Export of Services under GST: Clarifying the Confusion Around Common Directors and Foreign Affiliates
Export of Services under GST: Clarifying the Confusion Around Common Directors and Foreign Affiliates
When does a cross-border service transaction qualify as an export of service under GST? And more importantly, what if the Indian company and the foreign recipient share the same directors or promoters?
This is one of the most commonly misunderstood areas in GST compliance.
Let’s break it down using plain language, official clarifications, and statutory definitions.
What Is “Export of Services” Under GST?
As per Section 2(6) of the IGST Act, 2017, a service qualifies as an “export of service” only when all five of the following conditions are met:
1.The supplier of service is located in India
2. The recipient is located outside India
3. The place of supply of service is outside India
4. The payment is received in convertible foreign exchange or in Indian Rupees permitted by the RBI
5. The supplier and the recipient are not merely establishments of a distinct person, as per Explanation 1 to Section 8 of the IGST Act
While most of these conditions are factual and easy to verify, it is the fifth condition that often creates confusion.
The Common Question:
If two companies, one in India and one abroad, have the same directors or promoters, can their service transactions still be treated as exports?
Yes, they can, if both are separately incorporated under the laws of their respective countries.
CBIC Clarification: Circular No. 161/17/2021-GST (Dated 20.09.2021)
To eliminate ambiguity, the Central Board of Indirect Taxes and Customs (CBIC) issued a detailed clarification in September 2021.
Key points from the circular:
• A company incorporated in India and a body corporate incorporated outside India (such as a US Inc or UK Ltd) are considered separate persons under the GST law
• These two entities are not treated as “establishments of a distinct person” just because they are part of the same group or have common directors
• Therefore, services provided by an Indian company to its foreign-incorporated affiliate, parent company, subsidiary, sister concern, or group company can still qualify as exports, provided the other four conditions are met
• This clarification is a major relief for multinational groups operating across jurisdictions.
Let’s Simplify with an Example
ABC Pvt Ltd (India) provides IT support services to ABC Inc (USA).
Both entities have the same directors and shareholding.
However, ABC Pvt Ltd is incorporated under the Indian Companies Act, and ABC Inc is incorporated under US law.
Result: These are two separate legal persons. Hence, services provided by ABC Pvt Ltd to ABC Inc may qualify as export of services under GST, subject to payment receipt in convertible foreign exchange and other conditions.
What Doesn’t Qualify?
If an Indian entity provides services to a branch office or liaison office of itself or the same legal person abroad (or vice versa), such services will not be treated as exports.
This is because a branch is not a separate legal entity. It is merely an extension of the same person and falls under the category of “establishments of a distinct person.”
Final Thoughts
In GST, it is not about who runs the companies. It is about how they are structured under the law.
Disclaimer: This material and the information contained herein is intended for clients and other Chartered Accountants to provide updates and is not an exhaustive treatment of such subject. We are not, by means of this material, rendering any professional advice or services. It should not be relied upon as the sole basis for any decision which may affect you or your business.
