Since GST was implemented in India, several exporters have faced difficulties in claiming GST refunds. The result is large amounts of working capital being locked up until refunds are correctly applied for and received. Service exporters in particular have asked us how to get refunds because the process is more complex than for goods exporters. In this post, we answer some questions on getting GST refunds for service exporters.
What is an export of services?
Under the IGST Act, export of goods refers to taking goods from India to a place outside India. Export of services is a more nuanced definition – it refers to a supply of services where the supplier is in India and recipient is outside India, and:
- Place of supply of service is outside India
- Payment for such service is received in convertible foreign exchange and
- Supplier and recipient of services are distinct persons
Who is impacted by these rules?
All service exporters in India, including companies that provide services (back office support, software, etc.) to their parent companies overseas.
What is Zero Rated Supply?
Under Section 16 of the IGST Act, GST is not applicable in India on exports. Hence, all export supplies of a taxpayer registered under GST would be classified as "zero rated supply". According to Section 16, Zero Rated Supply is an exempted supply but Input Tax Credit (ITC) would be available on such supply. In effect this means a negative GST or a GST refund.
What are the routes for a refund?
Any person making a Zero Rated Supply can opt for one of the following two options, as per Section 16(3) of the IGST Act:
- Supply goods or services (or both) under a bond or Letter of Undertaking (LUT) without payment of IGST and claim refund of unutilised ITC, or
- Supply goods or services (or both) on payment of IGST and claim GST refunds of such tax paid
Is there a difference between the GST refunds process for a manufacturer and a service exporter?
Yes. The process for manufacturers is definitely simpler. A manufacturer's shipping bill itself will be treated as application for refund and they will get a refund directly into their bank account. No separate application is needed. To ensure smooth processing and payment of GST refunds, the GST authorities have declared that refund amount will be credited to the bank account of the exporter registered with customs, even if it is different from the bank account of the applicant mentioned in his registration particulars.
Unlike manufacturers, service exporters cannot get direct GST refunds into their bank account. To get a refund, the service exporter must file certain documents with the jurisdictional GST officer of the company. The differentiation is made because services are intangible and there is no documentation trail of exports. Export of goods has a clear trail with customs, shipping/transport and other bills being shared with the Government.
It's important to note that a proof of realisation (i.e. funds being received) is not required for export of goods but it is necessary for GST refunds on service exports. Depending on the payment terms for a service exporter's customers, this can add 30-60 days to the timeline.
What documents are required by a service exporter to claim GST refunds?
A process for online GST refunds has not yet been prescribed. The list of required documents for claiming an offline refund is:
- A covering Letter
- Export Invoices
- Bank Realization Certificates or Foreign Inward Remittance Certificates
- Application for Refund in the Form GST RFD 01
- Form GSTR 3B and GSTR 1
- A cancelled cheque
- If GST refunds claims exceed ₹2 lakhs (₹200,000 or ~$3,000) per quarter, a certificate from a Chartered Accountant/Cost Accountant must be submitted along with the documents above.
These documents are all mandatory, i.e. GST refunds cannot be requested until these are all submitted.
What is the process for claiming GST refunds?
Step 1: The application for GST refund is to be forwarded to the proper officer with the documents listed above. It must include a statement containing the number and date of invoices and the relevant Bank Realization Certificates or Foreign Inward Remittance Certificates. The officer shall, within 3 days of filing of the application, issue an acknowledgement in Form GST RFD-02.
Step 2: The officer will make an order in Form GST RFD-04, sanctioning the amount of refund on a provisional basis within a period of 7 days.
Step 3: The officer will issue a payment advice in Form GST RFD-05 to be electronically credited to any of the bank accounts of the applicant as specified in the application. 90% of the amount is credited at this stage.
Step 4: The remaining 10% of the amount is paid after scrutiny of documents (i.e. verification of physical documents with the online data in the GST portal). Form GST RFD-06 will be issued sanctioning the balance amount, if all details are okay.
When should the claim for GST refunds be filed?
Every claim should be filed within expiry of 2 years from the relevant date of exports. For service exporters, the relevant date is either:
- The date of completion of services, or
- The date of receipt of advance, in cases the advance is received prior to the date of issue of the invoice.
Typically, therefore, if a service exporter receives advances, it is beneficial to him to apply at that stage itself.
What are the typical timelines for GST refunds to be processed?
It is early days in the GST regime, but so far we have seen that GST refunds are being sanctioned smoothly within the timeline promised as mentioned above. It is of course critical to have the documentation in order for this.
What happens in case of delays in approval?
Cases delayed beyond 60 days will get interest at the notified rate (not exceeding 6%) till the date of refund, if the refund is sanctioned. In some cases which may be decided by Appellate or Adjudicating authority or Court, interest will be paid at the notified rate (not exceeding 9%), reckoned from the first period (i.e. after the first 60 days) till the date of refund.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.