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GST refund eligible if exporter receiving payment via Paypal

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GST refund eligible on freelancers & businesses exporting digital services : HC

Under (Afortune Trading Research LLP v. Additional Commissioner (Appeals I),[W.P. No. 2849 of 2021, Madras High Court (2024)] decided on 16.02.2024, the ruling by the Madras High Court is a major relief for freelancers and digital service exporters using PayPal or similar intermediaries. It essentially confirms that receiving export proceeds in INR, as long as the intermediary initially received them in convertible foreign exchange, does not disqualify an exporter from claiming GST refunds.

This could have significant implications for businesses offering digital services internationally, especially freelancers, IT firms, and consultancy services that frequently use PayPal and similar gateways. It reinforces the need for tax authorities to interpret GST laws in harmony with FEMA regulations, acknowledging the realities of modern cross-border trade.

Freelancers & businesses exporting digital services

Key takeaways for freelancers and businesses exporting digital services:

  1. GST Registration: Required even if turnover is below the threshold, as exports are zero-rated. To export services without paying IGST, a Letter of Undertaking must be filed. Taxpayer invoices should mention “Export of Services” and contain your GSTIN, the buyer’s details, and the currency of the transaction. Use the correct HSN code for digital services (9983 or relevant SAC).
  2. FEMA (Manner of Receipt and Payment) Regulations, 2016 under Regulation 3(3) explicitly allow authorized dealers to accept export proceeds from a 3rd party, not necessarily the buyer, as per RBI guidelines.Routing via an intermediary (like PayPal) does not invalidate an export transaction u/s  2(6) of the IGST Act, 2017. Freely convertible foreign exchange must be initially received before being converted to INR; taxpayers must ensure compliance with FEMA.

Receiving Payments via PayPal:

  1. Purpose Code: Select a purpose code under “Software and Information Technology Services,” such as P0805 (Software & Other IT Services). PayPal does not issue a Foreign Inward Remittance Certificate. Instead, get a Bank Realization Certificate from your bank.
  2. Export under LUT vs. IGST Payment: If you furnish a Letter of Undertaking, you can export without paying IGST. If you don’t have an LUT, you must pay IGST upfront and then claim a refund.
  3. Eligibility for ITC Refunds: Exporters can claim refunds on accumulated Input Tax Credit used in providing the exported service.
  4. Claiming Input Tax Credit (ITC) Refund: You can claim a refund of GST paid on inputs, input services, and capital goods used for exports. File RFD-01A (Refund Application) on the GST portal. Declare export supplies in GSTR-1 (monthly) and GSTR-3B. we must require Supporting documents, i.e. Export invoices, LUT/Bond, PayPal receipts, and GST filings should be well-documented
  5. PayPal Transactions: Payments received via PayPal are valid for export status if PayPal initially received the amount in convertible foreign exchange. Taxpayer required to maintain records of PayPal transactions, conversion rates, and credited INR amounts. And Reconcile payments with export invoices and GST taxpayers required to maintain documentation like export invoices, PayPal receipts, and bank statements to support refund claims.

In summary:

  • This decision aligns GST compliance with modern digital business models, ensuring that the role of intermediaries like PayPal does not create unnecessary tax hurdles. and that foreign exchange, does not disqualify an exporter from claiming GST refunds. This judgment is an important relief for service exporters relying on payment intermediaries like PayPal. It clarifies that as long as the initial receipt of payment is in convertible foreign exchange, the subsequent conversion into INR does not disqualify the transaction from being considered an “export of services” under GST law.
  • This judgment aligns GST refund eligibility with RBI’s foreign exchange rules, offering significant relief to exporters using global digital payment platforms.
  • Would you like assistance in drafting an LUT application or preparing GST refund documentation?

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