The export activity of a country is very crucial for its economic growth and development. The government of a particular country would always aim to expand its share of exports. This is because increased exports help in :
- maintaining the trade balance
- creating job opportunities
- bringing higher wages
- raising the standard of living
- adding to the country’s foreign exchange reserves
Thus, given its benefits to a country’s economic growth, government provides various relaxations and incentives to its exporters.
The government of India too has put in place various export incentive schemes. Some of the benefits under these schemes include:
- zero duty on inputs imported to be utilized for production of export goods,
- export duty drawbacks on customs, excise etc.
With the advent of GST, the government decided to provide further relief and tax saving facilities to the exporters under GST regime.
To give a further boost to country’s exports, the government of India declared exports as zero rated supplies under GST. That is to say, export of any kind, whether goods or services or both, would not be subject to GST.
Given this backdrop, let’s understand the concept of GST on export.
How are Exports Taxed Under GST?
As mentioned above, exports are treated as zero rated supplies under GST. In other words, GST is not levied on any goods or services or both exported outside India.
Furthermore, exporters can undertake exports in the following two ways under GST:
A. Export Under Bond or LUT(Letter of Undertaking) Without Payment of IGST
Exporters can opt for exporting goods or services or both without paying IGST. Section 96A of CGST rules, 2017 lays down the provisions for exporters who choose to undertake exports without the payment of IGST.
As per this section, the exporters who undertake exports without the payment of IGST are required to file either a LUT or bond in form GST RFD – 11 to the jurisdictional commissioner.
To know how exports are taxed under a bond or LUT, it is important to understand what each of these terms mean.
Letter of Undertaking (LUT)
What is LUT?
In terms of export and import, a Letter of Undertaking is basically a guarantee that a bank provides to its customer (exporter in this case). Through this document of guarantee, the bank allows the customer to raise short – term credit from a foreign branch of any other Indian Bank.
That is, the bank undertakes to repay such a credit in foreign currency, in case its customer (or the exporter) fails to do so.
The government introduced the option of filing LUT for exports undertaking exports without the payment of IGST. This was done to enable exporter to avoid the hassle of paying tax and then claiming refund later.
Who is Eligible to Export Under LUT?
All the registered taxpayers who seek to supply goods or services or both for export without the payment of IGST can export under LUT. Provided:
- such exporters have not been prosecuted for any offence under CGST act 2017, IGST act 2017 or any other existing laws and
- the amount of tax evaded in such cases is more than Rs. 250 lakhs
What is the Validity of LUT?
The LUT is valid for the complete financial year in which it is furnished. But, the provision of export under LUT shall be withdrawn if:
- the supplies are not exported within the time period as specified in sub rule(1) of rule 96A of the CGST rules
- and the exporter fails to pay the amount specified in the said sub – rule
However, the facility of export under LUT is restored if the exporter pays the amount specified in the said sub – rule.
How is LUT Filed?
The LUT is to be submitted by the exporter online via the GST common portal.
Export Bond under GST
What is Export Bond Under GST?
A bond is basically a financial instrument whereby the issuer of the bond is indebted to the holder of such an instrument. That is to say, the issuer is liable to the holder interest thereon or repay the principal amount at a future date.
Who is Eligible to Export Under Bond?
All the exporters who do not meet the conditions specified under LUT can undertake exports without paying IGST by furnishing an export bond.
There are certain regulations that exporter needs consider while exporting under a bond. These are as follows:
- Exporter is required to file a bank guarantee along with bond. Such a bank guarantee must not exceed 15% of the bond amount.
- Bond issued is not a one – time bond, meaning a separate bond for each consignment. Instead, it is a running bond which contains terms and conditions that are common for every consignment.
- Running bond must cover the amount of tax that is applicable for such exports. The tax amount is assessed based on the estimated tax liability which is self assessed by the exporter himself. If the bond does not cover the estimated tax liability, the exporter would have to furnish a fresh bond. This fresh bond would thus cover the remaining tax liability.
- Such a bond is required to be furnished on a non – judicial stamp paper. Further, the stamp paper would be of value as is applicable in the state in which the bond is being furnished.
Thus, by furnishing such a LUT or bond, the exporter binds himself to pay the amount of tax due along with the interest, if any. Further, he is liable to pay tax along with interest within:
- 15 days after the end of three months (or time period as prescribed by the commissioner) from the date of issue of invoice for export of goods. This is in case the exporter fails to export the said goods outside India.
- 15 days after the end of one year (or time period as prescribed by the commissioner) from the date of issue of invoice for export of services. This is in case the exporter does not receive the payment for the said services in convertible foreign exchange.
B. Export by Paying IGST and Claiming Tax Refund Later
The exporter can choose to export supplies by paying IGST at the time of export and claim a refund of tax paid on exports at a later date. Here’s how the exports are undertaken by the way of paying IGST for exports:
- The exporter charges IGST on the export invoice at the rate applicable
- Since exports are zero rated supplies, the exporter can claim refund for IGST paid at the time of export.
- Once the IGST is paid, the refund can be claimed for the following two components:
- the unutilized portion of the input tax credit on goods and services
- the IGST paid on export of goods or services
What are Zero Rated Supplies under GST?
According to section 16 of the IGST Act, the term “zero rated supplies” means:
- Export of goods or services or both
- Supply of goods or services or both to a Special Economic Zone (SEZ) developer or unit
The intent of the government via zero rating was to make both the input as well as output for zero rated supplies tax free.
The idea behind this was to make Indian goods and services competitive in the international market. Moreover, such type of supplies were introduced to ensure that taxes did not act as an impediment. That is increased taxes did not lead to increased cost of goods and services to be exported.
What are Deemed Exports Under GST?
As per section 147 of the CGST Act 2017, supplies are considered Deemed Exports under GST if they meet the following two conditions:
- Supplies include goods and not services manufactured in India. Further, the goods produced do not leave India.
- Payment with regards to such supplies is received in Indian rupees or in convertible foreign exchange
Deemed exports are separate from zero rated supplies. Such exports do not form part of zero rated supplies by default. As a result, supplies categorized as deemed exports are liable to taxes.
This means that such supplies are made by paying IGST and are not supplied based on a bond or Letter of Undertaking (LUT). Further, the refund for tax paid on supplies considered as deemed exports is claimed either by the supplier or the recipient.
Accordingly, the application for claiming such a refund is to be filed either by the supplier or the recipient of such deemed exports.