Export-oriented IT service providers occupy a structurally favourable position under GST, but the favourable treatment is conditional. Export of services is a zero-rated supply under Section 16 of the IGST Act, which means the provider can supply without payment of IGST and either claim refund of eligible accumulated input tax credit or use the IGST-payment route and claim refund. The benefit is real, but it is available only where all five conditions of Section 2(6) of the IGST Act are satisfied cumulatively. A single failed condition can convert an apparently zero-rated export into a taxable supply.
The Five Conditions Are Cumulative, Not Alternative
Section 2(6) defines export of services through five conditions: the supplier is located in India; the recipient is located outside India; the place of supply is outside India; payment is received in convertible foreign exchange or in permitted Indian rupees; and the supplier and recipient are not merely establishments of the same person.
The fifth condition is the one most frequently overlooked. An Indian IT company billing a foreign subsidiary or a foreign branch of the same group can fail the establishment condition if the supplier and recipient are establishments of the same person. A foreign customer with a different legal identity is not the same as a foreign establishment of the Indian supplier. The distinction requires a legal-entity analysis, not merely an address check.
The payment condition requires convertible foreign exchange or permitted Indian rupees. A receipt in a non-convertible currency, or a set-off against an Indian payable, does not satisfy the condition. Foreign exchange realisation should be documented through bank advice or FIRC.
LUT and the Working-Capital Advantage
A Letter of Undertaking in Form GST RFD-11 allows a registered exporter to supply without payment of IGST. The LUT is based on Rule 96A of the CGST Rules and is valid for one financial year; it must be renewed each year. The advantage is working capital: instead of paying IGST on export invoices and waiting for a refund, the exporter supplies zero-rated and preserves cash flow.
The LUT route is available to eligible exporters, subject to the conditions and exclusions in the rules. Exporters who are not eligible for the LUT route may supply on payment of IGST and claim refund under the alternative route. The choice between the LUT route and the IGST-payment route is not merely administrative; it affects cash flow, refund timelines and working-capital planning.
Refund of Accumulated Input Tax Credit
Where the exporter supplies under LUT, the input tax credit accumulated on inputs and input services used for the zero-rated supply is refundable. The refund claim must be supported by the export invoices, the GST returns, the LUT and the foreign exchange realisation evidence. The refund process requires reconciliation of export invoices with the zero-rated table in GSTR-1, the credit ledger and the bank receipts.
Where the exporter supplies on payment of IGST, the IGST paid is refundable under the alternative route. The IGST-payment route can be useful where the exporter has a large accumulated credit position and prefers a refund of IGST rather than ITC, or where the LUT route is not available. The choice should be modelled on the exporter’s credit position and cash-flow needs.
ITC on Software, Cloud and Data Centre Inputs
IT service exporters incur GST on software subscriptions, cloud infrastructure, data centre services, hardware and professional services. These inputs are ordinarily eligible for credit where used in the course or furtherance of business and where the invoice is in the name of the registered person. Where the input is used exclusively for zero-rated exports, the credit is not reversed; it is accumulated and refunded.
The Section 17(5) blocked-credit categories must be checked. Credit is blocked on certain goods and services, including works contract services for immovable property and goods or services used for personal consumption. Where inputs are used partly for taxable domestic supplies and partly for zero-rated exports, the common-credit rules apply and the credit must be apportioned.
What the Export-Oriented IT Provider Should Control
The provider’s GST position depends on four variables: whether the foreign recipient is a distinct legal person and not an establishment of the same person; whether payment is received in convertible foreign exchange or permitted Indian rupees; whether the LUT is filed and renewed; and whether export invoices, GST returns, bank realisations and refund claims reconcile. The provider who controls these variables obtains the full benefit of zero-rated treatment. The provider who treats every foreign-currency receipt as an export without testing the establishment condition is exposed to a demand and a reversal of credit.
Call to Action: We advise IT service exporters, SaaS businesses and ITES providers on LUT filing, export documentation, refund claims and ITC reviews. For a structured export-compliance review, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.