The export of services under GST is treated as zero-rated supplies, meaning that the tax is not levied on the services provided, but businesses can still claim refunds on the input tax credit (ITC). This article explores the intricacies of the export of services under GST and how businesses can ensure compliance while maximising benefits.
A brief
With the increasing globalisation of the service industry, India’s service exports have gained momentum. Under the GST regime, services exported outside India are considered zero-rated. This allows service providers to operate more competitively in international markets. In this article, we will guide you through the core concepts of exporting services under GST, the legal framework, documentation, refund processes, and more.
Legal Provisions Governing Export of Services under GST
For a service to be classified as an export under GST, it must meet specific criteria laid out under Section 2(6) of the IGST Act. The primary conditions include:
- The service provider should be located in India.
- The service recipient must be located outside India.
- The place of supply must be outside India.
- The payment must be received in convertible foreign exchange or Indian rupees wherever allowed by the RBI.
- The service provider and recipient must not be merely establishments of the same entity.
These conditions are crucial for businesses that want to enjoy zero-rated tax benefits. The classification as an export ensures that no tax is payable on the services rendered, but businesses can still claim refunds on the input tax used in the service.
Taxability of Export of Services
The export of services is treated as a zero-rated supply under GST. This means no tax is charged on the invoice raised for export services. However, businesses have two options:
- Export with payment of IGST: In this case, the business can claim a refund of the IGST paid.
- Export under a Letter of Undertaking (LUT) or Bond without payment of IGST: Here, no tax is paid, but the business can still claim a refund of the input tax credit (ITC) for the goods or services used to provide the export service.
Choosing the best route for your business depends on factors like cash flow and compliance ease. Businesses that opt for the LUT route must file the necessary documentation with the GST department, ensuring they follow the appropriate guidelines.
The tax treatment for the export of goods and services is similar in some ways, but there are key differences:
- Goods: The place of supply is determined by the physical location of the goods at the time of export.
- Services: The place of supply is determined based on the location of the recipient, with certain exceptions.
This distinction is important because services may involve intangible transactions, making the determination of the place of supply critical.
Key Documentation Required for Export of Services
To successfully export services under GST, businesses need to ensure proper documentation. The following documents are crucial:
- Invoice: An export invoice must contain all relevant details, including the words “Supply meant for export under Bond or LUT without payment of IGST.”
- Letter of Undertaking (LUT): This is filed by businesses to avoid the payment of IGST on exports. Once approved, it allows the business to export without paying GST.
- Bill of Export: Though generally used for goods, in certain cases, this document may be required for service exports.
Proper documentation helps in filing for refunds and avoiding compliance-related issues. The GST authorities may require these documents to process ITC refunds or verify export claims.
Must Read: Deemed Exports Under GST: Eligibility, Taxation, Benefits and Refunds
Place of Supply in GST
Determining the place of supply is crucial in GST as it dictates whether a transaction qualifies as an export. For services to be considered exports, the place of supply must be outside India.
General Rule for Export of Services: The general rule under GST law is that the place of supply for export of services is the location of the recipient. However, there are specific exceptions, particularly for services related to immovable property, performance-based services, and event-related services.
Specific Exceptions and Conditions for Place of Supply:
- Services related to immovable property: The place of supply is where the immovable property is located.
- Performance-based services: The place of supply is where the services are actually performed.
- Event-related services: The place of supply is where the event takes place.
For example, if an Indian architectural firm provides consulting services for a property located in Dubai, the place of supply would be Dubai, and thus, the service would be treated as an export.
Process for Claiming Refund of Input Tax Credit (ITC)
Exporters of services are entitled to claim a refund of input tax credit on taxes paid for goods or services used in providing the exported services. The process is straightforward but requires timely and accurate filing of returns. Here’s how it works:
- File GSTR-1: Mention export details without payment of IGST under the LUT route.
- File GSTR-3B: Include your export services in the zero-rated supply section.
- Submit the refund application in RFD-01: You must include all relevant documents, such as LUT, invoices, and input tax credit details.
Once submitted, the GST authorities will review the application. If approved, the refund is processed within a specified time frame. It is vital to ensure there are no errors in filing, as this can delay the refund process.
GST Refund: With Payment of Tax vs. Without Payment of Tax
When it comes to claiming GST refunds, businesses have two primary options:
- With payment of tax: Exporters can charge IGST on their invoices and claim the refund of IGST paid on exports.
- Without payment of tax (under LUT/Bond): Exporters can export without paying IGST and claim a refund of the input tax credit.
The LUT/Bond route is preferred by most businesses due to its simplicity and no immediate tax outflow. However, choosing the method that suits your business’s cash flow needs is critical. A well-planned approach can ensure timely refunds and better compliance with GST rules.
Exemptions and Special Cases in Export of Services
Certain services are exempt from GST, even if they don’t strictly meet all export conditions. For example, services provided to entities outside India, which benefit third parties within India, are partially exempt from GST. Similarly, services related to transportation, where the destination lies outside India, can also be exempt under certain conditions.
Businesses need to assess whether their service qualifies for such exemptions to avoid unnecessary tax burdens. The GST Council continuously updates the list of exempted services, and businesses must stay updated with the latest notifications.
GST Compliance for Exporters: Key Guidelines
GST compliance is essential for businesses exporting services. Following are some best practices:
- Ensure accurate filing of GSTR-1 and GSTR-3B forms.
- Always maintain updated records of invoices and LUTs.
- Verify that payments received are in convertible foreign exchange (except where permitted by RBI).
- Use GST software that automates your returns and ensures timely submissions to avoid penalties.
Keeping up with GST rules will not only help you stay compliant but also streamline the process of claiming refunds.
Recent Updates and Changes to Export of Services under GST
GST is a dynamic tax structure, and the GST Council regularly updates provisions. One of the significant updates includes changes in the refund application process to make it more efficient. Businesses can now expect faster refunds, provided they submit accurate documentation.
Additionally, the place of supply rules has seen some updates, particularly in services like software exports, cloud computing, and consultancy services, where the place of supply might be hard to determine.
Conclusion
The export of services under GST offers multiple benefits for businesses, particularly through zero-rated tax treatment and refunds on input tax credit. To maximise these benefits, exporters need to understand the legal provisions, ensure proper documentation, and follow a structured refund process. Staying compliant with the latest GST updates will help businesses minimise tax burdens and improve their cash flow, positioning them for success in the global market.
A product manager with a writer's heart, Anirban leverages his 6 years of experience to empower MSMEs in the business and technology sectors. His time at Tata nexarc honed his skills in crafting informative content tailored to MSME needs. Whether wielding words for business or developing innovative products for both Tata Nexarc and MSMEs, his passion for clear communication and a deep understanding of their challenges shine through.
I am freelancer and give digital services to UK-US clientele and I don’t pay any GST as it works like export of services and import earning.
Can we claim ITC refunds even if we export services under a Letter of Undertaking (LUT), or do we need to first pay IGST and then claim the refund?