GST on export of services — zero-rated, LUT and refunds

If you provide services to overseas clients — software development, consulting, research, design, finance — GST on those invoices is one of the first questions you run into. The short answer is that export of services is zero-rated under the IGST Act. The nuance, which catches a lot of businesses off guard, is that zero-rated is not the same as exempt, and the distinction has real cash consequences.

This piece walks through exactly how the framework works: the five conditions you must satisfy, the two routes for handling GST on exports, the mechanics of a Letter of Undertaking (LUT), how refunds flow, and the common mistakes that cost businesses either cash or ITC they were entitled to keep.

Zero-rated is not exempt — this matters enormously

The IGST Act, 2017 creates a category called zero-rated supply (Section 16). Export of services falls here. Under zero-rating, the supply is taxed at 0% — but critically, the supplier retains the right to claim Input Tax Credit (ITC) on all inputs used in providing that supply.

Zero-rated supply ≠ exempt supply. On an exempt supply you must reverse ITC. On a zero-rated supply, ITC survives — and you can claim a refund of the accumulated credit.

This distinction is not academic. A business that mistakenly treats its export invoices as "exempt" will reverse its ITC on rent, software subscriptions, professional fees, cloud infrastructure — and hand back credit it was entitled to keep. I have seen this happen. Get the classification right first.

The five conditions for export of services

Section 2(6) of the IGST Act defines "export of services." All five conditions must be met simultaneously — not four out of five, all five. If any one fails, the supply is not an export of services and zero-rating does not apply.

In practice, conditions 4 and 5 are where businesses most often trip up. Condition 4 fails when a company receives payment in INR from an overseas parent without proper RBI authorisation, or when forex realisation is delayed beyond the GST period in question. Condition 5 is the structural trap for Indian arms of multinationals — billing the group parent looks like an export on the surface but legally it is not, because both entities are "establishments of the same person" under Section 25(4) of the CGST Act.

Place of supply — why it matters

The place of supply determines whether a transaction is intra-state, inter-state, or an export. For services, Section 13 of the IGST Act governs where the recipient is outside India. The default rule is: place of supply = location of the recipient. For a US or UK client, that puts the place of supply outside India — condition 3 satisfied.

But there are specific overrides. Services directly in relation to immovable property in India are taxed at the location of the property regardless of where the recipient is. Intermediary services are a particularly significant carve-out: the place of supply for intermediary services is the location of the supplier — i.e., India. So if your Indian firm acts as a commission agent or broker for a foreign principal, facilitating sales in India, you are not exporting services; you are providing intermediary services with a domestic place of supply, and GST applies normally. This is one of the most litigated areas in India's export-of-services framework.

Two routes once you confirm it qualifies

Once you've confirmed all five conditions are met, you have two ways to handle GST on the supply:

Route 1 — Export under LUT (preferred for most)

You file a Letter of Undertaking on the GST portal before exporting, and then raise invoices to your overseas clients with no IGST charged. You continue paying GST on your inputs — rent, subcontractors, software, professional fees — and that ITC accumulates in your Electronic Credit Ledger. Since you have no output tax liability to set it against (all your supplies are zero-rated), you claim a refund of the accumulated ITC.

This is the preferred route for most service exporters. No cash is blocked at the point of invoicing — you're not paying IGST out of pocket and waiting to get it back. The only cash timing issue is the ITC refund, which, if processed smoothly, typically comes back within 60 days of filing.

Route 2 — Pay IGST, claim refund of IGST paid

Alternatively, you can export without an LUT, charge IGST on the invoice at the applicable rate (18% for most services), collect it from the client or absorb it yourself, pay it to the government, and then file for a refund of the IGST paid under Rule 96 of the CGST Rules.

The refund here is of the IGST paid — not of ITC. The government processes this refund and credits it back to you. But until that happens, the IGST amount is cash blocked. For a business running on tight working capital, this can be material. It's also more administratively complex — you're charging a foreign client an Indian tax, which is unusual and may raise questions.

Route 2 exists primarily as a fallback for businesses that forgot to file the LUT or missed the window. Most advisors will push you firmly toward Route 1.

LUT mechanics — what it actually involves

The LUT is filed on the GST portal in Form GST RFD-11. It is valid for one financial year (April to March) and must be renewed annually before the first export invoice of the new year. The filing is entirely online — no physical submission, no bank guarantee, no bond required for most exporters.

Historically, exporters with pending GST dues or those convicted of tax evasion exceeding ₹2.5 crore were required to furnish a bond with a bank guarantee instead of an LUT. The practical position now is that any registered person not in that category can file an LUT without additional security. If you are exporting services regularly, keeping the LUT current is a basic hygiene task — add it to your year-start compliance calendar.

A worked example: ₹16.6 lakh software invoice to a US client

Say your consulting firm raises an invoice for $20,000 (roughly ₹16.6 lakh at ₹83/dollar) to a US-based client for software consulting services. You've confirmed all five conditions are met. Your input GST for the period — on office rent, cloud subscriptions, a subcontractor, professional fees — amounts to ₹1.8 lakh in ITC.

Under LUT (Route 1): Invoice goes out with no IGST. You collect $20,000 in your EEFC or current account. The ₹1.8 lakh ITC sits in your credit ledger. You file a refund application under Section 54(3) for accumulated ITC. Processing time: typically 30–60 days if the application is in order. Cash blocked at any point: nil on the invoice itself; only the ₹1.8 lakh ITC is outstanding during the refund cycle.

Under Route 2 (IGST paid, no LUT): Invoice goes out with 18% IGST — that's ₹2.99 lakh (18% of ₹16.6 lakh). You pay ₹2.99 lakh to the government. You then file for refund of the ₹2.99 lakh IGST paid. Processing time: similar 30–60 days. But here you've blocked nearly ₹3 lakh in cash — not ₹1.8 lakh. For a firm billing multiple export invoices a month, the working capital drag of Route 2 compounds quickly.

The LUT route wins on working capital in almost every scenario for a pure service exporter.

Refund process, FIRC, and the forex realisation link

Whichever route you take, the refund process requires you to demonstrate that payment was actually received in foreign exchange. The primary evidence documents are:

• FIRC (Foreign Inward Remittance Certificate) — issued by your bank for each inward remittance, confirming the amount, currency, and remitter details.
• BRC (Bank Realisation Certificate) — the older form, still accepted; increasingly replaced by eFIRC in digital banking workflows.

These documents serve double duty: they satisfy condition 4 of the export-of-services definition (forex realisation), and they are required attachments when filing the GST refund application. If your FIRC is delayed — which can happen when the overseas bank is slow to process — your refund claim will be incomplete until it arrives.

There is also a mandatory reporting angle: for service exports, the Reserve Bank of India requires realisation and repatriation of export proceeds to be reported and reconciled through the EDPMS (Export Data Processing and Monitoring System). Your bank does this reporting, but you need to ensure the FIRC numbers and export invoice references are correctly mapped. A mismatch in EDPMS creates problems not just for FEMA compliance but also for GST refund processing, since the portal cross-checks are tightening. If you are running business on ERP — particularly Business Central — automating the EDPMS/IDPMS reconciliation significantly reduces this operational friction.

Common mistakes — and how to avoid them

These are the errors I see most frequently in practice:

• Treating export of services as exempt. Reversing ITC that should have been claimed as a refund. The fix is to reclassify correctly and file amended returns where possible — but prevention is far easier.
• Missing the LUT renewal. The LUT lapses at the end of March. If you raise an April export invoice before filing the new year's LUT, you technically needed to pay IGST on that invoice. The GST portal does not block you from raising the invoice, but the department can raise a demand later. Set a reminder: file LUT in the first week of April every year.
• INR receipts without RBI permission. Some Indian exporters receive payment from overseas clients in rupees — either because the client's bank settles in INR, or because it's an intra-group transaction. Without specific RBI permission for that route (under the FEMA Current Account Transactions Rules), condition 4 fails and the supply is not an export of services.
• Intermediary services misclassified as exports. If your Indian entity is acting as a middleman — arranging services between a foreign principal and Indian end-customers — you are likely an intermediary and your place of supply is India. GST applies at the normal rate. This is a high-risk classification area and worth a specific legal opinion if your business model has any commission or facilitation element.
• Not linking FIRC to invoices properly. A refund claim without complete FIRC-to-invoice mapping will either be rejected or sit in the queue until it is corrected. Maintain a dedicated tracking register: export invoice number → FIRC number → date of realisation → amount → filing reference.

Working capital and the refund lag

Even under the LUT route, there is a working capital cost to being a service exporter: your input GST is always "out" before the refund comes back. For a firm spending ₹10–15 lakh a month on GST-bearing inputs, the refund pipeline can represent two to three months of ITC at any given time — a meaningful cash drag if the business is growing fast or operating on thin liquidity.

The way to manage this is to file refund applications promptly and completely (no missing documents, FIRC in hand, correct ARN generated) and to track the 60-day statutory processing window. If a refund is not processed within 60 days, interest at 6% per annum becomes payable by the department on the delayed amount — not much comfort, but worth knowing. Understanding the full working-capital cycle, including where GST refunds fit within your cash conversion cycle, helps in planning credit lines and managing liquidity proactively.

Note: This article is general information on how the GST framework applies to export of services in India. It is not tax advice. Every business has specifics — the nature of the service, the client relationship, how payment is structured — that affect the analysis. Confirm the position for your situation with your chartered accountant before acting.