When Dollars Don’t Come Home: Navigating Export of Services under GST and FEMA
In the burgeoning digital economy, India has emerged as a global hub for cross-border professionals, freelancers, and IT consultants. With a laptop and a stable internet connection, an expert in Bengaluru can provide high-value consultancy to a firm in Delaware. However, while the digital borders have dissolved, the regulatory frameworks of the Goods and Services Tax (GST) and the Foreign Exchange Management Act (FEMA) have become more stringent. For many professionals, the realization that ‘Export of Services’ is not just about sending an invoice abroad, but meeting a complex set of legal conditions, comes too late—often during a tax audit.
The Five Pillars of Export of Services under GST
To qualify as an ‘export of services’ and thereby enjoy the status of a ‘zero-rated supply’ under Section 2(6) of the IGST Act, 2017, five specific conditions must be satisfied concurrently. If even one condition is missed, the transaction may be treated as a domestic supply, attracting a 18% GST liability.
1. Location of Supplier and Recipient
The supplier of service must be located in India, and the recipient of service must be located outside India. While this sounds straightforward, verifying the ‘location of the recipient’ in a digital world requires robust documentation, such as service agreements, IP addresses, or communication logs.
2. The Place of Supply (PoS)
The Place of Supply must be outside India. Under Section 13 of the IGST Act, for most digital services, the PoS is the location of the recipient. However, for specific services like those related to immovable property or ‘intermediary services,’ the PoS rules change, potentially dragging the transaction back into the Indian tax net.
3. Realization in Convertible Foreign Exchange
This is where most professionals falter. The payment for the service must be received in India in convertible foreign exchange (or in Indian Rupees wherever permitted by the RBI, such as from Nepal or Bhutan). Using platforms like PayPal or Payoneer is common, but ensuring that the funds eventually hit an Indian bank account as foreign inward remittance is vital.
4. Not Mere Establishments of the Same Person
The supplier and the recipient must not merely be establishments of a distinct person. This means an Indian branch providing services to its foreign head office may not qualify as an export under GST, even if foreign currency is received.
FEMA Compliance: The Realization and Repatriation Rule
While GST focuses on the taxability of the transaction, FEMA focuses on the movement of the currency. Under FEMA, exporters of services are required to realize and repatriate the full value of the export to India within a specified period—typically nine months from the date of the invoice.
The Importance of FIRC and BRC
A Foreign Inward Remittance Certificate (FIRC) or a Bank Realization Certificate (BRC) serves as the primary evidence that the ‘export proceeds’ have actually reached India. Without these documents, a professional cannot prove the completion of the export of service under GST, leading to potential demands for tax, interest, and penalties. In the digital age, many professionals fail to track these certificates, assuming a bank SMS notification of credit is sufficient. From a CA’s perspective, this is a significant compliance risk.
Reporting Requirements
Individual consultants and firms must ensure that their inward remittances are correctly coded by their Authorized Dealer (AD) banks. Incorrect purpose codes can lead to the transaction being categorized as something other than export proceeds, creating discrepancies between GST filings and FEMA records.
Registration Rules and Compliance Risks in a Borderless Economy
A common misconception among freelancers is that they do not need GST registration until they cross the INR 20 Lakh (or 10 Lakh) threshold. However, the moment a professional provides an ‘inter-state’ supply (which includes exports), the requirement for registration becomes a critical discussion point.
Mandatory Registration vs. Thresholds
While the government has provided certain exemptions for service providers with turnover below the threshold even for inter-state supplies, registering for GST is often beneficial. Registration allows the exporter to claim a refund of Input Tax Credit (ITC) on expenses like laptops, software subscriptions, and office rent. To do this without paying 18% upfront, the exporter must file a Letter of Undertaking (LUT) in Form GST RFD-11 annually.
The Risk of ‘Intermediary’ Classification
Perhaps the biggest risk for digital professionals is being classified as an ‘Intermediary.’ If you are merely facilitating a supply between a foreign client and another supplier, the Place of Supply becomes the location of the supplier (India). This reclassification turns a zero-rated export into a fully taxable domestic transaction, often wiping out the professional’s entire profit margin in back-taxes.
Conclusion: Best Practices for Cross-Border Professionals
To navigate this landscape safely, professionals should maintain a rigorous documentation trail. This includes signed contracts specifying the nature of the service, maintaining a ‘Foreign Inward Remittance’ file, and ensuring that the Place of Supply is clearly defined. In the digital age, the taxman isn’t just looking at your bank account; they are looking at the substance of your cross-border relationships. Compliance is not an afterthought—it is the foundation of a sustainable global practice.