One of the key features of GST is that it is based on the destination principle, which means that the tax is imposed where the goods or services are consumed rather than where they are produced or supplied.
This principle has important implications for the export sector, contributing significantly to the Indian economy. Exporters are entitled to various benefits and incentives under the GST regime, such as zero-rating export supplies, refund of input tax credit or integrated tax, and concessional GST rates for specific stores to merchant exporters. This blog will discuss applicable tax rates for export transactions, the GST rates for export supplies, and how they affect the exporters and the economy.
Meaning of Export of Services under GST
Import of Services” is a term defined in sub-section 11 of section 7 of the IGST Act, 2017. It signifies the provision of any service under specific conditions.
Place of Supply in India:
The first condition for a service to be categorised as an import is that the place of supply must be within the geographical boundaries of India. This emphasises that the service’s utilisation or consumption occurs within India’s territory. Determining the place of supply is crucial in identifying whether a service qualifies as an import.
Service Provider’s Location Outside India:
Another essential criterion is that the service provider, i.e., the entity offering the service, should be physically situated outside the sovereign borders of India. This condition ensures that the service originates from a foreign jurisdiction, highlighting the cross-border nature of the transaction.
Recipient of the Service in India:
The third condition emphasises that the service recipient must be present in India. This signifies that the beneficiary or the party availing the service is in the Indian territory. It underlines the importance of the impact and benefit of the service being realised within the country, reinforcing the concept of importing services into India.
Supplies that are not considered as exports of goods or services
- When the service is provided within India but to a person outside India, such as renting a property in Delhi to someone residing in New York or an agent in India providing services to a person in Dubai who is exporting goods to China.
- In cases where the consideration for the supply of services is received in Indian currency or any other currency that is not convertible, like a consulting firm in India offering consultancy services to an entity outside India, and the payment made by the Indian branch of the overseas entity is in Indian rupees.
- Services supplied to a foreign branch may not qualify as an export of services due to specific exclusions falling under the “export of service.” Consequently, this may require reverting input credits, treating such services as non-taxable rather than zero-rated.
Understanding GST rates on export supplies
Under the regulations stipulated in the Integrated Goods and Services Tax (IGST) law, the export of goods, services, or both is categorised as “zero-rated supplies.” A registered taxable person who exports such goods and services can claim a refund of the Goods and Services Tax (GST) paid.
Categories of GST rates for exports
Export under Bond :
- Goods, services, or both can be exported without paying Integrated Tax by furnishing a bond or Letter of Undertaking.
- The person who is exporting eligible to claim a refund of unutilised input credit.
- This option is subject to specific rules, procedures, and safeguards as prescribed.
Export with Payment of Integrated Tax:
- Goods and services, or both, can be exported with the payment of Integrated Tax.
- The exporter can claim a refund for the GST on the exported goods and services.
- The process for these refunds is governed by specific rules, procedures, and safeguards as may be prescribed.
Applicable tax rates for export transactions
In the Goods and Services Tax (GST) law framework, export supplies are zero-rated. Zero-rated supply under GST refers to the following categories of supplies involving goods or services or both:
- Export of goods or services or both.
- Supplying goods or services to a Special Economic Zone developer or a Special Economic Zone.
Notably, zero-rated supply does not imply that the goods and services carry a tariff rate of ‘0%’. Instead, it signifies that the recipient of the supply is entitled to pay ‘0%’ GST to the supplier. This distinction is crucial because, according to section 17(2) of the CGST Act, input tax credit is unavailable for supplies with a ‘0%’ tax rate. However, this restriction does not apply to zero-rated supplies covered by the specified categories mentioned in this section.
In this blog, we have discussed the GST rates for export supplies, the tax rate structure for export transactions, and the export supply and corresponding GST rates. These provisions aim to boost the export sector, which is vital for India’s economic growth and development. By reducing the tax burden on the exporters, GST enhances their competitiveness in the global market and encourages them to explore new opportunities and markets. GST also ensures that the tax revenue is collected at the point of consumption rather than at the end of origin, thereby avoiding the distortion of the tax base and the leakage of tax revenue.
Frequently Asked Questions(FAQs)
Are there any specific conditions for goods and services to be eligible for zero-rated export supplies?
Generally, all export supplies of goods or services are eligible for zero-rated status. However, specific conditions, documentation, and compliance with GST regulations must be met to qualify for this benefit.
Can businesses claim a refund on the input tax credit for goods or services exported under zero-rated supplies?
Yes, businesses involved in zero-rated exports can claim a refund of the unused ITC or input tax credit. They have the option to either export under a bond or letter of undertaking (LUT) without paying integrated tax and claim the refund or export on payment of integrated tax and subsequently claim a refund.
Are there any safeguards and procedures to be followed for claiming a refund on exported goods and services?
Yes, there are specific rules, procedures, and safeguards prescribed by GST authorities that businesses must adhere to when claiming a refund for exported goods or services. These guidelines are essential for a smooth refund process.