India has always been one of largest exporting countries all around the world. With new emerging policies in India regarding exports, people are moving towards export business which helps our Indian economy and GDP to grow at a faster rate. Here we will talk about various aspects of taxation in case of export of services (including- GST, Transfer Pricing provisions, Income Tax).
Case 1: – XAB LLP (where Mr. X, resident individual is a partner having 50% profit sharing ratio) is exporting services (Consultancy) to USA to his own entity (XYZ C-Corp, holding 50 % of share capital).
Case S 2: – YCD LLP (where Mr. Y, resident individual is a partner having 50% profit sharing ratio) is exporting services (Consultancy) to USA to other than own entities.
What will be his liability under GST, Transfer Pricing provisions and Income Tax under both case scenarios?
Registration under GST
All taxable persons whose turnover exceed exemption limit of Rs.20Lakhs (Rs.10 Lakhs in certain cases) has to take registration under GST. But As per the section 24 of CGST Act 2017 , certain categories of persons shall be compulsorily required to be registered under GST, even if their aggregate turnover is below specified exemption limit and are exempted from GST registration under section 22(1) – section 24(1) of CGST and SGST Act.
Interstate supply of goods by taxable person is required to be registered under GST irrespective of turnover limit
Exemption from compulsory GST registration even making interstate supply: –
(a) A person making inter-state supply of services is not required to register under GST if his aggregate turnover is less than Rs.20/10 lakhs. Notification No. 10/2017-IT dated 13-10-17
Export of Services
Export of Services under Goods and Service Tax is defined as follows: –
(i) the supplier of service is located in India;
(ii) the recipient of service is located outside India;
(iii) the place of supply of service is outside India;
(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange or in Indian rupees wherever permitted by the Reserve Bank of India; and
(v) 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;
Distinct persons are persons with different GSTINs belonging to one legal entity (single PAN) situated within the same state or in two different states or in a different country.
In case 1 exports of XAB LLP will not be considered as exports as they are exporting to their own entity and condition 5 above is not satisfied and will continue to tax at applicable rates.
In case 2 exports of person YCD LLP will be considered as exports and will be taxed at nil rates.
Since in both the above cases there is interstate supply of services so XAB LLP and YCD LLP will be required to register under GST if turnover exceed Rs. 20 Lakhs (Rs. 10 Lakhs in certain cases). If it would have been case of export of goods then both the entities would be required to compulsorily register under GST.
Invoicing and Receipt of Payments for Exports: –
All Exports contracts and invoices shall be denominated either in freely convertible currency or Indian Rupees but export proceeds shall be realised in freely convertible currency.
Export proceeds against specific exports may be realised in Indian Rupee provided funds are received through freely convertible vostro account of non-resident bank in any country other than member of Asian Clearing Union or Nepal or Bhutan. (Vostro account is the account held by a foreign bank with a domestic bank in domestic currency).
Where an assessee has received consideration from overseas client and foreign inward remittance certificate (FIRC) issued by the recipient bank in India reflects the currency of remittance as INR, then such remittance may be treated as receipt of foreign exchange as per the instructions/circulars of RBI if the amount is received through a freely convertible VOSTRO account of a non-resident bank situated in any country (not being member country of ACU or Nepal or Bhutan).
Thus, the exporter is suggested to receive the consideration in convertible foreign currency only i.e., in currency other than INR which is convertible in India.
Refund under GST in case of Exports: Since case 2 mentioned above is considered as exports so there are two ways to export under GST –
a) Through a bond or Letter of Undertaking (LUT) and without payment of IGST
b) Payment of IGST, refundable at a later date.
Export through LUT/bond (without paying IGST)
To export goods/services without paying IGST, taxable person must file a Letter of Undertaking (LUT) or an export bond. Exporting under LUT/bond is beneficial because it
a) saves the time and effort of seeking a tax refund,
b) prevents the blocking of funds, which can be critical for small businesses.
An LUT is valid for one financial year. It can be applied
If conditions for an LUT are not met, still exporter can export without paying IGST – by furnishing a bond on non-judicial stamp paper. The bond must cover the tax liability on the export as assessed by you (the exporter). If it falls short, a fresh bond can be furnished to cover the additional liability. A bond must be accompanied by a bank guarantee, which must not exceed 15% of the bond amount. Unlike an LUT, a bond does not have a fixed validity. Rather, it is a running bond with debit and credit facilities, so that it need not be furnished afresh for each export.
How to apply for LUT/Bond online
Applying for an LUT is fairly simple and entirely online:
1. Log in to the GST portal www.gst.gov.in
2. Under “Services”, click on “User Services”, then select “Furnish Letter of Undertaking (LUT)”
3. Select the financial year
4. In the LUT form (GST RFD-11) that appears, fill in the self-declaration, with which you undertake to:
5. Next, fill in the names and details of two witnesses
6. Enter “Place of Filing”, click “Save”, then “Preview” to check the form before submission
7. Sign the form using one of two options given – Digital Signature Certificate (DSC) or Electronic Verification Code (EVC)
8. Once the process is done, you will receive an acknowledgement
Unlike an LUT, which you can file online, a bond must be submitted in person to the GST officer (deputy/assistant commissioner) of the concerned jurisdiction. The steps to furnishing a bond:
1. Prepare the documents, which include:
2. Submit the bond with the required documents
3. The officer will verify the documents
4. On successful verification, the officer will issue a signed acknowledgement letter, usually within three days of submission
Export with Payment of GST
The GST refund process for exports and refund application in RFD-01 and RFD-11 will remain the same under the new GST return system. Exporter can opt for second option to pay GST and claim refund later. For this he has to file a separate refund application in RFD-01. Such taxpayer needs to login to the GST portal and selecting Services > Refunds > Application for Refund > Export of Services with payment of tax > RFD-01. The details relating to the export of services will need to be uploaded using the offline utility. The amount of refund and the bank account number in which the refund is to be credited will also need to be provided. On successful filing, an Application Reference Number (ARN) will be generated, which can be used to track the status of the refund application.
In Case 1, XAB LLP will be taxed at applicable rates as sale to own entity will not be considered as exports so they will have to file normal GSTR1 and GSTR 3B monthly. Sales shown in GSTR 3B will also reflect in form 26 AS of income tax, so it is advisable for taxable person to show correct sales in GST as well as Income Tax to avoid mismatch.
In case 2, YCD LLP will be taxed at nil rates since their sales falls under category of exports. They will also have to file GST Returns.
GST refund process for exports under the new return filing
For case 2 of YCD LLP following are the forms used to report refund details on exports: –
Form ANX-1: GST refund process for exports under new GST returns will begin with ANX-1. In this form, the invoice details of the exports are to be uploaded in Table ‘3C – Exports with payment of tax’ and Table ‘3D – Exports without payment of tax’ depending on whether the IGST is paid or not in respect of the supply. For a tax period, all such export invoices must be reported on which the shipping bills/bill of export are available till the date of filing the GST returns i.e., the 20th of the next month for monthly filers or 25th of the month following the quarter for quarterly filers. The rest will be reported in the next tax period. The details required in this field would be as follows:
Once the implementation begins, a separate functionality will soon be made available for updation of details of shipping bill/bill of export even after the date of filing return of the relevant tax period. It will then automate GST refund process for exports to a massive extent.
FORM RET-1: GST refund process for exports under the new GST returns system will continue with the declaration in RET-1. The value and the tax amounts in relation to the exports declared in ANX-1 will be auto-populated in Table 3A (row 3 and 4) for outward supplies. Hence, the taxpayer just needs to verify the same and not re-enter the details.
New amendment return introduced: The amendment to the export details whether or not with payment of IGST, can be done in ANX-1A that will amend the original annexure ANX-1 submitted for a tax period- either monthly or quarterly. It can be done by referring to the original details. These will be auto-populated to RET-1A.
Sales shown in GSTR 3B will also reflect in form 26 AS of income tax, so it is advisable for taxable person to show correct sales in GST as well as Income Tax to avoid mismatch.
Transfer Pricing Provisions
In case 1, since person X has direct control in XAB LLP and XYZ C-Corp so are associated enterprises since they have a common person (Mr. X) who control both entities.
In this case transfer pricing provisions will be applicable and transactions have to be done at arm’s length price. Further, XAB LLP will have to file form 3CEB in which details of all the international transaction and some specified domestic transactions with associated enterprises needs to be mentioned.
Income Tax Provisions
Both the entities XAB LLP and YCD LLP will have to pay income tax at rate of 30% on its total income.
Surcharge: The amount of income-tax shall be further increased by a surcharge at the rate of 10% of such tax, where total income exceeds one crore rupees. However, the surcharge shall be subject to marginal relief (the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees).
Health and education cess: The amount of income-tax and the applicable surcharge, shall be further increased by Health and education cess calculated at the rate of 4% of such income-tax and surcharge.