Input Tax Credit (ITC) Issues for Exporters With Foreign Expenses in India

Under India’s Goods and Services Tax (GST) regime, exporters are considered zero-rated suppliers. This means they can export goods or services without payment of tax and claim a refund of the input tax credit (ITC) on inputs, capital goods, and input services. When it comes to foreign expenses, the rules and regulations can create confusion among exporters.

In this blog, we will explain common challenges faced by exporters, what you should know as an exporter, ITC issues linked to foreign expenses, and how it affects their ability to claim refunds under GST.

Understanding the Basics: Export and Input Tax Credit

When a business exports goods or services from India, it can opt for either of the following exports:

• Export with payment of integrated tax (IGST): followed by a refund of IGST.
• Export without payment of tax: under LUT (Letter of Undertaking), followed by a refund of the accumulated ITC.

In both cases, the exporter will need to pay GST on inputs and input services used during the export of goods or services and needs to ensure FEMA Compliance. After the export, the exporters can claim ITC to get a refund. This helps them to export goods or services in India tax-free.

However, foreign expenses (such as payments to overseas consultants, agencies, or service providers) can turn out to be confusing for exporters when it comes to claiming input tax credit:

Recommended: Refund of GST on Export of Services – Step-by-Step Process

The Real Problem: Foreign Expenses and ITC Eligibility

Exporters need to spend on services like:

• Commission to foreign agents
• Legal consultation abroad
• Digital marketing or PR in other countries
• International trade fairs or exhibitions
• Cloud services or foreign SaaS tools

These services are essential to support the export of goods or services. However, the GST law restricts ITC on several such foreign expenses due to two main issues:

1. Place of Supply Outside India

Under GST, if the place of supply is outside India and the supplier is also located outside India, then the transaction is not subject to GST in India. Since no tax is paid, the exporters will not find any ITC to claim, even if the service is directly involved with the export of services or goods, GST will not be applicable.

2. Not a Supply under GST

Some foreign transactions are classified under the Income Tax Act as commission or professional fees, but GST doesn’t always recognize them as supply of goods or services under the GST law. This makes the claim of input tax credit ineligible due to not being recognized under the GST Act.

Impact on Refund of ITC for Exporters

When an exporter chooses to export without payment of tax, they have to rely on claiming a refund of ITC to recover the tax paid on inputs and services used during the exports. However, when it comes to foreign services not qualifying as inputs or input services, these credits get blocked, leading to:

• Increased cost of exports
• Loss of working capital
• Partial or rejected refund applications
• Challenges in GST return matching

Read Also: How Indian Companies Can Invest in Foreign Startups under ODI

Common Challenges in ITC Refund Claims for Foreign Expenses

Before you can resolve issues in ITC refund claims of cross border transactions, you need to be aware of the common challenges faced by exporters in India. It includes:

1. Blocked ITC on Commission to Overseas Agents

Exporters that hire foreign agents to help secure orders need to pay commission to the agents abroad. The commission paid to them is done in foreign currency. Since these agents are located outside India and the service is received outside India, GST is not levied on the commissions, and ITC cannot be claimed. This becomes a major challenge for exporters since they cannot claim tax credit benefits.

2. Mismatch in GST Returns and Refund Application

If any exporter attempts to classify foreign services as input services used in exports, it can create a mismatch in the GST returns (GSTR-1 and GSTR-3B) when they file the application for refund. Such inconsistencies may lead to rejection of the refund claim.

3. Capital Goods Not Covered

Another issue exporters face is the exclusion of capital goods from ITC refunds when exporting without payment of tax. Exporters who invest in machinery or technology abroad cannot claim a refund of ITC for such capital goods, even if it is used only for exports of goods or services.

Scenarios Where Exporters Lose ITC

GST Refund Rules: What Exporters Need to Know

To claim a refund of ITC on account of export, the following steps are mandatory for exporters in India:

• File accurate GST returns for the relevant tax period
• Submit a correct application for refund (Form RFD-01) on the GST portal
• Ensure the ITC being claimed is only for inputs and input services used in the export of goods or services
• Keep records of all export invoices, shipping bills, BRC/FIRC, and proof of foreign remittances

If the exporter includes ineligible ITC (such as foreign expenses), the refund will be entirely rejected. Make sure to file your GST returns accurately and on time to avoid penalties or legal repercussions. If you require professional assistance, you can reach out to the top tax consultant in Gurgaon for personalized guidance. 

Can Exporters Claim ITC on Foreign Expenses?

No, you cannot claim ITC for foreign expenses unless the expense qualifies under Indian GST as a taxed service. Most foreign service providers do not charge GST, and reverse charge (RCM) is not always applicable depending on the nature of supply and location. So, unless the exporter is paying GST under reverse charge for foreign services, input tax credit cannot be claimed. 

Read More: What is Reverse Charge Mechanism for Import of Services in GST?

Conclusion

Foreign expenses are an essential part of the export of goods and services in India. However, unfortunately, most of them are not eligible for input tax credit under the GST law in India.