When the GST taxation system was introduced in India, it wasn’t just a big change for shops and businesses domestically. It also changed how we handle goods and services we sell to other countries, which is a big part of our “Make in India” plan. This plan dedicated to making India the manufacturing hub and the go-to place for manufacturing things that are sold all over the globe.
Before GST, selling goods to other countries could get complicated and expensive because of the many different taxes levied on the exporters which made complying to the overall taxation system a very cumbersome process. GST on export made this simpler by bringing all these taxes under one roof and by removing the cascading effect of multiple taxes levied. This has made life easier for those who sell Indian products abroad. Now, the businesses in India don’t have to deal with as many tax headaches as they used to deal with — before the GST era.
GST was supposed to help Indian products compete better in the global market by making them cheaper and easier to sell. Understanding how GST affects selling goods to other countries is essential for any business that wants to grow beyond India. In this blog, we will take a deeper look into the export GST rules to understand how GST influences the operations and strategies for export businesses, and if the export of goods and services are liable to be taxed as per the GST regime. In addition, we will also explore why the export tax under GST matters for businesses in India and how it can help them grow.
Basics of Export and GST
What is an Export?
In simple terms, an export is when a business in India sells its goods or services to a buyer in another country. It’s a key part of India’s economy, helping to bring in foreign currency and expand the market for Indian products and services globally.
GST, or Goods and Services Tax, is a comprehensive tax levied on the manufacture, sale, and consumption of goods and services in India. It’s a single tax that replaced various indirect taxes, streamlining the tax system and making it easier to manage for businesses.
Simplifying Exports with GST
The introduction of GST brought significant changes for exporters. Under GST, exports are treated as zero-rated supplies. This means businesses don’t have to pay GST when they export goods or services. They can also claim refunds on any GST they’ve paid on inputs used to make these exported goods or services. This system makes Indian exports more competitive in international markets by reducing the overall cost of Indian goods and services abroad.
GST replaced the complex web of state and central taxes with a unified system, significantly reducing the paperwork and compliance burden for exporters. This change is particularly beneficial for smaller businesses, which previously struggled with complying to the complex taxation system. Under GST, the export procedures are standardized, making it easier for businesses of all sizes to reach global customers.
Zero-Rated Supply in Export
Under GST, a ‘zero-rated supply’ refers to items that are taxable but at a tax rate of zero. This means that when these items are exported, GST is not levied on them. The zero-rated supply in export is a concept designed to encourage exports by reducing the cost burden on exporters.
The benefit of a ‘zero-rated supply’ for exporters is twofold. First, the exporters don’t have to pay GST when they export goods or services. Second, they can claim a refund for the GST paid on inputs used to produce these exported goods or services. This feature is a significant boon for exporters as it improves cash flow and reduces the overall cost of production, making Indian exports more price-competitive globally.
For instance, consider a manufacturer in India exporting garments to Europe. Under the zero-rated supply mechanism, the manufacturer won’t pay GST on these exported garments. Additionally, they can claim a refund for the GST paid on the fabrics and other materials purchased to make these garments. This setup not only reduces the garment’s final cost but also boosts the manufacturer’s profitability.
This policy positions Indian exporters more favorably in the international market. By not adding GST to the cost of exported goods, India’s products can compete more effectively on price, quality, and value.
Export of Goods under GST
Under the GST framework, exporting goods is treated as a zero-rated supply, which means exporters can send goods abroad without adding GST to their prices. For exporters, this change has simplified the process significantly. When a business in India sends goods to, say, the United States or Europe, they don’t charge GST on these goods. This makes their products more affordable and competitive in international markets.
Claiming Input Tax Credit
A key benefit for exporters under GST is the ability to claim a refund on the input tax credit. This means that taxes paid on inputs used to manufacture exported goods can be recovered. This refund mechanism ensures that the capital is not tied up in tax costs, helping businesses maintain better cash flow.
Documentation and Compliance
While the process is simplified, compliance remains crucial. Exporters need to ensure proper documentation, like shipping bills and tax invoices, to prove that goods have been exported. This documentation is necessary for claiming input tax credits and avoiding any legal issues.
Export of Services under GST
The export of services under GST also enjoys the status of zero-rated supply, similar to the export of goods. However, the criteria and conditions for services differ slightly, catering to the intangible nature of services. For a service to qualify as an export under GST, it must meet certain conditions. These include the service provider being located in India, the recipient being located outside India, the payment received in convertible foreign exchange (or Indian rupees wherever permitted by RBI), and the service not being a supply to a Special Economic Zone (SEZ).
Advantages for Service Providers
Exporting services under this regime offers significant advantages. Service providers don’t need to charge GST on their invoices for international clients, making their offerings more competitive in pricing. Additionally, they can claim refunds on the GST paid on inputs used to deliver these services, aiding in better financial management and operational efficiency.
Ensuring Compliance in Service Export
Maintaining compliance in the export of services involves proper contractual documentation and proof of receipt of payment in foreign currency. Service providers should also keep records that substantiate that their services meet the criteria laid out for exports under the GST law.
GST Refunds for Exporters
|Value of Export
|GST Rate on Export
|GST on Export
|Value of Inputs Used
|GST Rate on Inputs
|Input GST Paid
|₹9,000 (18% of ₹50,000)
|₹13,500 (18% of ₹75,000)
|GST Refund Claimed
GST refund for exports offer financial relief to exporters by returning the GST paid on inputs. This system not only supports the cash flow of exporters but also encourages businesses to engage in export activities. Let’s understand how the GST refund mechanism works for exporters, an essential feature of the GST regime that supports and incentivizes export activities:
- Cash Flow Facilitation: One of the most significant benefits under the GST regime for exporters is the provision for GST refunds. This is important because it directly impacts the cash flow of businesses engaged in exports.
- Mechanism of GST Refund for Exports: Exporters, both of goods and services, can claim a refund for the GST paid on inputs used in the exported products or services. This refund mechanism ensures that the capital tied up in GST costs is returned to the business, aiding in maintaining healthy cash flow and operational efficiency.
- Refund Process: The process for claiming GST refunds has been simplified under the GST regime. Exporters need to file an application on the GST portal, detailing their exports and the corresponding GST paid on inputs. The system is designed to process these claims efficiently, reducing the wait time for refunds.
- Documentation for Refund Claims: To claim GST refund for exports, exporters must ensure proper documentation, including tax invoices, shipping bills, and proof of export. This documentation is necessary to maintain a smooth refund process and to avoid any discrepancies that could lead to delays or denials of refund claims.
In summary, the impact of GST on export has been transformative. With zero-rated supply in export and straightforward GST refund processes, exporting from India has become more efficient and financially viable. By aligning with the export GST rules, businesses can ensure that they compete globally without the burden of getting levied with an additional export tax under GST.
Frequently Asked Questions (FAQs)
What is GST on export?
GST on export refers to the tax treatment of goods and services sold from India to other countries. Under the GST framework, these exports are treated as zero-rated supplies, meaning exporters don’t have to pay GST on these sales, making Indian goods more competitive in the global market.
How do Export GST rules benefit exporters?
Export GST rules benefit exporters by allowing them to sell goods and services internationally without adding GST. This makes their offerings more affordable globally. Additionally, they can claim refunds on the GST paid on inputs, which aids in reducing the overall cost of production and export.
Is there any Export tax under GST?
There is no export tax under GST on goods or services sent out of India. This exemption is part of the zero-rated supply policy, ensuring that Indian products and services remain competitively priced in the international market, free from the added burden of domestic taxes.
How does GST refund for exports work?
GST refund for exports allows exporters to reclaim any GST they’ve paid on inputs used to produce exported goods or services. This process involves filing specific refund claims through the GST portal, which, when approved, provides financial relief and improves cash flow for exporters.
What is Zero-rated supply in export under GST?
Zero-rated supply in export under GST means that exports are taxed at a 0% rate. Exporters can send goods and services abroad without GST charges and claim a refund for the GST paid on their inputs. This policy is designed to boost India’s exports by reducing the tax burden on exporters.
Can exporters claim input tax credit under GST on export?
Yes, exporters can claim input tax credit under GST on export. This means they can get back the GST paid on raw materials or inputs used to produce exported goods or services. This system helps in lowering the cost of exported products, enhancing their competitiveness in foreign markets.
Are there any special conditions for Export GST rules?
Special conditions under export GST rules include that the supplier must be located in India, the recipient outside India, and payment received in convertible foreign exchange. Meeting these conditions allows businesses to classify their sales as zero-rated exports, benefiting from the associated tax advantages.
What documents are needed for claiming GST refund for exports?
To claim GST refund for exports, exporters need to provide shipping bills, tax invoices, proof of export, and documentation of GST paid on inputs. These documents are crucial for the refund process, ensuring that the claims are legitimate and comply with GST regulations.
How do zero-rated supplies impact the pricing of exports?
Zero-rated supplies under GST positively impact the pricing of exports by excluding GST on exported goods and services. This exemption allows exporters to offer more competitive prices in the international market, as the absence of GST reduces the final cost to the buyer.
What challenges do exporters face under the current GST on export rules?
Exporters face challenges like understanding export GST rules, ensuring proper documentation for zero-rated supplies, and complying with the GST refund process. Staying compliant with these rules while maintaining competitive pricing and managing cash flow are some of the concerns for businesses that are engaged in exporting under the current GST regime.