The Role of GST in International Trade and Cross-Border Transactions

Introduction: Navigating Global Commerce with GST

In today’s interconnected world, the Indian economy is more globalized than ever. For small and medium-sized businesses, this presents a massive opportunity to tap into international markets. However, with global opportunities come global rules. A critical piece of this puzzle is understanding the GST role in international trade. Since its implementation, the Goods and Services Tax (GST) has fundamentally reshaped cross-border business taxation in India, creating a unified tax structure that impacts every import and export transaction. For any entrepreneur looking to import raw materials or export finished goods, a solid grasp of GST is not just about compliance; it’s about leveraging the system to stay competitive and profitable. The international trade impact in India under the GST regime has been significant, streamlining processes that were once tangled in a web of multiple taxes and complex regulations.

Understanding GST Basics for International Trade

Before diving into the specifics of imports and exports, it’s essential to have a clear understanding of the foundational concepts of the GST framework. This context is crucial for appreciating how GST applies to transactions that cross India’s borders and why the system is designed the way it is.

What is GST? A Quick Refresher

The Goods and Services Tax (GST) is a comprehensive, destination-based indirect tax. The term “destination-based” is key here: tax is levied where the goods or services are finally consumed, not where they are produced. This principle is the cornerstone of how GST functions in international trade. The GST framework in India has three main components:

• CGST (Central GST): Collected by the Central Government on intra-state (within the same state) transactions.
• SGST (State GST): Collected by the State Government on intra-state transactions.
• IGST (Integrated GST): Collected by the Central Government on inter-state (between two different states) and international transactions (imports and exports). For any business involved in cross-border trade, IGST is the most important component to understand.

Key Terminology in GST for Trade

To navigate GST in international trade, you must be familiar with a few specific terms that define the nature of these transactions.

• Import of Goods/Services: This refers to the act of bringing any goods or services into the territory of India from a place outside India. Under GST, the import of goods is treated as an inter-state supply, making it subject to IGST.
• Export of Goods/Services: This is defined as taking goods or services from India to a place outside India. The GST regime treats exports very favorably to boost India’s foreign exchange earnings and global competitiveness.
• Zero-Rated Supply: This is a crucial concept for exporters. Exports of goods or services are considered “zero-rated supplies.” This means that while the output tax rate on these supplies is zero, the exporter can still claim a refund for the Input Tax Credit (ITC) paid on inputs and input services used to make those export products. This ensures that the tax is not exported along with the goods, making Indian products cheaper in the international market.

The GST Effects on Imports in India

When a business brings goods into India, GST plays a significant role in determining the final landed cost. The GST law has clear provisions for taxing imports to ensure a level playing field between domestic producers and foreign sellers. Understanding these rules is vital for managing cash flow and pricing strategies accurately.

How are Imports Taxed Under GST?

Under the GST regime, the import of goods into India is treated as an inter-state supply. Consequently, Integrated GST (IGST) is levied on these transactions. This IGST is charged in addition to the Basic Customs Duty (BCD) and any other applicable customs duties, such as Social Welfare Surcharge. This approach ensures that imported goods are subject to the same tax rate as domestically produced goods, preventing any unfair price advantage for foreign products and maintaining tax parity. The tax is collected at the point of importation before the goods are cleared by customs authorities for entry into the country.

Calculating IGST on Imported Goods

The calculation of IGST on imported goods is straightforward but requires careful attention to the components involved. The tax is not calculated on the transaction value alone but on a value that includes customs duties.

The formula is: IGST = (Assessable Value of Goods + Basic Customs Duty + any other duty chargeable) x IGST Rate

Let’s look at a simple example to understand this better:

• Assessable Value of imported machinery: ₹5,00,000
• Basic Customs Duty (BCD) rate: 10%
• Applicable IGST rate on the machinery: 18%

Calculation Steps:

1. Calculate Basic Customs Duty (BCD): ₹5,00,000 x 10% = ₹50,000
2. Calculate the Value for IGST Levy: Assessable Value + BCD = ₹5,00,000 + ₹50,000 = ₹5,50,000
3. Calculate IGST Amount: ₹5,50,000 x 18% = ₹99,000

So, the total import duties and taxes paid would be ₹50,000 (BCD) + ₹99,000 (IGST) = ₹1,49,000.

Claiming Input Tax Credit (ITC) on Imports

One of the most significant advantages of the GST system is the seamless flow of credit. The IGST paid on the import of goods or services can be claimed as Input Tax Credit (ITC) by the importing business. This is a critical aspect of the GST role in trade in India. The ₹99,000 IGST paid in the example above is not a final cost for the business. It can be used to set off the business’s output GST liability on its domestic sales. This mechanism prevents the cascading effect of taxes (tax on tax) and reduces the effective cost of imports for businesses, ultimately lowering the cost of production and making the final product more competitive. To claim this ITC, the importer must file the necessary GST returns and have valid documents, like the Bill of Entry. Proper GST registration and timely filing are prerequisites for this benefit. You can learn more about this on TaxRobo’s GST Registration Service page.

International Trade Laws for Indian Exporters under GST

The GST framework is designed to actively encourage exports, aligning with the “Make in India” initiative. The entire system for exporters is built around the principle of not exporting domestic taxes, which helps Indian goods and services remain competitive in the global marketplace. This is governed by specific international trade laws for Indian exporters under the GST umbrella.

Why Exports are Zero-Rated

Exports are treated as “zero-rated supplies” based on the internationally accepted “destination principle.” This principle dictates that goods and services should be taxed in the country where they are consumed, not where they are produced. By making exports zero-rated, the government ensures that no GST is ultimately collected on the goods leaving India. This doesn’t mean they are exempt; rather, it means the tax rate is zero. The crucial difference is that for zero-rated supplies, the entire supply chain becomes tax-free, as exporters can claim a refund of the GST paid on their inputs (raw materials, services, etc.). This refund mechanism is a core part of the international trade regulations in India and is vital for maintaining the liquidity and cost-effectiveness of exporting businesses.

Two Options for Exporters

GST law provides exporters with two flexible pathways to manage their tax compliance for zero-rated supplies. A business can choose the option that best suits its cash flow and operational model.

Feature	Option 1: Export with Letter of Undertaking (LUT)	Option 2: Export with Payment of IGST
GST Payment	No IGST payment is required at the time of export.	IGST is paid at the time of export.
Mechanism	Exporter files a Letter of Undertaking (LUT) on the GST portal, promising to meet export obligations.	Exporter pays the applicable IGST and later claims a refund of the same amount.
Cash Flow Impact	Positive. Working capital is not blocked in tax payments.	Negative. Working capital is blocked until the refund is processed.
Compliance	Requires filing an LUT annually and mentioning its ARN on invoices.	The shipping bill itself is treated as a refund application. Requires accurate data in GST returns.
Best Suited For	Businesses that want to maintain liquidity and have a good compliance history.	Businesses that have sufficient ITC to utilize for IGST payment or prefer a straightforward refund route.

1. Exporting without Payment of IGST (Using LUT):
   This is the most popular route for exporters. A Letter of Undertaking (LUT) is a document submitted online via the GST Portal, where the exporter commits to exporting the goods or services within the prescribed time limits. Any registered taxpayer can file an LUT, provided they have not been prosecuted for tax evasion exceeding ₹2.5 crores. The LUT is valid for one financial year. Once filed, the exporter can export goods or services without paying any IGST, which significantly helps in managing working capital as funds are not blocked in tax payments.
2. Exporting with Payment of IGST (Claiming Refund):
   Alternatively, an exporter can choose to pay IGST on their export supplies and then claim a refund of the tax paid. This option is often chosen by businesses that have a significant accumulation of Input Tax Credit (ITC). They can use this ITC to pay the output IGST on exports, effectively converting their locked-in credit into a cash refund. In this process, the shipping bill filed with the customs authorities is treated as the application for a refund. The refund is processed once the exporter accurately files their GSTR-1 and GSTR-3B returns, and the information matches the data available with the customs portal (ICEGATE).

Mastering Cross-Border Transactions Compliance in India

While the GST framework simplifies many aspects of trade, adherence to compliance requirements is non-negotiable. Mastering cross-border transactions compliance in India involves meticulous documentation, timely registrations, and accurate tax filing. A single error can lead to delays in shipments, denial of refunds, and potential penalties. Understanding the GST role in international trade from a compliance perspective is essential for smooth operations.

Essential Documentation for International Trade

Proper documentation is the backbone of any international trade transaction. Under GST, certain documents are mandatory for both customs clearance and tax compliance.

• Tax Invoice: For every export, a tax invoice must be issued. It must contain specific details like the exporter’s GSTIN, HSN code of the goods, a clear declaration for export (e.g., “SUPPLY MEANT FOR EXPORT UNDER BOND OR LETTER OF UNDERTAKING WITHOUT PAYMENT OF INTEGRATED TAX”), and the LUT number if applicable.
• Shipping Bill / Bill of Export: This is a critical document filed with customs. It acts as a primary proof of export. For exporters claiming a refund of IGST paid, the shipping bill number and date must be correctly mentioned in their GSTR-1 return.
• Bill of Lading / Airway Bill: This document is issued by the carrier (shipping line or airline) and serves as proof of shipment and a contract for the transportation of goods.

Mandatory Registrations and Codes

Before you can even think about your first international shipment, certain registrations are required by law.

• GSTIN (Goods and Services Tax Identification Number): GST registration is mandatory for any person or business engaged in the inter-state supply of goods. Since both imports and exports are treated as inter-state supplies, any business involved in these activities must obtain a GSTIN, regardless of their annual turnover.
• Import Export Code (IEC): An IEC is a 10-digit code issued by the Director General of Foreign Trade (DGFT). It is a mandatory prerequisite for undertaking any import or export activities in India. TaxRobo can assist you with seamless IEC Registration to get your global business started.

GST Filing and Reporting

Accurate and timely filing of GST returns is the final and most crucial step in the compliance cycle. It ensures that your transactions are correctly reported to the tax authorities, enabling you to claim ITC on imports and refunds on exports smoothly.

• GSTR-1: This is the return for reporting details of all your outward supplies. Export invoices must be reported in Table 6A of GSTR-1 with accurate shipping bill details.
• GSTR-3B: This is a summary return where you declare your total tax liability, claim ITC, and pay the net tax amount. It is essential that the figures in GSTR-1 and GSTR-3B reconcile.

Failure to file these returns on time can lead to a complete halt in the refund process and may attract late fees and interest.

Conclusion: The Strategic Role of GST in International Trade

The implementation of GST has been a game-changer for India’s foreign trade landscape. It has successfully streamlined cross-border business taxation in India by subsuming multiple indirect taxes into a single, unified structure. The framework’s core features—treating exports as zero-rated supplies and allowing Input Tax Credit on imports—are designed to make Indian businesses more competitive on the global stage. A clear understanding of the GST role in international trade is no longer just a compliance requirement; it has become a strategic advantage. By navigating the system effectively, businesses can optimize cash flow, reduce operational costs, and unlock their full potential in the international market.

Navigating international trade regulations in India can be complex. Let the experts at TaxRobo handle your GST compliance, from registration to filing, so you can focus on growing your global business. Contact us today for a consultation!

Frequently Asked Questions (FAQs)

1. What is a Letter of Undertaking (LUT) and who can file it?

An LUT is a document that exporters can file on the GST portal to export goods or services without paying IGST. Any registered taxpayer who intends to export is eligible, provided they haven’t been prosecuted for tax evasion exceeding ₹2.5 crores. It simplifies the export process by eliminating the need to pay tax and then claim a refund, thereby improving the exporter’s working capital.

2. How is IGST calculated on services imported into India?

For imported services, IGST is typically paid by the recipient in India under the Reverse Charge Mechanism (RCM). This means the service recipient, not the foreign service provider, is liable to pay the applicable IGST directly to the government. The recipient can later claim this IGST amount as Input Tax Credit (ITC), subject to the condition that the services are used for business purposes.

3. Is GST registration mandatory for exporting goods from India?

Yes. Under GST law, exports are considered inter-state supplies. Any business or individual making an inter-state supply of taxable goods is required to get registered for GST, irrespective of their annual turnover. Therefore, GST registration is mandatory for anyone looking to export goods from India.

4. How long does it take to get an IGST refund on exports?

As per GST law, 90% of the refund amount should be processed provisionally within seven days of the acknowledgement of the refund application. However, the process is highly automated and depends on the correct and timely filing of GSTR-1 and GSTR-3B by the exporter. The data in these returns must match the information filed in the shipping bill with the customs portal (ICEGATE) for the refund to be processed seamlessly.

5. Do I need to mention my LUT number on my export invoices?

Yes. If you are exporting goods or services under a Letter of Undertaking (LUT), it is mandatory to mention the LUT’s Application Reference Number (ARN) on your export invoices. You must also include the following declaration on the invoice: “SUPPLY MEANT FOR EXPORT UNDER BOND OR LETTER OF UNDERTAKING WITHOUT PAYMENT OF INTEGRATED TAX”. This informs the tax authorities that the supply is a legitimate zero-rated export.