- Goods & Services Tax (GST):
GST is the complete mechanism to bring in numerous indirect taxes under one umbrella and thus rationalising the whole tax system. GST engulfs Central Goods & Services Tax (CGST), Integrated Goods & Services Tax (IGST), State Goods & Services Tax (SGST), Union Territory Goods & Services Tax (UTGST). When any sales are made within a state, then CGST & SGST/ UTGST are applied as GST taxes. When Purchase/ Sales cross the border of a state, then IGST is applied.
- Zero- rated supply
Zero-rated supply means
- Export of goods or services or
- Supply of goods or services to Special Economic Zone
- Types of Business Organisations
Business organisations & operations can be of different types. One, which we are covering here specifically are those which are captive unit. Captive units are those which are controlled and governed by parent company which is located abroad. Whatever the Indian unit does, it is for the foreign parent only. All the services of Indian company are consumed by parent company. Thus operating as a backend office and hence termed as captive unit.
Another form of organisation being dealt here is an independent organisation which exports software services to its clients who are located abroad.
The difference is that such independent organisations do not cater to only one parent company and is not operating as a backend office for only one client.
- Taxable Event / Time of Supply
Taxable event means the point of time when provision of service will be taxed. In case of such service exporter, the point of taxable event will be:
- Place of Supply
Since the service is being exported out of India, here the supply will not be the place of consumption of service, rather it will be the place of actual provision of service i.e. India. E.g. Service is being provided from Delhi office and is exported directly to parent company located in USA, or client located in USA, the place of supply will be Delhi.
If multiple locations in India are being used to supply such service to foreign company, the point of provision of service will be the place from where invoice is raised. In case the place of supply is not identifiable then place of supply will be the place which is most directly related with such supply.
- Registration Requirement
If the Indian service provider is already registered under Service Tax, migration is to be done before 30.06.2017 or from 01.07.2017 as per the provisions or arrangements made by Govt.
If there is more than one place of such service provision, all of them are to be registered under GST having same PAN but different state GSTIN. IEC (Import Export Code) is to be mentioned while taking registration under GST. Such place of provision of service must be having reasonable permanent establishment from where services can be provided. Registration is required only for the places from where supplies are being made.
Export of Software service is not covered under composition scheme, hence, regular registration is to be done.
- Value of Supply
Value of supply is the transaction value on which the bills are raised. This transaction value can include incidental expenses like packing, commission, interest or late fee/ penalty for late payment or subsidies but not to include GST. Also, discount in invoices decided after the supply is made cannot be reduced from transaction value.
If the transaction value is not determinable, specifically in the case of providing software export service to foreign parent company, Transfer Pricing provisions have to be referred. Hence, Transfer Pricing Study plays an important role and is to be conducted in time with the help of proper consultation.
- Consumption of Service
Consumption of outward service here will be in foreign territory. Consumption which actually is to be considered would be inward supplies which will act as input and input tax paid can be claimed as refund. Inward supplies means supplies of goods or services received from vendor for executing software export service.
- What is INPUT
Input means all those services and materials used directly for the purpose of rending the service. In the present scenario, some of the examples of Input would be:
- Internet facility, Stationery, Consumables
- Manpower, Security Guard, Annual Maintenance
- Computer maintenance services, Insurance of employees
It is important to mention that there are various inputs on which input credit is not available. Such inputs include:
- Motor Vehicles, Food & Beverages, Outdoor Catering, Beauty treatment, Health Services, Cosmetic & Plastic Surgery
- Membership of Club, health & fitness centre, Rent-a-cab, life insurance and health insurance.
- Travel benefits extended to employees on vacation such as leave or home travel concession
- Works contract services for construction of immovable property (except plant & machinery)
- Supplies received for construction of immovable property (except plant & machinery) taken up on own.
- Taxes paid to suppliers who are under composition levy scheme., any goods or services used for personal consumption
- Goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples.
Taxes paid on account of order by department for wilful default, confiscation or detention in transit. Confiscation and detention in transit apply in case of goods, hence, it is not applicable on present scenario of export of software services.
It is to be noted that input tax credit will be allowed before 20th October after the end of financial year to which such input tax credit pertains or filing of annual return, whichever is done earlier. Last date for furnishing annual return under form GSTR -9 is 31st December after end of Financial Year. It is hereby suggested to file annual return by 20th October so that there is no accidental chance of losing any credit.
Apportionment of Credit:
- If input goods or services are used partly for the purpose of providing such software export service and partly for other purposes, credit of input tax will be available only for portion actually used for such service export business.
- If input goods or services are being used for exempted goods or services, then such portion will not be allowed as input credit. In the present scenario, software export services are Zero Rated, not exempt, hence, input portion on these Nil rated services will be allowed for set-off from output tax liability. However, since there is no output tax liability, such input will be refunded.
- Input of Capital Goods
Capital Goods are those which are capitalised in the book of accounts and are not short-term in nature. When such capital goods are purchased, the buyer pays excise/ VAT on them. In the present law, the credit of such taxes or duties paid is available in two years at 50% each. The whole amount of duty/ tax paid is booked in full, however, while discharging output tax liability, 50% of input credit on capital goods is available for set-off.
However, in GST 100% credit is allowed at the time of purchase. If depreciation has been claimed on the tax component of capital goods, input tax credit of such tax component is not allowed.
- Reverse Charge Mechanism (RCM)
Reverse Charge Mechanism is applicable to all persons registered under GST. Any person registered in GST takes services or materials from an unregistered person, then such registered person has to pay applicable GST on such input or input services. Such reverse payment of taxes by receiver of supply is called Reverse Charge Mechanism. The payer will get credit of such tax paid on reverse charge. In present scenario, since the supply is Zero Rated, hence, tax paid under reverse charge will be refunded.
Services imported which are utilised for the purpose of rendering software export service are covered under reverse charge mechanism, indicating that GST on import service is to be paid under reverse charge. If tax on such import services have been paid in full before the implementation date of GST, then no tax is to be paid after GST date. However, if no or part payment has been paid, then any payment paid after implementation of GST will be taxed under GST provisions.
- Input Service Distributor (ISD)
There are situations when the business is operated from different locations. However, only one office receives all the invoices of input goods & services. The tax paid on such services by the said office is then distributed to other working offices according to their contribution in providing the software export service. This office which distributes Input Tax Credit (ITC) is called Input Service Distributor (ISD).
Points noteworthy for ISD:
- For distributing such credit, it is necessary that all the offices are registered under same PAN and ISD is to be registered as ISD while taking registration under GST.
- Mandatory registration of ISD is required under GST regime.
- GST Return of ISD will be GSTR-6 which is to be filed by 13th of the next month.
- Other office to which ISD distributes credit has to accept or reject such credit between 15th – 17th of the next month.
- Input credit available from services received prior to the day of implementation of GST and invoices received after the date, such input credit shall be eligible for distribution.
Conditions for distribution of credit by ISD:
- The ISD can distribute credit against a document.
- Excess credit is not to be distributed.
- Credit attributable to a particular office to be distributed to that office only.
- If there are more than one office to whom credit is to be distributed, then, pro- rata distribution to be done based on turnover.
Invoicing for Software Export service providers is not a very big concern as the provisions are same, however, only format has been changed. For understanding purpose, a draft format is being enclosed at the end of this book. Only few major parts to be understood:
- Service Accounting Code (SAC): This is the code that is assigned to each type of services. Depending upon the exact classification of the service, it is to be mentioned on the invoice.
- Type of GST: The invoice format has CGST, SGST and IGST as separate columns to be filled for tax portion. Here, nothing will be mentioned as software export services are Zero Rated.
- The text to be used is: “Supply Meant For Export On Payment Of IGST” – if IGST has been paid on the exports. “Supply Meant For Export Under Bond Or Letter Of Undertaking Without Payment Of IGST”– if IGST has not been paid
Invoice format for your reference
- Payment of Taxes
Though, output tax liability is disregarded in this scenario as Software Export service is Zero Rated, however, tax payments may arise on account of:
- Interest, late fee or any other payment
- Tax, interest, penalty as awarded by GST Department officer
- Reverse Charge
Refer Annexure- 1 for details of GST Payment Forms.
Understanding refund mechanism is important in export service business. The reason being such services are zero rated, however, tax is paid on inputs which is refundable. Proper method has been devised for claiming refund for every month. Following points are worth understanding for smooth flow of refund:
- Electronic cash or credit ledger contains details of taxes, interest, penalty, fees etc. paid or to be paid. The balance after netting off payable and paid tax maybe payable or refundable.
- Refund can be claimed by furnishing returns as specified.
- Documents specifying that payment of such input have been made and such tax burden has not been passed on to the customer.
- If such refund is less than Rs. 2 Lakhs, a declaration in place such documentation would be sufficient for this purpose.
- The Departmental Officer referred to as Assessing Officer, will refund 90% of the total refund, on a provisional basis until clearance of complete refund based on assessment of documents. Such complete assessment will be done in 60 days from the date of receipt of application by the officer.
The order will be passed for this refund in FORM GST RFD -04.
Such refund will be paid directly to the applicant by issuing a payment advice in FORM GST RFD -05.
- If default has been committed in filing of returns or payment of any tax, interest etc, the officer may hold the payment of refund and also can deduct any tax, interest, penalty from the refund amount before payment of such refund. The order will be in FORM GST RFD- 06.
If the whole of refund is completely adjusted against such pending demands, such details will be made available in Part A of FORM GST RFD -07.
If officer is of the view that refund is being claimed by fraud and the matter is under litigation at higher authorities, the whole amount of refund will be on hold. Such order will be made available in Part B of FORM GST RFD -07.
- If the matter after litigation results in granting of refund, the amount of refund held, will be paid with interest upto 6% maximum.
- The relevant date from where refund will be counted as eligible will be:
- The date of receipt of payment if services rendered before receipt of payment.
- The date of issue of invoice if payment is received as advance before issue of invoice.
- Where refund arises as a result of any order by authority or court and application for refund is filed after such order, the same shall be paid with interest upto 9% if refund is not paid within 60 days from such application.
- Where such services are exported, STPI certificate is to be obtained for proving export of service.
- Services given to units under Special Economic Zone are to be treated in similar fashion as exports. It shall be noted that when such service is given to SEZ, a specified officer of SEZ certifies receipt of services. That certificate is to be kept in record for refund purposes.
- Documents required for refund:
- A statement containing the number of and date of invoices, Bank Realisation Certificate or Foreign Inward Remittance Certificate.
- Services made to a Special Economic Zone – A statement containing the number and date of invoices, the evidence regarding endorsement and the details of payment, along with proof.
- A declaration that SEZ unit or SEZ developer has not claimed input tax credit of tax paid by supplier of such software services.
- A declaration to the effect that burden of Tax, interest or any other amount claimed as refund has not been passed on to any other person, where amount of refund is less than Rs.2 Lakhs.
- For the sake of knowledge of the reader :- A certificate from Chartered Accountant or a cost accountant is to be annexed in Form GST RFD – 01, which will certify that burden of tax that has been claimed as refund, has not been passed on to any other person. Such certificate is required in case the refund amount is greater than Rs.2 Lakhs.
However, in case of Zero Rated supplies, such certificate is not required to be furnished.
- When refund becomes due, resulting from order of authority or court, reference number of the order and a copy of the order.
- In case of supply without payment of tax under bond or letter of undertaking i.e. with or without payment of Integrated Goods and Services Tax, refund of input tax credit shall be granted as per the following formula:
Refund Amount = (Turnover of zero-rated supply of services) x Net ITC ÷ Adjusted Total Turnover
- “Refund Amount” means the maximum refund that is acceptable;
- “Net ITC” means input tax credit availed on inputs and input services during the period;
- “Turnover of zero-rated supply of services” means the value of the software service rendered without payment of tax under bond or letter of undertaking, calculated in the following manner:-
Zero-rated supply of services is the total of payments received during the period for such supply of services and supply of services completed for which payment received in advance in any period prior to the relevant period
advances received for services for which the supply of services has not been completed during the relevant period;
- “Adjusted Total turnover” means the turnover of software services excluding any exempt supplies turnover.
This definition of adjusted total turnover has been modified keeping in view limited scope of the topic.
- Acknowledgement of application for refund filed will appear in FORM GST RFD -02 on portal and will be available for viewing to the applicant within 3 to 15 days.
- If there are any deficiencies, such deficiencies will appear in FORM GST RFD – 03 on portal.
- The refund granting is subject to a condition of non- prosecution of applicant for evading tax of more than Rs.2.5 Crores in the preceding 5 years.
- Where the officer or authority is satisfied that no or part of refund is not allowable, a notice will be issued in FORM GST RFD -08 asking the applicant to furnish their reply in FORM GST RFD -09 within 15 days. Thereby making final order in FORM GST RFD -06.
- A Ledger is maintained on portal for payable or credit available to be utilised. Refund mechanism to operate by debiting or crediting the ledger balance.
Refer Annexure – 2 for Summary of Refund Forms
- Maintenance of database, documents or records:
Database needs to be maintained to ensure smooth data flow along with processing and feeding of any information while complying with GST Law. Although complete database maintenance is case specific, however, major points have been highlighted:
- Vendor Details: Name, Address, PAN, GSTIN, HSN Code of goods being purchased, SAC (Service Accounting Code) of services.
- Buyer Details: Name, Address, PAN, GSTIN, SAC (Service Accounting Code) of services.
- Backup of all entries being feeded whether through accounting software or through maintenance of excel sheets.
- All bills of inward supplies being goods or services consumed, all invoices raised to customers, Credit notes, debit notes, receipt vouchers, payment vouchers, refund vouchers
- Calculation done for netting off output tax liability and input tax credit. In the present case, the output tax liability will be Zero.
- All applications for refund and their complete files for refund processing, all sorts of communication with GST department.
- Certificate from STPI (Software Technology Park of India) for approving Software Services being exported, Foreign Inward Remittance Certificate, all type of communication with customer with regard to rendering of service.
- IEC (Import Export Code) certificate, Bank Statements
- Accounts Books to be properly maintained and kept upto date.
- Returns to be filed & their timing:
|S. No.||GST Return||Purpose||Due Date|
|1.||GSTR – 1||Outward Supplies being Software Services||10th of Next Month|
|2.||GSTR – 2||Inward Supplies received||15th of Next Month|
|3.||GSTR – 3||Monthly Return for netting off Output & Input tax||20th of Next Month|
|4.||GSTR – 6||Return for Input Service Distributor||13th of Next Month|
|5.||GSTR – 9||To be filed by all persons covered under GST||31st December of Next Financial Year|
*Any Rectification/ omission can be taken care of only in next return.
- Credit of Existing Inputs
Credit of existing inputs lying as on 30.06.2017, will be carried forward and can be claimed by filing form GST TRAN -1 by 30.09.2017.
- How to integrate with GST Returns
Manual Feeding provisions have been made for filing GST Returns with some information being auto-populated. However, purchasing a recognised accounting software and hiring consultants for monthly review & filing is much favourable.
Few Other important Facts
- Deemed Export means export to EOU/ STPI/ Consulate/ Embassy etc.
- Export, Supply to Special Economic Zone and Deemed Exports can be viewed under the same light with some particular differences.
- Once voluntary registration is taken it cannot be surrendered for 1 year.
- Once registration is taken, exemption limit of Rs.20 Lacs do not apply, i.e. all provisions are to be complied in totality.
- Business organisation must authorise a person for handling compliance for ease of use in terms of signatures and other verification part including dealing with GST department.
Annexure – 1
- Form GST PMT – 01 is a liability register which will show liabilities in terms of tax, interest, penalty, late fee or any other amount payable.
- Form GST PMT – 02 will show input tax credit available.
- Form GST PMT – 03 will be used by GST Officer for making order of any rejection of refund.
- Form GST PMT – 04 will be used for communicating any discrepancy in tax liability data to the GST Officer.
- Form GST PMT – 05 is the cash ledger account which will depict tax, interest, penalty, late fee or any amount deposited or paid therefrom.
- Form GST PMT – 06 will generate challan for entering details of payment for tax, interest, penalty, fee etc. Such challan will be valid for 15 days.
- Form GST PMT – 07 where payment as per challan has been deducted from bank but challan identification number was not generated, this form will be used to show the initiation of payment.
Annexure – 2
Summary of Refund Forms
|Sr. No||Form Number||Content|
|1.||GST RFD-01||Application for Refund|
|3.||GST RFD-03||Deficiency Memo|
|4.||GST RFD-04||Provisional Refund Order|
|5.||GST RFD-05||Payment Advice|
|6.||GST RFD-06||Refund Sanction/ Rejection Order|
|7.||GST RFD-06||Interest on delayed refund order (same as refund order)|
|8.||GST RFD-07||Order for complete adjustment of sanctioned Refund/ order for withholding of refund|
|9.||GST RFD-08||Notice for rejection of application for refund|
|10.||GST RFD-09||Reply to show cause notice|
|11.||GST RFD-10||Application for Refund by any specialize agency of UN or Multilateral Financial Institution and Organization, Consulate or Embassy of foreign countries, etc.|
About the Author:
- Anuj Aggarwal
Chartered Accountant, LL.B., B.Com (Hons.)
He is a partner of 25 year old Chartered Accountant firm in New Delhi. The firm provides expert services in GST, Income Tax, Auditing, Accounting, Corporate Laws and Project Finance.
Author can be reached at: [email protected]