Since GST was implemented in India, several exporters of services are facing a number of difficulties, foremost being basic understanding and meaning of “Export of Service“, and its related confusions of legal provisions.
In this article, let us discuss and clarify on basic concept of Export of Service and distinctly distinguish Services that Seems to be Export, but are Not Treated as Export of Service under GST. Before proceeding let us first understand the concepts.
As per Sec 2(102) of CGST Act
“services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged
The distinction is necessary because of the following reason:
A service is an intangible process that cannot be weighed or measured, whereas a good is a tangible output of a process that has physical dimensions.
Schedule II to the CGST Act, 2017 lists a few activities which are to be treated as supply of goods or supply of services. For instance, any transfer of title in goods would be a supply of goods, whereas any transfer of right in goods without transfer of title would be considered as services.
As per Schedule II of the CGST Act 2017, following are Treated as Service
5.(c’) : temporary transfer or permitting the use or enjoyment of any intellectual property right;
5.(d) development, design, programming, customisation, adaptation, up-gradation, enhancement, implementation of information technology software
But, if a pre-developed or pre-designed software is supplied in any medium/storage (commonly bought off-the-shelf) or made available through the use of encryption keys, the same is treated as a supply of goods classifiable under heading 8523.
AS per Sec 2(6) of IGST Act: “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;
(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange; 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 of the IGST Act, 2017;
The supply of any service is considered an export of service, where all the above conditions are met. Therefore, unless all the above conditions are not satisfied a supply of service cannot be regarded as exports and hence would be taxable even when place of supply lies outside India.
Let us now discuss different cases that Seems to be Export, but are Not Treated as Export of Service under GST.
Case – 1: Supply of Service to a Person Located Outside India where Place of Supply of Service is in India
1. An agent in India of a foreign IT/ITES provider (principal located outside India). For agency services, provided in India he shall get consideration in convertible foreign exchange.
2. A Businessman in India rented out his property in Hyderabad to a person residing in Singapore.
3. Microsoft of US, entered into an Agreement with Indian Provider of Software Services to Deliver such service to Client of Microsoft in India.
In the above Examples though all the conditions are fulfilled except the Place of Supply which is in India, therefore the transactions are Not Treated as Exports
Case – 2 : Supply of Service to a Person Located in India where Place of Supply of Service is Outside India
Example : Indian Agents; Consulting Firms Engaging Indian Service Providers for Delivering Services Overseas, like Engineering & Architectural Services; Education & Training Services.
In the above examples, since the Recipient of Services is in India, therefore even if other conditions are satisfied, the transactions are Not Treated as Export of Service
Case – 3: Supply of Service by Overseas Supplier to a Person Located in India where Place of Supply of Service is Outside India
TCS of India Received an Overseas Contract from UK, then TCS Places Order on another Oversea Firm say from France to Deliver Software Services Directly to a Company in UK.
Here the Service Provider is abroad (Not in India), therefore such Services are Not Treated as Service Exports
Case – 4: Supply of Service to a Person Located Overseas where Place of Supply of Service is Outside India, But Payment Received in Indian Currency
Supply of services where consideration is received in Indian currency or a currency other than convertible currency.
For example supply of consultancy service by an Indian consulting firm to an overseas entity, payment for which is made in Indian rupees by Indian branch of overseas entity.
Since Consideration is Received in Indian Currency, the transaction is Not Treated as Export of Service.
Case – 5: Supply of Service to a Person Located Overseas where Place of Supply of Service is Outside India, Payment Received in Foreign Currency, but Supplier & Recipient are Distinct Persons
Who is a Distinct Person?
Explanation 1 to section 8 of the IGST Act, 2017
For the purposes of this Act, where a person has,––
(i) an establishment in India and any other establishment outside India;
(ii) an establishment in a State or Union territory and any other establishment outside that State or Union territory; or
(iii) an establishment in a State or Union territory and any other establishment being a business vertical registered within that State or Union territory,
then such establishments shall be treated as establishments of distinct persons.
When a service is provided by a unit in India to a branch outside India, even though all of the conditions of Sec 2(6) of IGST Act are satisfied, except the condition ‘The supplier and recipient are not establishments of the same person’, such transactions are Not Treated as Export of Services.
As the unit in India and the branch outside India are establishments of the same person, this supply cannot be considered as an export of service.
This also means that supply of service to a branch outside India will not be zero rated and hence, not entitled for refund of Input Tax Credit (ITC)
This supply will also not be a non-taxable supply as it is not listed among the exempt supplies. In the previous tax regime, services provided to overseas branches were treated as non-taxable supplies, as the place of provision of service is outside India. However, such provisions are not available under GST Law and therefore Taxable.
That means Supply of Services by an Indian Unit to a branch in Overseas shall be treated as a taxable supply under GST, and IGST has to be levied at the applicable rate, as the place of supply is outside India.
Disclaimer : The views and opinions; thoughts and assumptions; analysis and conclusions expressed in this article are those of the authors and do not necessarily reflect any legal standing.
Author : SN Panigrahi, GST Consultant, Practitioner, International Corporate Trainer & Author
PMP Trainer, ZED Consultant
Can be reached @ firstname.lastname@example.org