Applicability of GST on Overseas Transactions: FAQs and Case Studies
We address some frequently asked questions about India’s indirect tax regime, specifically the goods and services tax, GST applicability on overseas transactions, and provide some case studies where relevant.
For a quick reference guide on key terminologies under India’s GST regime, you may refer to our article: What is GST in India? Tax Rates, Key Terms, and Concepts Explained.
Q1. What is the meaning of GST and how is it implemented in India?
GST or the goods and service tax is a comprehensive, multi-stage, and destination-based tax levied on every value addition. GST law applies as a single domestic indirect tax law for the entire country. Further, the GST has replaced many indirect taxes, such as excise duty, value added tax (VAT), service tax, etc. It came into effect from July 1, 2017.
GST is technically paid by suppliers but its ultimate burden is carried over to final consumers. Under GST, input tax credit is provided throughout the value chain for creditable acquisition.
In India, the GST rate for various goods and services is divided into four slabs – 5% GST, 12% GST, 18% GST, and 28% GST.
India is a federal country where both the central government and state governments have the powers to levy and collect taxes through appropriate legislation.
GST in India is thus structured as follows:
- Central Goods and Service Tax (CGST) levied and collected by the central government.
- State Goods and Service Tax (SGST) levied and collected by state governments/union territories with state legislatures.
- Union Territory Goods and Service Tax (UTGST) levied and collected by union territories without state legislatures on intra-state supplies of taxable goods and/or services.
- Integrated Goods and Service Tax (IGST) levied and collected by the central government on inter-state supplies of taxable goods and/or services.
Q2. What is the meaning of “goods” and “services” under GST?
Section 2(52), CGST Act, 2017: Goods
Goods means any kind of movable property other than money and securities but includes actionable claims, growing crops, grass, and things attached to or forming part of the land, which are agreed to be served before supply or under a contract of supply.
Section 2(102), CGST Act, 2017: Services
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.
For the removal of doubts, it was clarified that the expression “services” includes facilitating or arranging transactions in securities. Thus, service charges, service fees, documentation fees, or broking charges that are imposed on transactions in securities will be chargeable under GST.
Q3. What is the GST applicability on overseas transactions?
The category of transactions that falls under the scope of overseas transaction under the GST regime are:
- Category 1: Export of goods by payment of IGST or under LUT/Bond
- Category 2: Export of services
- Category 3: Import of goods, which is governed by Customs Act, 1962
- Category 4: Import of services whether for business or non-business purpose
- Category 5: Sale and purchase of goods without such goods entering into India
- Category 6: Supply of goods before clearance for home consumption
- Category 7: OIDAR services (for business or non-business purpose)
Q4. What is the meaning of export of goods and services in GST?
Section 2(5), CGST Act, 2017: Export of Goods
The term “export of goods” means taking goods out of India to a place outside India.
Section 2(6), CGST Act, 2017: Export of Services
The term “export of services” means the supply of any service, when:
- the supplier of service is located in India.
- the recipient of service is located outside India.
- the place of supply (POS) of service is outside India.
- the payment for such services has been received by the supplier of service in convertible foreign exchange or in Indian Rupees wherever permitted by Reserve Bank of India (RBI).
- the supplier of service and the recipient of service are not merely an establishment of a distinct person in accordance with Explanation 1 in Section 8 of IGST Act.
Explanation 1 in Section 8 of the IGST Act: An establishment of a person in India and another establishment of the said person outside India are considered as establishments of a distinct person.
Q5. What is the meaning of the term “import” under GST?
Section 2(10), IGST Act, 2017: Import of goods
The term “import of goods” means bringing goods into India from a place outside India.
Section 2(11), IGST Act, 2017: Import of services
The term “import of services” means the supply of any service, where:
- the supplier of service is located outside India.
- the recipient of service is located in India.
- the place of supply of service is in India.
Q6. What is the meaning of zero-rated supply?
According to Section 16, IGST Act, zero-rated supply means any of the following supplies of goods and services or both, namely:
- Export of goods or services or both.
- Supply of goods or services or both to a Special Economic Zone (SEZ) developer or an SEZ unit.
Q7. Is GST payable on export of goods/services outside India?
Under GST law, export of goods or services are treated as:
- Inter-state supply and covered under the IGST Act, 2017.
- Zero-rated supply, that is, the goods and services exported outside India shall be relieved of GST levied upon them – either at the input stage or at the final product stage.
This computation is intended to make Indian exports more competitive in the international market. Moreover, under the GST regime, the procedures relating to export have been simplified to remove paperwork and intervention of the tax department at various stages of export.
The salient features of the GST regime as it applies to exports are as follows:
- The goods and services can be exported either on payment of IGST, which can be claimed as refund after the goods have been exported, or under bond or Letter of Undertaking (LUT) – that is, without payment of IGST.
- In case of goods and services exported under bond or LUT, the exporter can claim refund of accumulated input tax credit (ITC) on account of export.
- In case of goods, the shipping bill is the only document that is required to be filed with the Customs authorities for exports.
- In case of supplies for export, self-sealing and self-certification by the exporter is required, without needing intervention of the departmental officer.
- The shipping bill along with other export related documents filed on the Indian Customs Electronic Commerce Gateway (ICEGATE) shall be treated as an application for refund of IGST. The applicant must also furnish a valid return in Form GSTR 1 and GSTR 3B along with the Form GST RFD-01 on the GST portal.
Q8. How soon will refunds on export of goods or services be granted under the GST regime?
1) In case of refund of tax on inputs used in exports:
- Refund of 90% of the total amount so claimed, will be granted provisionally within seven days of acknowledgement of refund application.
- Remaining 10% will be paid within a maximum period of 60 days from the date of receipt of application after due verification of documents furnished by the applicants.
- Interest at 6% is payable if full refund is not granted within 60 days.
2) In the case of refund of IGST paid on exports:
Upon successful filing of all the export documents and furnishing of valid return in Form GSTR-3 or Form GSTR 3B, as the case maybe, by the exporter on the common portal – the Customs authorities shall process the claim for refund and an amount equal to the IGST paid in respect of each shipping bill shall be credited to the bank account of the exporter.
Q9. Is GST applicable on import of goods from a place outside India?
Under the GST regime, the import of goods into the territory of India would be treated as supply of goods in the course of inter-state trade thereby attracting the levy of IGST. Hence, imports will be treated as inter-state supplies and would be subject to GST.
GST on import of goods:
The GST Act defines the import of goods as bringing goods into India from abroad. Accordingly, the GST Act considers all imports into India as inter-state attracting Integrated GST (IGST). In addition to the IGST, the import would also be subject to Customs Duty.
Thus, when goods are imported into India, IGST would be applied to the value of the goods and collected along with Customs Duty.
Under the Customs Act, 1962, removal of goods from a customs station can be done only after payment of Customs Duty and the IGST payable. Thus, the importer should pay the Integrated tax at the time of removal of goods from a customs station to a warehouse or for a home consumption.
Q10. Whether GST is applicable on import of services from a place outside India?
As per IGST law, GST applies when inter-state trade occurs. It also applies on import of services such as when the consumer in India receives services from a person residing outside India. The Government of India implemented GST to overhaul the existing service tax regime and bring in significant changes to the way of doing business in the country and reduce costs.
Here are a few cases to determine GST applicability on imports:
Case 1: Import of services for consideration
If services are imported with consideration, whether or not in the course or furtherance of business, it shall fall within the scope of the term “supply” and GST will be applicable on such transaction.
Exception to Case 1: If the services are imported by the Government or an individual in relation to any purpose other than business purpose or entities registered under Section12AA for the purpose of providing charitable activities, then GST will not be applicable.
Case 2: Import of services without consideration
If services are imported without consideration, whether or not in the course or furtherance of business, it shall not fall within the scope of the term “supply”. Hence, GST will not be applicable on such transactions.
Example: Import of free services from Google and Facebook by individuals without any consideration are not considered as supply, hence no GST is applicable.
Exception to Case 2: Import of services by an Indian branch from their parent company outside India in the course or furtherance of business, even if without consideration, will be a supply and GST will be applicable on such transaction.
Import of goods is governed by the Customs Act whereas import of services is governed by the IGST Act. Import of goods and services attracts GST under reverse charge – that is, liability to pay tax shall be on the recipient of services under the Reverse Charge Mechanism (RCM).
Q11. Is GST applicable on sale and purchase of goods without such goods entering India?
Under Schedule III of Section 7(2)(a) of the CGST Act, 2017, the supply of goods from a place in a non-taxable territory to another place in the non-taxable territory – without such goods entering India – shall not be treated as supply. This means that such transactions will be out of the scope of GST.
Q12. Is GST applicable on merchant trade transaction?
GST is not applicable on merchant trade transactions.
Merchant trade transaction:
- Merchant trade transaction is a transaction which involves shipment of goods from one foreign country to another foreign country involving an Indian trader.
- Such transactions are basically procurement and/or supply under “Bill to-Ship-to” arrangement.
- A ‘person/ consignor’ in India, without physically importing the goods into India, procures goods from a supplier outside India and supplies the same goods to another ‘person/consignee’ outside India.
Example: Goods are purchased by M/s C (Mumbai) from M/s A (London), but these goods are directly shipped to ‘B’ in Singapore without the goods entering into the territory of India.
Merchant trade transaction is a common practice today and there have been several issues with respect to liability of tax on such transactions ever since the roll-out of GST. However, with effect from February 1, 2019, GST is not applicable on Merchant Trade Transactions.
The above view is also confirmed by the Authority of Advance Ruling (AAR) sought by M/s Sterlite Technologies Ltd, Gujarat.
Q13. Is GST applicable on supply of goods after the goods have been dispatched from the port of origin located outside India but before clearance for home consumption?
Under Schedule III of Section 7(2)(a) of the CGST Act, 2017, the following transactions shall not be treated as supply:
- Supply of warehoused goods to any person before clearance for home consumption.
- Supply of goods by the consignee to any other person, by 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.
Since the above transactions do not fall under the ambit of supply, GST will not be applicable.
Q14. Is GST applicable on OIDAR services?
OIDAR services are charged under GST.
Section 2(17) of the IGST Act, 2017 defines OIDAR services as follows:
Online information and database access or retrieval (OIDAR) services refers to the category of services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated involving minimum human intervention. Consequently, these services are impossible to ensure in the absence of information technology. They include electronic services such as:
- advertising on the internet
- providing cloud services
- provision of e-books, movie, music, software, and other intangibles via telecommunication networks or internet
- providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network
- online supplies of digital content (movies, TV shows, music, etc.)
- digital data storage
- online gaming
Any such service, as listed above, and provided by an Indian service provider from within the taxable territory to recipients in India will be taxable. Further, such OIDAR services received by a registered entity in India would also be taxable under reverse charge. The overseas suppliers of such services would otherwise have an unfair tax advantage should the services provided by them be left out of the tax net. However, since the service provider is located overseas and may not have a permanent establishment / presence in India, the compliance verification mechanism becomes difficult. The government has plans to come out with a simplified scheme of registration for such service providers located outside India.
For any supply to be taxable under GST, the place of supply should be in India. In case both the supplier of OIDAR service and the recipient of such service is in India, the place of supply would be the location of the recipient of service – that is, it would be governed by the default place of supply rules. For more information, you may read our article: OIDAR Digital Services in India: GST Applicability and Compliance.
Case 1: What happens in cases where the supplier of service is located outside India and the recipient is located in India?
In such cases also the place of supply would be India and the transaction would be amenable to GST.
In cases where the supplier of such service is located outside India and the recipient is a business entity (registered person) located in India, the reverse charge mechanism would get triggered and the recipient in India who is a registered entity under GST will be liable to pay GST under reverse charge and undertake necessary compliances.
Case 2: What happens if the supplier is located outside India and the recipient in India is an individual consumer?
In such cases also the place of supply would be India and the transaction is amenable to levy of GST, but here the problem that arises is with respect to how such tax gets collected. It would be impractical to ask the individual in India to register and undertake the necessary compliances under GST for a one-off purchase on the internet.
For such cases, the IGST Act, 2017 provides that on supply of online information and database access or retrieval (OIDAR) services by any person located in a non-taxable territory and received by non-taxable online recipient (NTOR), the supplier of services located in a non-taxable territory shall have to obtain a single registration under the Simplified Registration Scheme in Form GST REG-10 or, they may appoint any intermediary in the taxable territory, in which case such person shall be the person liable for paying integrated tax/IGST on such supply of services.
But in case such services are received by a person other than NTOR, then tax shall be paid by the recipient of such services under the reverse charge mechanism.
Note: NTOR means any government or government authority, an individual, or any other person located in India and not registered under GST, receiving such services in relation to any purpose other than business purpose.
It has been clarified by the government via notification that if such services are received by a) the Government or government authorities, b) an individual in relation to any purpose other than business purpose, c) any entity registered under Section 12AA of Income Tax Act, 1961 for the purpose of providing charitable activities, d) or person located in non-taxable territory – they shall be exempt from GST.
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