GST Export of Services Rules for Contract Manufacturing

This guide explains how GST export of services rules apply to contract manufacturing in India, covering when the activity qualifies as an export of services, how to claim zero-rated benefits, and the documentation required. You’ll learn the step-by-step process to ensure compliance and avoid common pitfalls.

What You’ll Need

• GST registration certificate (for the contract manufacturer and, if applicable, the foreign client)
• Contract or agreement detailing the manufacturing service scope, terms, and payment
• Foreign inward remittance certificate (FIRC) or bank statement showing receipt of payment in convertible foreign exchange
• Export invoices (tax invoices) issued for the service
• Shipping bills or bill of lading (if goods are exported as part of the service)
• Letter of undertaking (LUT) or bond filed on the GST portal (to export without paying IGST)
• Records of the place of supply determination (e.g., client’s location, contract terms)
• Access to the GST portal for filing refunds or claiming zero-rated supplies

Step-by-Step

1. Determine if the activity qualifies as a ‘service’ under GST. Contract manufacturing typically involves converting raw materials into finished goods. Under GST, if the job worker or manufacturer provides the service of manufacturing using materials supplied by the foreign client, it is treated as a supply of service (job work or manufacturing service), not a supply of goods. Confirm that the contract clearly states that the manufacturer is providing a service and not selling goods.
2. Check if the supply is an ‘export of services’ under Section 2(6) of the IGST Act. Five conditions must be met: (a) the supplier is located in India, (b) the recipient is located outside India, (c) the place of supply is outside India, (d) payment is received in convertible foreign exchange, and (e) the supplier and recipient are not merely establishments of distinct persons. If any condition fails, it is not an export.
3. Verify the place of supply (POS) for the service. For services related to goods that are temporarily imported into India and then exported, the POS is the location of the recipient (outside India) if the goods are not physically present in India at the time of service provision. But in contract manufacturing, the goods are usually in India when the service is performed. Under Section 13(2) of IGST, the general rule is that the POS is the location of the recipient. However, for services related to goods that are required to be physically made available in India, the POS is the location where the goods are situated. Since the raw materials are in India, the POS may be in India unless the service falls under a specific exception. In practice, the POS for job work on goods that are exported is the location of the recipient outside India, provided the goods are exported after the service. Confirm with a tax advisor, as this is a nuanced area.
4. Ensure the payment is received in convertible foreign exchange. The entire consideration must be received in foreign currency (e.g., USD, EUR) and not in Indian rupees. If payment is received in INR from a foreign client’s overseas account, it may still qualify if it is convertible foreign exchange, but the safest route is to receive in foreign currency.
5. File a Letter of Undertaking (LUT) or bond. To export services without paying IGST, file LUT in Form GST RFD-11 on the GST portal before the supply. This is valid for one financial year and must be renewed. Alternatively, you can pay IGST and claim a refund later, but LUT is simpler.
6. Issue an export invoice. The invoice must be in the name of the foreign client, mention the service description, and clearly state that it is an export. Include the terms of payment and the fact that payment will be received in foreign exchange.
7. Receive the payment and obtain proof. Ensure the payment is received within the prescribed time (usually 1 year from the date of invoice, but check current rules). Obtain a FIRC or bank statement showing the receipt of foreign currency.
8. File GST returns. Report the export of services in GSTR-1 (as zero-rated supply) and GSTR-3B (as zero-rated supply). The value should be in INR as per the exchange rate on the invoice date or the date of receipt, as per rules.
9. Claim refund of input tax credit (ITC) if applicable. If you have accumulated ITC due to zero-rated supplies, file a refund application in Form GST RFD-01 on the GST portal. The refund is for the ITC on inputs and input services used in providing the export service.

Common Mistakes

• Treating the supply as a sale of goods instead of a service. If the contract transfers ownership of the goods to the foreign client, it is a supply of goods, and export rules for goods apply. Ensure the contract clearly states that the manufacturer is providing a service and the raw materials belong to the client.
• Not meeting the ‘place of supply outside India’ condition. Many contract manufacturers assume that because the client is abroad, the POS is automatically outside India. But for services on goods, the POS may be where the goods are located. Get a clear contractual clause and legal opinion.
• Receiving payment in INR. Payment must be in convertible foreign exchange. If the client pays in INR from an NRE account, it may be acceptable, but it’s safer to receive in foreign currency.
• Failing to file LUT before export. LUT must be filed before the supply is made. If you export without LUT, you must pay IGST and then claim a refund, which is more complex.
• Not maintaining proper documentation. Keep all contracts, invoices, FIRCs, and shipping documents in order. Missing documentation can lead to denial of zero-rated benefit or refund.

Tips

• Draft a robust contract. Clearly state that the service is being provided, the raw materials are supplied by the client, and the finished goods are to be exported. Include a clause on the place of supply and payment terms.
• Use a job work declaration. If the raw materials are imported into India without payment of customs duty under bond, ensure the job work declaration is filed with customs.
• Track the time limit for payment. The payment must be received within 1 year from the date of invoice (or as per current rules). If delayed, the supply may be treated as taxable.
• Reconcile GSTR-1 and GSTR-3B. Ensure the export value is reported correctly in both returns to avoid notices.
• Seek professional advice. Given the complexity, consult a GST practitioner or chartered accountant to confirm the classification and POS for your specific case.

Troubleshooting

• If your refund is rejected: Check the reason for rejection. Common reasons include missing FIRC, incorrect invoice details, or mismatch between GSTR-1 and GSTR-3B. Rectify and resubmit the application.
• If the GST department issues a notice for non-payment of IGST: Review your LUT status and ensure it was valid. If you did not file LUT, you may have to pay IGST with interest. In such cases, you can still claim a refund of the IGST paid, but it is a lengthy process.
• If the payment is received after the prescribed time: The supply may be treated as taxable. You can apply for condonation of delay in certain cases, but it’s better to ensure timely receipt.
• If the client disputes the place of supply: Provide the contract and any evidence that the benefit of the service is outside India. If needed, get a legal opinion.

Frequently Asked Questions

Q1: Is contract manufacturing always treated as a service under GST?
Not always. If the contract transfers ownership of the goods to the manufacturer (i.e., the manufacturer buys raw materials and sells finished goods), it is a supply of goods. It is a service only when the raw materials are supplied by the client and the manufacturer provides the processing service.

Q2: Can I export services without paying IGST?
Yes, by filing a Letter of Undertaking (LUT) on the GST portal, you can export services without paying IGST. This is a zero-rated supply.

Q3: What is the time limit to receive payment for export of services?
Generally, the payment must be received within one year from the date of invoice. However, the government may extend this period in specific cases. Always check current rules.

Q4: Do I need to file a refund if I use LUT?
Yes, if you have accumulated input tax credit (ITC) on inputs used for the export service, you can claim a refund of that ITC. The refund is not automatic; you must file Form GST RFD-01.

Q5: What if my client is a foreign entity but has an Indian subsidiary?
If the recipient of the service is the foreign entity, it is an export. But if the Indian subsidiary is the recipient, it is a domestic supply. Ensure the invoice is issued to the foreign entity.

Q6: Can I receive payment in Indian rupees from a foreign client?
Payment must be in convertible foreign exchange. If the client pays in INR from an NRE account, it may be considered convertible foreign exchange, but it’s safer to receive in foreign currency to avoid disputes.

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