In our previous blog on imports and exports under GST, we had learnt about the conditions to be satisfied for a supply to be considered as an export of service. Let us list them down again:

  1. The supplier of the service should be located in India
  2. The recipient of the service should be located outside India
  3. The place of supply of the service should be outside India
  4. The payment for the service should be received by the supplier in convertible foreign exchange
  5. The supplier and recipient are not establishments of the same person

When services are supplied to Nepal or Bhutan, all of the above conditions can be satisfied, except the condition ‘The payment for the service has been received by the supplier in convertible foreign exchange’. In Nepal and Bhutan, there can be scenarios where the payment for the service is received in Indian Rupees. In such cases, will supply of the service to Nepal or Bhutan under GST be considered as export and hence, be zero rated, or will they be taxable?

Under GST, it has been made clear that for a service to be considered as an export, the payment should be received in convertible foreign exchange. Hence, supplies where the payment is received in Indian Rupees will not qualify as an export and will hence, be taxable. The supplier will be liable to pay tax on such supplies.

Hence, businesses providing services to Nepal or Bhutan need to note this provision and ensure that payment for the service is received in convertible foreign exchange. This would ensure that the supply is zero rated and refund of the tax paid on inputs can be claimed. If the payment for the service is received in Indian Rupees, the service will be taxable and the supplier will be liable to pay IGST on the supply. This will, in turn, increase the cost of export, result in blockage of working capital and hence, businesses should ensure to avoid this.

Note: When the supply is of ‘goods’ to Nepal or Bhutan, it is considered as an export, regardless of the currency in which the payment is received. The above conditions are only applicable in the case of supply of services to recipients in Nepal or Bhutan.

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