What is GST? How does it work?

GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage.

Benefits of GST on Imports and Exports

Benefits of GST on Imports and Exports

Export of goods means

  • Section 2 (5) “export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India;
  • Export of goods will be treated as ‘zero-rated supplies

Export of services means

  • Section 2(6) “export of services” means the supply of any service when
  • (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;

Zero Rated Supply

By zero rating, it is meant that

  • the entire value chain of the supply is exempt from tax.
  • not only output is exempt from payment of tax, but there is also no bar on taking/availing credit of taxes paid on the input for making/providing the output supply.

Such an approach would in the true sense make the goods or services zero-rated.

All supplies need not be zero-rated. As per the GST Law exports are meant to be zero-rated, the zero rating principle is applied in letter and spirit for exports and supplies to SEZ.

exports and supplies to SEZ

Import of Goods and Services

‘‘Import of goods” with its grammatical variations and cognate expressions, means bringing goods into India from a place outside India;

‘‘Import of services” means the supply of any service, where––

Import of services

Export Procedures

Stage 1:  In this stage, the goods are transported from the exporter’s warehouses or the location of the business to the CONTAINER FREIGHT STATION or INLAND CONTAINER DEPOT. For transportation purposes, the exporter has to generate an e-way bill at this stage. Here I want to stress if the invoice is less than Rs. 50,000/- then generating an e-way bill is not required.

Stage 2:  The goods so transported from the exporter’s warehouse to CFS or ICD are then transferred to the port or airport. This transfer of goods to a port or airport is exempted from the provision of the generation of an e-way bill.

Import Procedures

Stage 1:  When the goods have arrived at port or airport HERE the goods are said to be actually imported.

Stage 2:  After the arrival of goods at the port, they remain under customs custody.

Stage 3:  From the custody of the customs, the goods are further transferred for clearance to either CFS (Container Freight Station) or ICD (Inland Courier Depot).  These kinds of transactions are exempted from generating an e-way bill for this transaction.

Stage 4:  Then these goods are further transported from CFS or ICD, either to

The bonded warehouse; or

To The factories or businesses’ consumptions.

What is E-Way Bill and how it works?

An electronic Way Bill (E-Way Bill) is a yielding mechanism wherein, through a digital interface or software, the person moving goods uploads the relevant information and data before the movement of goods and produces an e-way bill on the GST portal.

  • Import: The distance and validity of an e-way bill shall be calculated when the goods are transported to the location of the business or factory from either CFS/ICD or warehouses
  • Export:  The distance and validity of an e-way bill shall be calculated before the transportation of the goods from the location of the business to ICD/CFS or warehouses as the case may be.

Place of Supply of Goods

Place of supply of goods imported into or exported from India –

Place of supply of goods imported into or exported from India will be determined in accordance with the provisions of Section 11 of the IGST Act, 2017.

As per the provisions of Section 11, place of supply of goods shall be as follows –

Supply Type Place of Supply GST
Goods Imported into India Location of the Importer Always GST is charged for imports
Goods Exported from India Location outside India GST on exports are eligible for refund

Leviability of Integrated Tax on High Seas Sales Transactions

High Sea Sales is a common sales practice carried out by the actual buyer and another buyer while the goods are on the high seas or before the goods have crossed the customs frontiers of the specific country.

Let’s try to understand the high sea sales procedure with an easy example. If a buyer from India purchases an item from a seller in the USA and makes a sale to another buyer in India while the item or product is still in transit, it is called high sea sale. There is no bar on the same goods being sold to more than one buyer while being on the high seas.

 The documents required to consider high sea sales under the GST Law

  • Commercial Invoice
  • High Sale Agreement
  • Bill of lading
  • Certificate of Origin
  • Import Invoice
  • Insurance Certificate

Import of Services

The IGST act 2017 defines import of services as the supply of any service where the:

  • The supplier of said service is located outside of India
  • Recipient of the said service is located in India and
  • Place of supply of the said service is in India

Further, the nature of the service imported, its underlying consideration and its purpose determine if a particular import of service can be treated as supply.

Case I: Import of Service for Consideration Whether or not in the Furtherance of Business

Say there is an import of service. Further, such an import is for consideration but may or may not be in furtherance of business. Thus, the import of service in such a case is considered as a supply.

This implies that any import of service that takes place without consideration is not considered as supply. It is not necessary that an import of service in exchange of consideration is done for the furtherance of a business.

Case II: Import of Services by a Taxable Person from a Related or Distinct Person

Say there is an import of service by a taxable person from a related or distinct person as defined in section 25 of the CGST act, 2017. Further, such an import of service is in furtherance of business and may or may not be undertaken for consideration. Such an import of service is considered a supply.

Letter of Undertaking under GST

The letter of the undertaking is the document that the user provides declaring the fulfillment of all requirements under GST. It is furnished in case of export undertaken without paying IGST. Also, according to Notification No. 37/2017 – Central Tax It is mandatory to furnish LUT to export goods or services or both without paying IGST. If the exporter fails to provide the LUT, then he has to pay IGST or provide an export bond. Earlier LUT could only be filed offline at the concerned GST office. But to further ease the process the Government has made the LUT filing online.

Section 2(14) Location of Recipient of Service

Where  supply is received at a place of business for which the registration has been obtained

The location of such place of business
Where supply is received at a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere) The location of such fixed establishment.
Where supply is received at more than one establishment, whether the place of business or fixed establishment The location of the establishment most directly concerned with the receipt of supply
In absence of such places The location of the usual place of resident of the recipient

Importance of Place of Supply

  • Wrong classification of supply between interstate or intra-state and vice-versa may lead to hardship to the taxpayer as per section 19 of IGST Act and section 70 of CGST Act
  • Where wrong taxes have been paid on the basis of the wrong classification, a refund will have to be claimed by the taxpayer
  • The taxpayer will have to pay the correct tax along with interest for the delay on the basis of revised/correct classification
  • Also, correct determination of place of supply will help us to know the incidence of tax. As if the place of supply is determined as a place outside India, then tax will not have to be paid on that transaction

OIDAR – sec 13(12)

Online Information Database Access and Retrieval services (hereinafter referred to as OIDAR) is a category of services provided through the medium of the internet and received by the recipient online without having any physical interface with the supplier of such services. For E.g. downloading of an e-book online for payment would amount to a receipt of OIDAR services by the consumer downloading the e-book and making a payment.

No GST is leviable in the below cases

  • Supply of goods from a place in a non-taxable territory to another place in the non-taxable territory without such goods entering in India
  • Supply of warehoused goods to any person before clearance for home consumption
  • Supply of goods by the consignee to any other person, by the endorsement of document of title to the goods, after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption.

Merchant Exports under GST

A merchant exporter is a person who is involved in trading activity and exporting or intending to export. They do not have any manufacturing units. They buy goods from a manufacturer and then ship them to foreign customers.

Merchant exporters are compulsorily required to obtain registration under GST.

Under the GST regime, since the procedure of exports has been simplified therefore Merchant exporters also have the option to

Make an export under bond/LUT, and then the unutilized input tax credit can be claimed as a refund.

OR to make an export by paying off IGST and then claim a refund of the same. However, this option is only available if the exporter has not opted for the Special Relief Scheme of buying goods at 0.1% GST.

Merchant exports are similar to regular exports. They boost the country’s economy by bringing in foreign currency. Therefore, the government has provided concessional rate benefits in the case of merchant exporters, which helps them, reduce their working capital requirements. Thus, the government has provided special relief to merchant exporters by way of reducing the GST rate to 0.1% for purchasing goods from domestic suppliers.

Deemed Exports

  • Supply of goods by a registered person against Advance Authorization
  • Supply of capital goods by a registered person against Export Promotion Capital Goods Authorization
  • Supply of goods by a registered person to Export Oriented Unit
  • Supply of gold by a bank or Public Sector Undertaking against Advance Authorization.

When refunds can be rejected/ withheld?

  • failed to furnish any return
  • required to pay any tax, interest, or penalty
  • deduct unpaid taxes, interest, penalties, late fees from the refundable amount
  • the order of refund is under appeal and the grant of such refund would adversely affect revenue in the said appeal on account of malfeasance or fraud committed

Reasons why the refund might be stuck?

  • Insufficient Information
  • Lack of due diligence while filing GST returns
  • Error while matching the details electronically

Interest in a delayed refund

  • Application for refund filed
  • If the refund is not issued within 60 days of the application
  • 6% p.a. Interest for the period of delay
  • Refund issued after 60 days by Order of Appellate Authority / Tribunal/ court
  • 9% p.a for the period of delay.

Conclusion: The government of India is taking continuous steps to promote domestic goods abroad through a series of measures. One such direction in the field of Taxation is the refund of ITC accrued on such exports, so as to make such goods competitive in the International market and thereby promote indigenous products and thereby augmenting India’s forex reserves. Further, it is essential that in order to claim the export benefits one must prepare adequate documentation, as required under the GST Act.

About the Author

Ruchika Bhagat

The author is Ruchika Bhagat, FCA helping foreign companies in setting up and closure business in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat & Co. Chartered Accountants is a well-established Chartered Accountancy firm founded in the year 1997 with its head office at New Delhi.

Author Bio

Qualification: CA in Practice
Company: Neeraj Bhagat & Co.
Location: New Delhi, New Delhi, IN
Member Since: 28 Feb 2019 | Total Posts: 152
Neeraj Bhagat & Co. is helping foreign companies in opening up of Liaison/ Branch Office in India and complying with various tax laws applicable to foreign companies while establishing a business in India. Neeraj Bhagat is the founder of Neeraj Bhagat & Co. Chartered Accountants, a Chartered View Full Profile

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December 2023