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Shaaransh Sharma

September 27, 2024

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‍GST on Export of Services to Nepal and Bhutan – Critical Questions Answered

GST on the Export of Services to Nepal and Bhutan regimes in India is a simple and efficient approach, whether domestic or foreign trade or export of services. However, there are certain exclusive practices under GST for exporters who supply goods to Nepal or Bhutan. Read on to find out the recent exclusion, and how it affects you — This article answers important questions about businesses exporting goods & services: applicable tax regime for supplying goods or services, refund process, and impact businesses.

GST on Export of Services to Nepal and Bhutan

In the GST regime, the export of services is usually considered a "zero-rated supply". As a result, exports of services to Nepal and Bhutan from India would be exempted by GST. The government introduced special rules for the exporters to follow for these countries so that they could pay and enjoy zero-rated supply.

What is a Zero-Rated Supply?

Where the GST rate is zero, then it is a Zero-rated supply. There is a zero tax rate on the export of services, but service providers can take back the input tax credit (ITC) that they have kept while providing exportable services. However, for the supply of services to be zero-rated other conditions must also be met.

Specific Conditions for Nepal and Bhutan

While exports to Nepal and Bhutan are treated as zero-rated, the following are required for these services:

1. The service recipient needs to be outside the boundaries of India.

2. With prior approval, the payment for such services can also be received from companies in INR (Indian Rupees) – except where the provider has a bank account outside India.

3. The place of supply shall be outside of India.

A critical one is the specific condition regarding payment in convertible foreign exchange for Nepal and Bhutan. Payments in INR can be made under the settlements with certain conditions subject to routing such payments through a freely convertible Vostro account of a non-resident bank.

Is GST Applicable on Export of Services?

Tax is not levied on exports of services in GST including to Nepal and Bhutan provided that these are considered zero-rated exports. This is to say that IGST (Integrated Goods and Services Tax) need not be charged by the exporters in the invoices raised towards services provided to these countries.

These can be either:

1. Availing of the export services without payment of IGST by furnishing a Letter of Undertaking (LUT), or

2. Pay IGST on export and get a refund of the tax paid later.

You might also be interested in our Guide to GST on the Export of Services

GST on Export of Services to Nepal

For exporters dealing with Nepal, GST law treats the country as part of the “export of services” category. Key points to note are:

1. Payment has to be in freely convertible foreign exchange, or INR subject to conditions.

2.The recipient of service should be out of India.

3. Place of Supply Outside India.

If all of the above conditions are satisfied, then the export of services to Nepal is said to be a zero-rated supply and the invoice will be raised without IGST. However, the payment needs to be in line with RBI guidelines on foreign exchange.

Documentation Required for Export to Nepal

1. Submission of an LUT (Letter of Undertaking) to export services without payment of IGST.

2.IInvoices issued to the recipient must specify that the transaction is an export of services.

GST on Export of Services to Bhutan

The export of services to Bhutan is in a planned manner. Services provided to Bhutanese clients - If conditions for zero-rated supplies under GST law are met The same rules apply:

1. The place of supply should be located outside India.

2. The payment of services will be in freely convertible foreign exchange or INR through a Vostro account as per RBI guidelines.

These stipulations ensure that services exported to Bhutan are still zero-rated under the law.

GST Impact on Export of Services

GST, and the zero-rating for exports under it, has been helpful for a large segment of services exporters. This results in the simplification of tax compliance, removing the GST burden on exports and allowing refunds to be claimed for any input taxes paid.

Benefits for Exporters

1. Cash Flow Management: Ideally, exporters who wish to avoid paying GST at the earliest (‘upfront’) can opt for the LUT and can manage their cash flow.references

2. Input Tax Credit (ITC) Refund: Exporters can have a refund on the GST paid on their input supplies which will eventually make it cheaper to supply goods.

Even though, the need to keep records and how an FX requirement operates frequently constitutes a bumps for businesses as they try to oblige with these new rules. Any missteps in these areas may slow refunds or cause compliance liabilities.
Speaking of services, RCM on security services under GST might also be something you're trying to understand

How to Claim GST Refund on Export of Services

There are two main methods to claim GST refunds on the export of services:

1. Export with Payment of IGST

In this method, the exporter pays IGST on the supply of services and later claims a refund of the tax paid. While this method provides an immediate credit of taxes paid, it can impact cash flow as taxes are paid upfront.

2. Export under LUT without Payment of IGST

In the LUT method, exporters do not pay IGST on exported services. Instead, they can claim a refund for the unutilized input tax credit. This method is particularly popular among service exporters as it does not require upfront tax payment, easing cash flow management.

Steps to Claim a Refund

File LUT: Exporters who choose not to pay IGST must submit a Letter of Undertaking (LUT) in Form GST RFD-11 to the jurisdictional tax officer.
Export the Services: The exporter should proceed with the provision of services and ensure that payment is received in convertible foreign exchange.
File Refund Application: After exporting the services, the exporter can apply for a refund using Form RFD-01 on the GST portal. The application must be supported by relevant documents like export invoices and Foreign Inward Remittance Certificates (FIRCs).
Processing of Refund: The GST department processes the refund, typically crediting the amount within a stipulated period.

Key Documents for Refund

Export invoices.
LUT or Bond details.
Proof of receipt of payment in foreign currency or INR as per RBI norms.

Conclusion

For businesses exporting services to Nepal and Bhutan, the GST law provides a clear framework for treating such exports as zero-rated supplies, provided certain conditions are met. By understanding the nuances of GST on exports, including documentation requirements, refund mechanisms, and compliance with foreign exchange guidelines, exporters can maximize the benefits of the zero-rated supply provisions while ensuring full compliance with GST regulations. The availability of refunds on input tax credits further enhances the attractiveness of the GST regime for exporters, reducing their tax burden and promoting smoother international trade.

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FAQ

1. Is GST applicable on the export of services to Nepal and Bhutan?

With an exception, if you export services to Nepal or Bhutan then no GST is applied. Subject to certain conditions such as payment in convertible foreign exchange or INR from RBI guidelines, these are zero-rated supplies under the GST law.

2. In what circumstance services exported can be viewed as zero-rated?

To be considered for zero-rated benefit, the Service Receiver should be located outside India, the Place of Supply be outside India and Payment received either in Convertible Foreign Exchange or Inr in special circumstances.

3. What is the procedure to apply for a GST refund on the Export of services?

However, you have to carry out an export under the LUT procedure or pay IGST and then claim a refund (when opting for option 1), to claim your GST refund. Refund application in Form RFD-01 will have to be filed on the GST portal along with export invoices and FIRCs.

4. If you are an Indian service exporter and want to export your services to Nepal or Bhutan in foreign exchange, then can I get payment in Indian Rupees?

In some instances, yes, payments in Indian Rupees are allowed subject to routing the funds through a freely convertible Vostro account as per guidelines laid down by RBI. Otherwise, payments must be in freely convertible foreign exchange.

5. What is the role of a Letter of Undertaking (LUT) in exporting services?

Exempting exporters for export of services: Exporters supplied services are to be exempted from payment of IGST on such export A Letter of Undertaking (LUT) will continue to be accepted, instead of a Bond. This is a newly configured application, although it is only valid for one financial year and also needs to be filed before commencing exports so that taxpayers can claim a refund on input tax credit.

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