Exporting services from India can sometimes get tangled in the web of regulatory language and technical jargon. Circular No. 161/17/2021-GST, issued on September 20, 2021, aims to clear up some of this confusion, particularly around the conditions defining the “export of services” under the Integrated Goods and Services Tax (IGST) Act, 2017.
This circular addresses a specific concern: whether services provided by an Indian subsidiary, sister concern, or group company of a foreign entity to its parent or related company abroad qualify as exports. The answer relies on the interpretation of section 2(6) of the IGST Act and the concept of “distinct persons.”
Key Provisions of Export of Services
To understand the circular, let’s break down the critical components of the “export of services” as per section 2(6) of the IGST Act:
- Supplier of Service in India: The provider of the service must be based in India.
- Recipient Outside India: The recipient should be located outside India.
- Place of Supply: The place where the service is supplied should be outside India.
- Payment in Convertible Foreign Exchange: The payment for the service must be received in convertible foreign exchange.
- Distinct Persons: The supplier and the recipient should not be merely establishments of a distinct person as per Explanation 1 of section 8.
Understanding “Distinct Persons”
Explanation 1 of section 8 states that establishments of the same entity in different countries are considered distinct persons. This means if a company has branches in India and abroad, these branches are treated as separate entities for tax purposes.
Also Read this: Concept of Distinct persons and Related persons in GST
Example: A foreign company with a branch in India and a branch in another country would have these branches treated as distinct entities. Thus, transactions between them would not qualify as exports if considered as transactions between distinct persons.
Detailed Analysis and Clarifications
Clause (v) of Section 2(6)
Clause (v) plays a crucial role by stipulating that services between distinct persons (establishments of the same entity in different countries) do not qualify as exports. This includes scenarios where an Indian branch provides services to its foreign parent company.
Separate Entity Scenario
The circular emphasizes that a company incorporated in India and a foreign company incorporated outside India are considered separate legal entities under the CGST Act. Explained with scenario:
- Indian Subsidiaries: If an Indian subsidiary provides services to its foreign parent or related company, this transaction is considered between separate legal entities. It is also noted that they should also qualify as a ‘company’ in India as per Companies Act.
- Foreign Branches: Conversely, services provided by an Indian company to its foreign branches or offices, if these branches are incorporated in their respective countries, also qualify as exports.
Let’s illustrate these rules with some practical examples:
| Scenario | Considered Export? | Reason |
| An Indian subsidiary providing services to its foreign parent company. | Yes | Separate legal entities under CGST Act. |
| An Indian company providing services to its foreign branch (not incorporated abroad). | No | Considered distinct persons. |
| An Indian company providing services to a foreign company (no direct ownership). | Yes | Separate legal entities. |
Clarification in detail
Important Note: This implies that the company (Indian and Foreign) should be incorporated. That is the most important aspect to qualify as a separate entity and fulfill the conditions of export. If any entity working as a branch in another foreign country but not incorporated under the respective laws, won’t be treated as a separate entity and does not qualify for exports.
It can be concluded that any supply of service by a company incorporated in India to its branch or agency or representational office, located in any other country and not incorporated under the laws of the said country, shall also be considered as supply between establishments of distinct persons and cannot be treated as export of services.
Further, these two separate persons or companies would not be considered as “merely establishments of a distinct person in accordance with Explanation 1 in section 8”, if they are incorporated under the laws of the said countries.
The circular clarifies that such transactions can be treated as exports if they meet all other conditions in section 2(6) of the IGST Act. This clarification aims to resolve ambiguity and ensure uniform application of the law across different jurisdictions.
Related FAQs
Q1: Are services provided by an Indian subsidiary to its foreign parent considered exports?
- A: Yes, if the foreign parent is incorporated abroad, they are considered separate entities, and the service qualifies as an export.
Q2: What if an Indian company provides services to its foreign branch that is not a separate legal entity?
- A: This would not be considered an export as both are considered establishments of the same entity.
Q3: How does payment in convertible foreign exchange affect the status of export?
- A: For a service to be considered an export, payment must be received in convertible foreign exchange.
Q4: Are transactions between branches of the same company in different countries considered exports?
- A: No, such transactions are between distinct persons and do not qualify as exports under the IGST Act.
Conclusion
Circular No. 161/17/2021-GST provides much-needed clarity on the export of services involving related entities across borders. By distinguishing between distinct persons and separate legal entities, it ensures that legitimate export transactions are correctly classified and benefit from the associated tax exemptions.
If you have further questions or face difficulties in implementing these guidelines, the Central Board of Indirect Taxes and Customs encourages you to reach out for clarification. This proactive approach helps maintain compliance and facilitates smooth international service transactions.
