The comprehensive Goods and Service Tax (GST) replaces all other indirect taxes imposed by the state and central government. It is levied on manufacture, sale and use of the goods and services. The government will use the amount collected after levying GST to propel the economic growth of the country. Through this article, we will discuss the levy of GST on Export of Services.
Exports are classified as zero-rated supply.
In layman terms, zero-rated supply refers to items that are:
- Taxable, but the rate of tax is nil on their supplies and
- You can avail input tax relating to them.
Meaning of Export of Services
Section 2(6) of IGST Act defines Export of Services as ‘the supply of any service 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 supplier of the service has received the payment in convertible foreign exchange.
- 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
As per Section 7(5) of the IGST Act, in such a scenario, the supply is ‘inter-state’ supply and accordingly shall be classified as ‘inter-state’ sale. Section 24 of the CGST Act specifies that any person engaging in ‘inter-state’ sale is required to be registered under GST law irrespective of threshold.
Section 22 of the CGST Act mandates that every supplier making taxable supplies of goods or services or both, in a State or Union territory (other than special category States), and whose aggregate turnover in a financial year exceeds twenty lakh rupees, shall be liable to register under this Act. However, if such a person makes taxable supplies from any of the special category states, registration is required only if the aggregate turnover in a financial year exceeds ten lakh rupees. Importantly, the threshold of 20 lakhs does not apply to inter-state supplies. Since exports are considered inter-state supplies, all service exporters must obtain GST registration.
Are Exports Taxable?
Section 16 of IGST act defines zero rated supply as:
- “zero rated supply” means any of the following supplies of goods or services or both, namely:–
a.) export of goods or services or both; or
b.) supply of goods or services or both to a Special Economic Zone developer or a Special Economic Zone unit
- You can avail input tax credit for making zero-rated supplies, even if they are exempt supplies, subject to the provisions of sub-section (5) of section 17 of the Central Goods and Services Tax Act.
- A registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely:–
a.) He can supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards, and procedure as may be prescribed, without paying integrated tax and can claim a refund of unutilized input tax credit; or
b.) The supplier may provide goods or services or both, under the prescribed conditions, safeguards, and procedures, by paying integrated tax. They can also claim a refund of the tax paid on the supplied goods or services or both. It will be done in accordance with the provisions of section 54 of the Central Goods and Services Tax Act or the rules made thereunder.
How to Claim Refund?
Section 54 of CGST Act deals with refund of tax
- Section 54 (1): The applicant can make an application for the refund of any tax, interest, or other paid amounts within two years from the relevant date. In the case of a registered person claiming a refund from the electronic cash ledger balance under section 49(6), they may claim the refund within the return filed under section 39, following the prescribed manner.
- Section 54 (6): The proper officer may refund, on a provisional basis ninety percent of the total amount claimed as a refund for zero-rated supply of goods or services or both by registered persons. This applies to all registered persons except those categories notified by the Government upon the Council’s recommendations. The refund will be provided. You should exclude the provisionally accepted amount of input tax credit as per the prescribed manner, conditions, limitations, and safeguards. Subsequently, the proper officer will issue an order for the final settlement of the refund claim after verifying the documents.
In the Conclusion
Though export of services continues to be exempt, as per GST experts, exporter will either have to take a bond for making exports or deposit GST on exports and then claim refund. This has lead to lot of hardship to service providers, Start ups and freelancers.
For any further enquiry regarding the export of services under GST, you can contact Starters’ CFO.