Impact of GST on Export of Goods and Services
Exports have been a significant contributor to India’s growth, aligning with the ‘Make in India’ initiative. As per the World Bank’s data, exports contributed around 18.7% of India’s GDP in the year 2020. However, what was the scenario in the pre-GST regime? Did anything change for exports after the introduction of GST? Read on to understand the impact of GST on the export of goods and services.
What is Export under GST?
Exports have been defined under the Integrated Goods and Services Tax Act, 2017 as follows:
As per Section 2(5), “export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India.
As per Section 2(6), “export of services” means 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 payment for such service has been received by the supplier of service 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.
In the case of the export of services, all the conditions shall be met cumulatively.
Treatment of GST on Exports
The exports are treated as under:
Exports are considered as interstate supplies of goods or services or both. Therefore, IGST becomes applicable to exports.
Exports are a zero-rated supply on which no GST shall be charged. This gives rise to the availment of refunds for the exporter.
As the exports qualify as zero-rated supply, the exporter is allowed to claim a refund through two options at his discretion.
Option-1: Under Bond/Letter of Undertaking
An exporter can export the goods/services under a bond or Letter of Undertaking (LUT). This will be without payment of tax where the exporter shall be allowed to claim the refund of excess input tax credit lying in his electronic credit ledger.
The exporter shall furnish the details of export in GSTR-1. The GST common portal automatically transmits the details to the system designated by the customs. The application for refund shall be filed in Form RFD-01 for claiming a refund of the ITC balance lying in the electronic credit ledger.
However, the exporter shall comply with certain conditions while claiming the refund. The exporter shall furnish the bond or Letter of Undertaking in Form GST RFD-11. The bond/LUT shall be submitted to the jurisdictional commissioner prior to undertaking export, thus, binding himself to pay the tax along with the interest due if
The goods are not exported out of India, within 15 days after the expiry of 3 months from the date of issue of the invoice of export;
The payment for export of services under GST is not received by the exporter in convertible foreign exchange, within 15 days after the expiry of 1 year or such further period as allowed by the Commissioner from the date of issue of the invoice.
All the exporters can export under option-1, i.e., through bond or LUT, except those who have been prosecuted under the CGST Act or IGST Act or any other existing law in case the tax amount evaded exceeds Rs. 2.50 crores.
Option-2: Refund of IGST
Here, the exporter shall pay the GST liability arising out of export by utilizing the input tax credit lying in his electronic credit ledger. The exporter shall raise an invoice in INR for the purpose of GST where IGST shall be charged. The IGST liability shall be set off against ITC on purchases.
The exporter can claim a refund of the amount paid as IGST. The shipping bill itself acts as the refund application for the purpose of claiming the refund. The details furnished in GSTR-1 get transmitted electronically from the common portal to the system designated by the Customs.
Methodology to Calculate the Refund
While in the case of exports with payment of tax (Option-2), no separate calculation is required for determining the refund amount, the GST act has specified the methodology for calculation of the refund amount in case of exports without payment of tax. The formula is as under:
Refund Amount = [(Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) / Adjusted Total Turnover] * Net ITC
When exports are done through third parties, it is known as merchant exports. For instance, A Ltd. supplies goods to B Ltd. for exports. In this case, A Ltd. will be the supplier while B Ltd. will be the merchant exporter. A low rate of GST @ 0.1% has been specified in the case of exports undertaken through 3rd parties by the issue of exemption notifications.
In such a case, the supplier to the merchant exporter shall issue an invoice charging a concessional rate of GST. Such suppliers can avail of the refund under the inverted duty structure. While the merchant exporter of such goods shall also be eligible to claim a refund, he can only claim so under the bond/LUT without payment of tax. The option to pay IGST and then claim a refund is not open to such merchant exporters.
In a Nutshell
The goods and services tax in India brought major changes in the export scenario. There is a slight difference between GST on the export of services and that of goods. As for direct taxation, the income tax on the export of services and goods have a separate set of provisions and are not extensively related to the GST provisions. The GST provisions are streamlined with the economic requirements and efforts have been made to encourage exports among the businesses. Measures such as refunds with alternative options, concessional GST rates, etc., further encourage the businesses to undertake export of goods.
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