26 July 2023
I have a question regarding the tax liability of foreign exchange payments received in India. We have a client based in the United States who sends converted Indian rupees directly to my bank account. However, the mechanism used by their bank, Bank of America, allows customers to choose whether to send foreign currency (INR) or USD. If the client selects foreign currency, the bank pre-converts the amount before the transfer. If client does not select respective foreign currency, they send the payment in USD, following the usual transaction route.
Specifically, I would like to know if the payment received by me, as an Indian exporter, would be taxable under the Goods and Services Tax (GST) scheme.
I greatly appreciate your expertise and insights in this matter. Thank you in advance for your assistance.
07 July 2024
When dealing with foreign exchange payments received in India, especially in the context of GST for an Indian exporter, there are a few key considerations to take into account. The primary concern is whether the payment received qualifies as an export of services under the GST regime.
### Export of Services under GST According to the GST law, the export of services is treated as a zero-rated supply. To qualify as an export of services, the following conditions must be satisfied: 1. The supplier of the service is located in India. 2. The recipient of the service is located outside India. 3. The place of supply of the service is outside India. 4. The payment for such service has been received by the supplier in convertible foreign exchange or in Indian rupees wherever permitted by the Reserve Bank of India. 5. The supplier and the recipient are not merely establishments of a distinct person.
### Key Points Regarding Your Situation: 1. **Client-Based in the United States**: Since your client is based in the United States, condition 2 is satisfied. 2. **Location of Supplier**: As an Indian exporter, you are located in India, satisfying condition 1. 3. **Place of Supply**: If the service is provided to the client outside India, this condition is met. 4. **Payment in Convertible Foreign Exchange or Permitted Indian Rupees**: The critical factor here is how the payment is received.
### Payment Mechanism and Tax Liability 1. **Payment Received in USD**: - If your client sends payment in USD and it gets converted to INR upon reaching your bank in India, this is considered a payment received in convertible foreign exchange. It satisfies the requirement for zero-rated export of services under GST.
2. **Payment Received Directly in INR**: - If the client selects to send the payment directly in INR and it is converted by their bank before the transfer, it is crucial to verify if this is permissible under the RBI regulations. If it is permissible, it should not affect the zero-rated status of the export of services.
### Taxability under GST - **Zero-Rated Supply**: As long as the service meets the criteria for export of services, including the receipt of payment in permissible currency (whether USD converted to INR or directly in INR as allowed by RBI), it will be treated as a zero-rated supply under GST. - **No GST Liability**: Being a zero-rated supply, the export of services will not attract GST, and you can claim a refund of the input tax credit (ITC) related to such supplies or apply for a Letter of Undertaking (LUT) to export services without payment of IGST.
### Practical Steps: 1. **Verification**: Ensure that the direct receipt of INR from a foreign client is permissible under RBI regulations. 2. **Documentation**: Maintain proper documentation of the transaction, including invoices, bank statements showing receipt of funds, and any relevant RBI permissions if required. 3. **LUT Application**: If you are not already doing so, consider applying for an LUT to export services without the payment of IGST. 4. **Consultation**: Consult with a tax professional or GST consultant to ensure compliance with all applicable laws and to address any specific nuances in your situation.
### Conclusion As long as the payment mechanism adheres to the RBI guidelines and you meet the criteria for the export of services, the payments received should be treated as zero-rated supplies under GST, and thus, not subject to GST. However, verifying the specific circumstances with a tax professional is always advisable to ensure full compliance.
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