GST on Export of Services

The service sector is the fastest and largest growing sector in India. India is among the top 10 service exporter countries having a 4.1% share in world commercial service exports in 2020. In the first half of the 2021-22 fiscal year service sector contributed more than 50% of the GDP of India and it is still further growing. Services sectors like software services, financial services, and professional services are the major growing sub-sectors. Hence with the growth of service industries, it becomes important to have a well-managed chartered accountant firm in India to handle all compliances and business requirements.

India is an export hub for software and other professional services. As per the website www.ibef.org India is expected to witness 6-8% growth in the Indian IT outsourcing firms. The policy of the government supports the exporter to export services with ‘’zero tax’’ under the GST law. Hence understating the zero-rated policy in case of export of service becomes important.

Zero-rated services carry more obligations and compliances that every exporter has to fulfil. The concept of export of services is borrowed from the provisions of the erstwhile service tax law. In this article, we will discuss the procedural and legal aspects of the export of services that would help the reader to understand and manage the compliances applicable to the exporter of services.

‘’Export of service’’ is defined under section 2(6) of IGST act when-

  • the supplier of service is located in India;
  • the recipient of service is located outside India;
  • the place of supply of service is outside India;
  • the payment for such service has been received by the supplier of service in convertible foreign exchange [or in Indian rupees wherever permitted by the Reserve Bank of India]; and
  • the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8;

Following aspects to be noted:

  • It is important to correctly interpret and find the correct factual conditions to apply the definition of export of service. Incorrect treatment may lead to misapplication of the definition and the claiming benefits that could have been availed are not available.  If any of the conditions specified in the definition is not followed, the supply of services will not be treated as an export service. It is important to note that the export of service requires fulfilling certain conditions to qualify as ‘export of service’ but the export of goods doesn’t require fulfilment of any such conditions.
  • Where both the establishments are in a State under the same GSTIN, the establishments will not be considered as distinct persons.
  • Liaison offices are not meant to undertake activities that are commercial in nature. If any service is rendered by the liaison office in India to its parent company situated outside India for the customer located in India could be subject to tax because this may not be termed as reimbursement of expense.

Zero-rated supplies-

Under the GST law export of services are treated as zero-rated supplies, accordingly, no tax is charged on such supplies. Export of services is treated as inter-state supply. Section 16(2) of the IGST act specified that credit of input will be available on zero-rated supply even if supply is exempted.

Zero rates supply is defined as: Zero-rated supply means the supply of goods or services or both by Exporter of the goods or services or Supply of goods or services or both to a ‘’Special Economic Zone Developer’’ or ‘’Special Economic Zone’’

Under section 16(3) of the IGST act, there are two schemes to export services out of India.

a) Exporter under the bond or LUT

Exporters of services can export without payment of GST under the bond or letter of undertaking (LUT). In this case, the exporter can claim input tax credit of Input, inputs services and capital goods. Alternatively, exporters can claim the refund of input tax credit laying on the electronic credit ledger. Refund of input services and capital goods under this route is not allowed. The supplier is required to furnish the LUT in Form GST RFD – 11. The LUT should be filed before effecting the zero-rated supplies in order to claim an exemption from payment of taxes.

b) Pay IGST on Exported services and claim refund:

Exporter of services can claim refund of IGST paid on services exported. Exporters are allowed to claim refunds of input tax credit as well.

Aspects to be noted:

  • Export of goods or services, the invoice shall carry an endorsement as follow:

Where the supply is effected on payment of IGST: “Supply meant for export/supply to sez unit or sez developer for authorised operations on payment of integrated tax”

Where the supply is effected without payment of IGST: “Supply meant for export/supply to sez unit or sez developer for authorised operations under bond or letter of undertaking without payment of integrated tax”

  • In clause (6), in sub-clause (iv), after the words “foreign exchange”, the words “or in Indian rupees wherever permitted by the Reserve Bank of India” were inserted. This amendment was made to consider a service to be exported even if the export proceeds are received in Indian rupees, if the same is permitted by RBI. This has been done mainly to include within export of services, services provided to Nepal and Bhutan wherein payment is received in Indian Currency.

Registration for Exporter of Services

Export of services is treated as inter-state supply, hence persons engaged in the business of export of goods are compulsorily required to take GST registration irrespective of the fact that export turnover is less than 20 lakhs.

For Example: Ajay is running his business in gurgaon, but he has no GST registration in Gurgaon because his turnover is not exceeding the exemption limit. Now he wants to export his services out of India without GST registration.

In the case of export of services, GST registration is mandatory, and he is not allowed to render services without taking GST registration in Gurgaon. The exemption threshold will not apply to him.

About the author: Nitin Bhatia is a qualified chartered accountant practising in Delhi/NCR. He is the best CA in Gurgaon. During his professional journey, he has gained advanced experience in International Taxation, Transfer Pricing, Expatriate Taxation, Corporate Taxation, Domestic Taxation and litigation matters. International Taxation and Domestic taxation are his study topic, and he is deeply involved and updated with the recent judicial pronouncements. It helps him to give efficient and legitimate tax planning to his clients.

For any information/query/concerns related to GST provisions, please feel free to contact us at mail@nbaoffice.com