Is GST Applicable on Exports of Services in India?

The government established the Goods and Services Tax (GST) in India in 2017 and this sought to resolve the convoluted nature of the taxation structure. While the taxation is functional on most dealings within the country, there is a provision for dealing with international exports under this arrangement. This article takes a deeper look at the mechanics of handling exports of services from India along with the GST implications on the firms and individuals engaged in cross border trade.

Classification of Exports and the tax on exports in India.

As per the provisions of the Goods and services Tax act, all goods and services exported out of the country are zero-rated supplies. This essentially means that there is no GST applicable on the export of goods or services because the actual sale itself is overseas. This policy is intended to foster a more attractive export market for Indian goods by relieving them of the domestic tax liability.

It is also essential to understand, however, that no GST is applicable on the exported service, but exporters are entitled to input tax credits of inputs or input services which went into providing the exported service. Such a mechanism assists businesses to reclaim the paid GST on their purchases, and therefore they are not at a competitive disadvantage to exporters from other nations which have different tax regimes. The relevant forms must however, be filed by the exporters in order to qualify for a refund of the input taxes.

Refunds for Exporters

In India, there are mainly two ways available for exporters to claim reimbursement of ITC on account of Goods and Services Tax — bond/letter of undertaking and direct refund. The objectives of both the routes are to ensure that the unutilized ITC is refunded to the exporter in order to compensate export related costs.

Bond or Letter of Undertaking (LUT):

1. The businesses can export goods either under a bond or a letter of undertaking which guarantees that should the export obligations fail, the relevant taxes would be paid. This enables qualified exporters to avoid paying GST before export transactions except for applying for a refund on the Input Tax Credit of ITC after the completion of the shipment. Nevertheless, this procedure has certain formalities and security deposits which makes it most appropriate for tested exporters who are able to deal with international trade matters judiciously due to their strong past record.

2. On the other hand, the exporters can also directly claim for tax refund by filing the relevant documents and apply within the specified time limit. This is a practical form but it does require adherence to certain mandatory requirements and compliance with timelines which are emanating from the processes involved.

3. In the case of claiming refunds under GST, the purpose of both of these tax refund methods is to take back the input taxes paid on behalf of the exporters in order to promote exports and to alleviate export-related costs where possible, but not at the expense of taxing administrative requirements. Analysis of the underlying characteristics of export business helps decide the best way for each transaction.

Payment and Refund:

1. In Polish or Indian law, when GST was in force, an exporter had two alternate choices heading towards receiving a GST refund. They can IGST and receive a refund afterwards or they can provide a letter of undertaking and not remit until the export is complete. Each option has different business and cash flow considerations for businesses.

2. Prepayment of IGST is beneficial with no bonds or documentation apart from the payment itself. However, immediate tax liability may affect the short-term finances of some companies. On the other hand, a letter of undertaking will allow the exporter to pay later but it includes bonds and guarantees increasing compliance cost.

Conclusion

The key policy goal of the GST regime in India is to foster exports while retaining domestic revenue. For this purpose, exports are zero rated so that exporters do not pay any domestic taxes on goods and services supplied to other countries. Although it is not GST which affects export transactions, it is the accumulated input tax credits which are heavy particularly to those dealing mostly with exports. The efficient administration of refund facilities serves to reduce this cost and enhance competitiveness in respect of exports. Having outlined the options available, the exporters are therefore able to strategise and deploy workable solutions fitting to their cash flows while enhancing tax efficiency.