GST on Export of Services for Indian IT Freelancers

Yes, under GST, export of services by Indian IT freelancers and companies is treated as a zero-rated supply, meaning you can provide services to foreign clients without charging GST, provided you receive payment in convertible foreign currency and meet the other conditions. You can either export services without paying IGST under a Letter of Undertaking (LUT) or pay IGST and claim a refund, with the LUT route being far more common for freelancers.

What Counts as an Export of Services Under GST

For your IT services to qualify as an export under GST, all the following conditions must be met:

• The service provider is located in India.
• The recipient of the service is located outside India.
• The payment for the service is received in convertible foreign exchange (or in Indian rupees where permitted by the RBI, such as for Nepal or Bhutan).
• The service is not a service that is specifically excluded from export benefits under GST law.
• The provider and recipient are not merely establishments of the same person – i.e., you cannot export to your own foreign branch or subsidiary and claim export benefits.

For a freelancer, the key point is that your client must be outside India and the payment must come into your Indian bank account in foreign currency. If you receive payment in Indian rupees from a foreign client (without RBI approval), the transaction may not be treated as an export of services.

Zero-Rated Supply vs. Exempt Supply

Export of services is ‘zero-rated’, which is different from an ‘exempt’ supply. Under zero-rating, you do not charge GST on the invoice, but you can still claim Input Tax Credit (ITC) on the GST you paid on your business expenses (like software subscriptions, laptop purchases, or cloud hosting). Under an exempt supply, you also don’t charge GST, but you cannot claim ITC on your inputs, making your costs effectively higher. This distinction is critical for freelancers who have significant local expenses.

Two Ways to Export Services: LUT vs. Paying IGST

You have two options for exporting services:

1. Export under Letter of Undertaking (LUT): You file a LUT on the GST portal before exporting. This allows you to export services without paying any IGST. You can then claim a refund of accumulated ITC if any. This is the preferred method for most freelancers because it does not block your working capital.
2. Export on payment of IGST: You charge IGST on your invoice and pay it to the government, then file a refund claim for that IGST. This method is rarely used by freelancers because it requires you to have funds to pay the tax upfront and wait for the refund.

To file a LUT, you need to have been registered under GST for at least two years, or you can file a bond with a bank guarantee if you are newly registered. The LUT is filed annually and is valid for the financial year.

How to File a Letter of Undertaking (LUT)

Filing a LUT is done online through the GST portal (gst.gov.in). Here are the steps:

1. Log in to the GST portal with your credentials.
2. Navigate to ‘Services’ > ‘User Services’ > ‘Furnish Letter of Undertaking (LUT)’.
3. Select the financial year for which you are filing the LUT.
4. Fill in the required details, including your name, GSTIN, and the reason for export (choose ‘Export of Services’).
5. Verify the declaration and submit. You will receive a reference number, and the LUT is typically approved instantly.

There is no fee for filing a LUT. You must file a new LUT for each financial year. Keep a copy of the submitted LUT for your records, as you may need to provide it to your bank or tax authorities.

Refund of Input Tax Credit (ITC) on Export

When you export services under LUT, you are not charging GST, but you can still claim a refund of the ITC that has accumulated on your purchases. This refund is filed using Form GST RFD-01 on the GST portal. The refund is for the ‘unutilized ITC’ that arose due to the zero-rated supply. The process involves:

• Filing the refund application in Form RFD-01.
• Submitting a statement of zero-rated supplies (Form GST RFD-02).
• Providing a certificate from a Chartered Accountant (in some cases) to verify the ITC claimed.

In practice, many freelancers do not have significant ITC to claim, so they may skip this step. However, if you have large purchases, it is worth pursuing. The refund process can be time-consuming, so maintain proper records of all your export invoices and input tax credits.

Common Mistakes and Compliance Issues

Freelancers often make mistakes that can lead to denial of export benefits:

• Not receiving payment in foreign currency: If you receive payment in Indian rupees from a foreign client without RBI approval, it is not considered export. Ensure your client remits in USD, EUR, GBP, etc., or through an approved channel.
• Not filing LUT before exporting: If you export without a LUT, you must pay IGST. You cannot retrospectively apply for LUT for past exports.
• Incorrect invoice details: Your invoice must clearly state that it is for export services, mention the foreign client’s name and address, and indicate the currency of payment.
• Missing the 2-year rule for LUT: Newly registered businesses (less than 2 years) cannot file a LUT; they must provide a bond with a bank guarantee. This is often overlooked.
• Not maintaining proper records: Keep all contracts, invoices, payment receipts (FIRA/encashment certificates), and LUT copies for at least 6 years.

Frequently Asked Questions

Do I need to register for GST as a freelancer exporting services?

If your aggregate turnover exceeds the threshold limit (₹20 lakh for services, or ₹10 lakh for special category states), you must register for GST. Even if your turnover is below the threshold, you may voluntarily register to claim ITC and avail export benefits. However, if you are not registered, you cannot export services under GST rules; you would be outside the GST regime.

What is the difference between LUT and bond for export?

A LUT is a simple undertaking that you will comply with GST rules; it is available to businesses that have been registered for at least 2 years. A bond is a legal agreement with a bank guarantee, required for businesses that are newly registered or have defaulted on tax payments. The bond amount is typically equal to the estimated IGST liability.

Can I export services to a foreign branch of an Indian company?

No, export of services requires that the recipient is located outside India and is not an establishment of the same person. If you are providing services to your own foreign branch, it is not considered an export; it is treated as a supply between related persons and may be subject to GST if it is not covered under the ‘export of services’ definition.

How do I prove that I received payment in foreign currency?

You need to obtain a Foreign Inward Remittance Advice (FIRA) from your bank, or a certificate from an authorized dealer (bank) confirming the receipt of foreign exchange. This document is essential for claiming export benefits and for your records.

What happens if I don’t file a LUT and export services?

If you export services without a LUT, you must pay IGST on the export invoice. You can later claim a refund of that IGST, but it involves a separate refund process. It is always advisable to file a LUT before exporting to avoid blocking your funds.

Can I claim ITC on expenses incurred in foreign currency?

Yes, you can claim ITC on GST paid on any goods or services used for your business, regardless of whether the expense is paid in foreign currency. However, you must have a valid tax invoice and the expense must be for business purposes.

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