earn About GST on Foreign Remittances

As an exporter, you know it is essential to understand the various tax laws that apply to your business, along with the RBI guidelines for inward remittance. Any miss on your part about documentation, and you will find it challenging to accept international payments to India.

That’s why this article will focus on GST, or Goods and Services Tax, for international payments to ensure you understand how GST on foreign remittances works. GST is critical to ensure compliance and determine the costs involved as it applies to international transactions.

How does GST apply to foreign remittances?

Inward remittance: When exporters receive funds from businesses abroad as payment for goods or services delivered, they do not generally incur any GST as there is no GST on foreign remittances. When you export services or goods abroad, it is considered zero-rated supply under GST when the export conditions are met. Exporters can also claim an Input Tax Credit (ITC) on GST paid for inputs used to produce goods or services being exported.

Outward remittance: When you make payments for the import of services, GST could be attracted under the Reverse Charge Mechanism (RCM) if tax applies to the service in India. These could include software services, royalties, and consulting fees paid to international vendors.

What is the Reverse Charge Mechanism (RCM) for services import?

As per RCM mechanism, an Indian business has to pay GST on services it imports from a supplier abroad. However, if the company uses these services for taxable purposes, it can pay GST as an input tax credit (ITC). For RCM to be applicable, the recipient or buyer should be located in India, the supplier or vendor should be outside India, and the supply location should be in India.

What are considered for GST exemptions and zero-rating?

Refund on unused ITC: Exporters are eligible for a refund on GST paid on exports or unused ITC, and they can claim this by exporting with LUT (letter of undertaking) or exporting on payment of IGST Exporting under a Letter of Undertaking (LUT) without paying IGST.

SEZ units: Supplies sent to Special Economic Zones (SEZ) are considered zero-rated.

Service export: When a business exports services, they are considered zero-rated, which means they do not attract GST. Exporters can claim a refund for unutilized input tax credits as per the rules that apply to GST on foreign remittances.

GST-exempt remittances: Remittances for personal reasons, such as education or maintenance for family members living abroad, are exempt from GST. Also, services that qualify as intermediary services may not be taxed under specific conditions.

How does GST apply to Forex conversion?

When a business converts currency for remittance, GST will apply to the conversion service that banks or financial institutions provide. It is calculated as a fixed percentage of the exchanged value of the currency, as per the applicable slabs. The actual value of the transaction is also considered when calculating the GST rate.

What are the compliance requirements for GST?

As an exporter, you need to register and get a GST number. The other requirements include:

• Documentation: Keep proper records and related documents for foreign remittances that will include the related contracts, invoices, and other proof of export
• File GST returns: Regularly declare inward and outward remittances when you file GST returns to ensure your business is compliant with the applicable laws
• RCM tax payment: When you import services, pay GST under RCM and claim input tax credit if applicable

What are the main challenges businesses face regarding GST?

Place of supply: Businesses could find it challenging to identify the supply place as this determines the applicability of GST.

• Also Read: Types of Export Invoices

Impact on cash flow: When the company has to pay GST under RCM, it can affect the liquidity before it can claim input tax credit.

Issues with classification: Businesses may find it challenging to determine if a transaction comes under export of intermediary services or services.

How can businesses overcome these GST-related challenges?

GST laws can be complicated, and any mistake you make will invite penalties. To avoid such situations, it is best to consult a tax expert knowledgeable about the complications involved in foreign transactions. Another aspect that will help is leveraging technology to automate many repetitive tasks in filing for GST. Also, keep abreast of international agreements for tax treaties or agreements that could impact GST applicability.

When it comes to documentation for inward remittance, filing of GST returns, or any other form of compliance, you must adopt the right platform to enable easy operations. At LeRemitt, we endeavor to provide the kind of support that exporters require throughout their journey. Want to learn how? Click here to get in touch with us.