices issued for pre-export legs.

• LUT used for domestic supplies.

• Refund claimed on inward supplies misclassified as “zero-rated”.

• Bill-to ship-to misused to avoid GST.

Authorities may invoke Section 74, interest and penalties.

Consolidated Case Law Support

Issue	Case	Principle
Pre-export movement not export	Arcelor Mittal	Port movement ≠ export
Intention irrelevant	Mohit Minerals (SC)	Tax attaches to supply event
Export begins only after customs frontier	Phoenix Industries	Export starts after clearance
Strict interpretation of exemptions	Dilip Kumar (SC)	No presumption of benefit
Purpose cannot alter supply classification	Canon India	Statute governs, not intention

Final Analysis — A Hard Legal Boundary is Re-Drawn

The AAR’s ruling reinforces the doctrinal clarity:

Zero-rating is not chain-based, not intention-based, and not destination-within-India-based.
It is triggered only when goods are physically exported.

Everything else—no matter how close it appears to the export chain—remains a domestic supply, attracting normal GST.

This ruling will now influence:

• GST audits

• Refund sanctions

• Supply chain tax planning

• Advisory positions in agri, textile, pharma & engineering sectors

It restores the boundary the GST law always intended:

Only the actual export is zero-rated. Every prior leg remains domestic.