Introduction

In an increasingly globalized economy, businesses frequently engage in cross-border transactions, making the taxation of such transactions a critical concern. The Goods and Services Tax (GST) framework in India, introduced to unify indirect taxation, still faces significant challenges regarding cross-border transactions, particularly in determining the ‘Place of Supply’ and handling Integrated GST (IGST) refunds. These ambiguities have resulted in compliance burdens, delayed refunds, and increased litigation, impacting cash flow and financial planning for businesses.

This article provides insights into the challenges of cross-border GST transactions, discusses complexities surrounding the place of supply, and offers strategic recommendations to mitigate tax risks and optimize cash flow.

Understanding ‘Place of Supply’ in Cross-Border Transactions

GST in India is destination-based, meaning tax is levied at the place of consumption rather than the place of origin. For international transactions, defining the place of supply is crucial in determining whether a supply qualifies as an export (zero-rated supply) or an import (liable to IGST). However, the interpretation and practical implementation of these rules remain a significant challenge for businesses. Additionally, incorrect determination of the place of supply can lead to tax disputes, compliance issues, and potential penalties.

Key Challenges in Determining Place of Supply:

1. Services vs. Goods: The place of supply rules differ for goods and services, leading to complexities in multi-jurisdictional transactions. For goods, the place of supply is determined by physical movement, but for services, it often depends on the recipient’s location—creating confusion in cases of cross-border digital transactions.
2. Intermediary Services: The GST Council continues to deliberate on clarifications regarding the definition of intermediaries. Many rulings indicate that even if services are provided to foreign entities, they may not qualify as exports if the intermediary is located in India. The recent 2024 Authority for Advance Ruling (AAR) in Maharashtra upheld this view. (Advance Ruling No. GST-ARA-117 of 2022-23/2024-25/B-53, involving Gulf Turbo Solutions LLP, dated July 31, 2024)
3. Supply to SEZs: Transactions involving Special Economic Zones (SEZs) are considered zero-rated supplies, but procedural inefficiencies and compliance hurdles often delay IGST refunds, impacting working capital.
4. Cross-border Software and SaaS Transactions: The GST Council’s 2024 report on digital taxation suggests revising place-of-supply rules for SaaS, cloud computing, and digital products. Certain tax officers interpret SaaS transactions as ‘services consumed in India’ and levy GST, leading to disputes.
5. Performance-Based Services: In cases where services are performed in India but consumed overseas, businesses find it difficult to classify whether such services qualify as exports or are taxable in India. This creates uncertainty in industries like software development, consulting, and outsourcing.

6. E-Commerce and Online Marketplaces: With the rise of cross-border e-commerce, determining the place of supply for online marketplaces and aggregators has become increasingly complex. The applicability of GST depends on whether the platform is acting as a facilitator, seller, or service provider, leading to varied tax treatments.
7. Branch and Subsidiary Transactions: Transactions between Indian branches and foreign parent companies or subsidiaries often face ambiguity in determining whether they qualify as distinct supplies under GST. The classification of such transactions impacts input tax credit claims and tax liabilities.

Examples of GST Treatment in Cross-Border Transactions

To better understand how GST applies to cross-border transactions, consider the following real-world examples:

• Export of IT Services: An Indian IT firm provides software development services to a U.S.-based client. Since the place of supply is outside India, this qualifies as an export of services and is subject to a zero-rated tax under GST, provided all conditions for export are met.
• Intermediary Services: A consultancy firm in India facilitates a deal between a foreign company and another entity outside India. Under current GST laws, this transaction may be taxed in India since the intermediary is located in India, even though the ultimate service is provided to a foreign client.
• Supply of Goods from India to a Foreign Buyer: An Indian manufacturer ships goods to an international client. The place of supply is determined based on the recipient’s location, making it a zero-rated supply, and IGST paid on inputs is eligible for a refund.
• Software as a Service (SaaS): A cloud service provider based in India sells subscription-based software to a U.S. customer. If the software is used outside India and the recipient is a registered foreign entity, it qualifies as an export of services and is eligible for IGST refund claims.
• Cross-Border Training Services: An Indian training company provides online courses to foreign students. The place of supply is outside India, making it a zero-rated supply under GST. However, if the payment is received in INR rather than foreign currency, GST authorities may challenge the export classification.

• Import of Consulting Services: An Indian company hires a foreign consultant for business advisory services. Since the recipient is in India, the place of supply is India, and the Indian company is liable to pay IGST under the reverse charge mechanism.
• Freelance IT Services: An Indian freelancer develops a website for a European client. As the service is provided to a foreign entity, the place of supply is outside India, qualifying it as an export of services, provided the payment is received in convertible foreign exchange.
• Drop Shipment Transactions: An Indian trader sources goods from a foreign supplier and directly ships them to an overseas buyer without the goods entering India. Since the goods do not physically move within India, GST is not applicable, and the transaction is considered outside the purview of Indian GST laws.
• Event Management for Foreign Clients: An Indian event management company organizes a corporate conference in Singapore for a U.S.-based client. Since the event takes place outside India, it qualifies as an export of services, making it zero-rated under GST.

The IGST Refund Conundrum

IGST paid on exports is eligible for refunds under two mechanisms:

1. With Payment of Tax: The exporter pays IGST and claims a refund.
2. Without Payment of Tax (Under LUT/Bond): The exporter supplies goods/services without paying IGST but claims an input tax credit (ITC) refund.

Despite this structured mechanism, businesses continue to face significant roadblocks in securing IGST refunds due to:

• Mismatch in GST Returns: Even minor discrepancies between GSTR-1 and GSTR-3B can result in refund rejections. Given the volume of transactions, manual reconciliation becomes tedious and prone to errors. The government has introduced an auto-validation tool in 2025 to minimize errors.
• Delay in Processing: Refund processing often takes months, disrupting working capital and causing cash flow constraints for exporters.
• Export Compliance Hurdles: Exporters must ensure compliance with the Foreign Trade Policy and customs regulations to avoid refund denials, adding to administrative burdens.
• Bank Realization Certificate (BRC) Requirement: Refund claims are often delayed or denied due to discrepancies in foreign exchange remittances. Exporters must furnish a BRC or Foreign Inward Remittance Certificate (FIRC) as proof of payment, and any delay or mismatch in these documents can lead to complications in securing IGST refunds.

Strategic Considerations for Businesses

Given the challenges, businesses must adopt proactive strategies to mitigate tax risks and optimize GST compliance. Key recommendations include:

1. Strengthen GST Documentation and Compliance
   • Ensure accurate reporting in GSTR-1, GSTR-3B, and shipping bills to avoid refund rejections.
   • Maintain robust documentation for cross-border services to establish eligibility for zero-rated supplies.
2. Adopt Technology for GST Reconciliation
   • Use automated GST reconciliation tools to identify mismatches in tax filings early.
   • Utilize AI-driven compliance monitoring to track changes in GST laws and their implications.
3. Seek Advance Rulings for Place of Supply Classification
   • Obtain advance rulings on complex transactions to pre-emptively address potential tax disputes.
   • Engage with tax consultants to clarify GST implications of international services and intermediary transactions.
4. Optimize Refund Claim Processes
   • Regularly review and reconcile export invoices with foreign remittances to ensure timely IGST refund claims.
   • Establish internal checkpoints to track refund applications and follow up with tax authorities to prevent unnecessary delays.

Conclusion

Cross-border GST compliance remains a challenging area for businesses operating in India. While businesses must adopt strategic compliance measures, the government must introduce clear policies and reforms to eliminate inconsistencies. A more transparent and streamlined GST regime will facilitate smoother international trade and strengthen India’s position in the global economy.