"Export-Only Companies Don't Need GST": What India's IGST Act Requires
Zero-rated does not mean zero compliance. Foreign-owned Indian subsidiaries that export 100% of their services still trigger GST registration through reverse charge on parent-company recharges, and registration is the only route to recovering input tax credit.
CA Harun Raaj
makeitlegit.in
Legal basis: CGST Act 2017 ss.22–24 read with IGST Act 2017 ss.2(6), 2(11), 5(3) and 16 / CGST Rules 2017 Rule 96A (LUT) and Rule 89 (refund) / Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017 — Effective: 01.07.2017 (GST commencement); Rule 96A mechanism ongoing. Source: gst.gov.in. Last updated: September 2026.
A Netherlands-based software company incorporates a wholly owned private limited subsidiary in Bengaluru. The Indian entity will provide engineering services exclusively to the Dutch parent. The controller's first question is predictable: "We export everything — we're zero-rated, so we can skip GST registration, right?"
The short answer is almost always no. The longer answer is that the phrase "zero-rated" does not mean "zero compliance." Misunderstanding this distinction costs foreign-owned Indian companies in two ways: first, by forfeiting recoverable input tax credit; second, by leaving a reverse charge liability completely unpaid, which compounds into a tax demand with 18% interest.
This article explains the registration triggers that apply to a foreign-owned Indian private limited company, the mechanics of the Letter of Undertaking that makes export-zero-rating workable, and the compliance traps that appear repeatedly in the first year of Indian operations.
What zero-rated supply actually means
Under Section 16(1) of the IGST Act 2017, a "zero-rated supply" covers two categories: export of goods or services, and supplies made to a Special Economic Zone developer or unit. Zero-rated is not the same as exempt. An exempt supply carries no GST and also carries no right to claim input tax credit. A zero-rated supply carries no GST on the outward transaction, but the supplier can still take input tax credit under Section 16(2) and claim a refund of accumulated, unutilised input tax credit under Section 16(3).
Key point: Under Section 16 of the IGST Act, zero-rated exports carry no outward GST but still allow a full input tax credit refund — an entitlement that exempt supplies do not carry, and that unregistered entities cannot access at all.
That distinction matters. A foreign-owned Indian subsidiary that provides services to its parent pays rent, buys software licences, engages professional advisors, and acquires equipment — all of which carry 18% GST in the vendor's invoice. If the entity never registers, it absorbs that input tax permanently. If it registers, files the correct returns, and maintains a Letter of Undertaking, it can recover that input tax through a refund claim.
Sections 16(3) and 16(4) of the IGST Act (as substituted with effect from 1 October 2023) provide two routes:
- Option A (LUT route): Export without paying Integrated GST on the outward supply under a bond or Letter of Undertaking; claim a refund of accumulated, unutilised input tax credit in Form GST RFD-01 under Section 16(3), read with Section 54 of the CGST Act and Rule 89 of the CGST Rules 2017.
- Option B (IGST payment route): Pay IGST on the export supply, then claim a refund of that IGST paid. Since 1 October 2023 this is no longer a general option: under Section 16(4), it is available only to a class of persons, or for a class of goods or services, notified by the Government. Check the current notification before relying on this route.
Most foreign-owned service entities with domestic input costs should use Option A. It avoids the working-capital drag of paying IGST first and waiting for the refund.
Registration triggers: four paths that force your hand
The confusion usually comes from Section 23(1)(a) of the CGST Act, which exempts from registration any person engaged exclusively in supplying goods or services that are "not liable to tax or wholly exempt from tax". Zero-rated exports do not fall within this exemption: they are taxable supplies on which input tax credit may be taken under Section 16(2) of the IGST Act. Exports also count towards "aggregate turnover" under Section 2(6) of the CGST Act. A subsidiary that exports 100% of its services must therefore register under Section 22(1) once its aggregate turnover in a financial year exceeds ₹20 lakh (₹10 lakh in the special category States). Only an exporter below that threshold could, in principle, operate without registration.
In practice, four triggers make registration necessary for virtually every foreign-owned entity:
Trigger 1: Import of services from the foreign parent. Under Section 5(3) of the IGST Act, read with Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017, any service received from a supplier located in a non-taxable territory attracts 18% IGST under Reverse Charge Mechanism (RCM), and the Indian recipient must pay it. Management fees, technical support, shared-service recharges, royalties, and software licences from the foreign parent all fall here. To pay RCM, an entity must be GST-registered. The obligation to register therefore arises from the inbound flow — before the first outward supply ever occurs.
Trigger 2: Crossing the turnover threshold — exports included. Under Section 2(6) of the CGST Act, aggregate turnover includes exports of goods or services from the very first invoice, together with any domestic supplies (a sub-let of office space, a reimbursement re-billed to an Indian vendor, or an incidental domestic service). Once aggregate turnover exceeds ₹20 lakh in a financial year (₹10 lakh in the special category States), registration under Section 22(1) is mandatory, whether or not the entity makes any domestic supply.
Trigger 3: Export of goods, not services. Section 24(i) of the CGST Act makes registration mandatory regardless of turnover for every person making an inter-state taxable supply. Exports of goods are treated as inter-state supply. For entities that ship physical products — samples, manufactured components, prototypes — registration is compulsory with no threshold exemption.
Trigger 4: Wanting the ITC refund. The refund under Section 16(3) of the IGST Act, read with Section 54 of the CGST Act and Rule 89, is only available to a registered person making a zero-rated supply. An unregistered entity cannot file Form GST RFD-01. Any entity that wants to recover input tax on rent, equipment, or professional services must register voluntarily to access the refund machinery.
The Letter of Undertaking: what it is, what it does, and when it lapses
A Letter of Undertaking (LUT) is the foundational document that enables Option A zero-rated exports. It is filed in Form GST RFD-11 on the GST portal before raising the first export invoice of each financial year. In return, the entity exports without charging IGST on its outward invoices.
Compliance conditions under Rule 96A of the CGST Rules 2017:
| Export type | Realisation window | Consequence of missing the window |
|---|---|---|
| Export of goods | Goods must be exported within 3 months of the invoice date, or such further period as the Commissioner allows | Pay IGST + interest under s.50(1) within 15 days of expiry |
| Export of services | Payment must be received within 1 year of the invoice date or the period allowed under FEMA (including any RBI extension), whichever is later, or such further period as the Commissioner allows — in convertible foreign exchange or in Indian rupees where RBI permits | Pay IGST + interest under s.50(1) within 15 days of expiry |
Annual renewal: The LUT filed for a financial year covers that year only. For FY 2026-27 (which started 1 April 2026), a fresh LUT must have been filed before the first export invoice raised after 1 April 2026. Rule 96A(1) requires the LUT to be furnished prior to export; if it was filed late, check the applicable CBIC guidance on how exports made before filing are treated.
Once LUT conditions are met, the refund claim follows Rule 89. The application goes in Form GST RFD-01. The officer-in-charge must issue a refund order within 60 days of a complete application.
Refund formula (Rule 89): Refund = (Turnover of zero-rated supply / Adjusted total turnover) × Net ITC
The reverse charge obligation in detail
Under Section 2(11) of the IGST Act, management fees, royalties, IT licences, and back-office recharges from the foreign parent are "import of services." Notification No. 10/2017-Integrated Tax (Rate) Entry 1 covers services from any person in a non-taxable territory — which includes all services from the foreign parent.
The Indian entity must: issue a self-invoice within 30 days; pay 18% IGST in GSTR-3B Table 3.1(d); and simultaneously claim ITC in Table 4(A)(2) (import of services). For a fully export-oriented entity, the net cash outflow is typically zero — the ITC offset eliminates the tax cost.
The common mistake: entities pay the management fee by wire transfer, treat the transaction as complete, and never raise a self-invoice. The IGST goes unpaid. The deficiency emerges in a GST audit with three to five years of 18% interest.
Note on the "distinct person" condition: a branch office and its foreign head office are the same legal person, and cross-charges between them are not exports for GST purposes. A subsidiary and its foreign parent are separate legal entities — Section 2(6)(v) is satisfied. See the liaison and branch office entity page for how the branch office structure is taxed differently.
Step-by-step: what a newly incorporated foreign-owned subsidiary must do
- Apply for GST registration (Form GST REG-01) before the earlier of: raising the first export invoice, or receiving the first management fee or IP licence from the foreign parent.
- File LUT in Form GST RFD-11 on the GST portal before the first export invoice of each financial year (Rule 96A(1) requires it to be furnished prior to export).
- Self-invoice every inbound recharge from the foreign parent within 30 days of receiving the supply (Rule 47A), and report it in GSTR-3B Table 3.1(d).
- File GSTR-1 and GSTR-3B monthly or quarterly. List export invoices in GSTR-1 Table 6A (exports under LUT).
- File Form GST RFD-01 once ITC accumulates, attaching bank realisation certificates for services.
- Renew the LUT before 1 April each year.
The GST checker on this site can verify an existing GSTIN's status and track registration milestones.
Sources
- CGST Act 2017 ss.22, 23, 24 — provisions confirmed via secondary sources below
- IGST Act 2017 ss.2(6), 2(11), 5(3), 16 — confirmed via secondary sources below
- CGST Rules 2017, Rule 96A (LUT) and Rule 89 (refund): taxguru.in guide to LUT filing and zero-rated export compliance
- Notification No. 10/2017-Integrated Tax (Rate) dated 28.06.2017: taxindiaupdates.in
- GST registration and export of services: taxguru.in
- CBIC GST portal: gst.gov.in
Planning India entry? Start with a structure review at makeitlegit.in/tools/india-entry-modes, then read the entity page for your structure at makeitlegit.in/entity/pvt-ltd.
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See Also
Frequently Asked Questions
Do I need GST registration if my Indian subsidiary only exports services to its foreign parent?+
Almost always yes. Under Section 5(3) of the IGST Act read with Notification No. 10/2017-Integrated Tax (Rate), any service received from the foreign parent triggers reverse charge IGST, which can only be paid by a GST-registered entity. This obligation arises before the first outward export invoice is even raised. Separately, exports count towards aggregate turnover under Section 2(6) of the CGST Act, so registration under Section 22(1) is mandatory once aggregate turnover exceeds ₹20 lakh (₹10 lakh in the special category States).
What is the difference between zero-rated and exempt supply under GST?+
Under Section 16(1) of the IGST Act, a zero-rated supply covers exports and supplies to SEZ units and carries no GST on the outward transaction. The supplier can still take input tax credit under Section 16(2) and claim a refund of accumulated, unutilised input tax credit under Section 16(3). An exempt supply carries no GST but also carries no right to claim input tax credit.
What happens if export proceeds from a services invoice are not received within one year?+
Under Rule 96A(1)(b) of the CGST Rules 2017, the time allowed is one year from the invoice date or the period allowed under FEMA (including any RBI extension), whichever is later, or such further period as the Commissioner allows. Payment may be received in convertible foreign exchange or in Indian rupees where RBI permits. If payment is not received within that period, IGST becomes payable along with interest under Section 50(1) of the CGST Act, and payment must be made within 15 days of the deadline expiry, after which LUT status is restored.
Do I still need GST registration if I only pay a management fee to my foreign parent?+
Yes. A management fee paid to a foreign parent is an import of services under Section 2(11) of the IGST Act and Notification No. 10/2017-Integrated Tax (Rate), which attracts reverse charge IGST. The Indian entity must be registered to self-invoice and pay this IGST in GSTR-3B Table 3.1(d).
When must I file the LUT (Letter of Undertaking) for GST?+
The LUT is filed in Form GST RFD-11 on the GST portal before raising the first export invoice of each financial year. It covers that financial year only and must be renewed before the first export invoice raised after 1 April of the following year.
Can an Indian subsidiary claim a GST refund without registering?+
No. The refund of unutilised input tax credit under Section 16(3) of the IGST Act, read with Section 54 of the CGST Act and Rule 89 of the CGST Rules, is only available to a registered person filing Form GST RFD-01. An unregistered entity has no mechanism to recover input tax paid on rent, equipment, or professional services.
Does exporting goods instead of services change the GST registration requirement?+
Yes, it removes any turnover-based exemption. Section 24(i) of the CGST Act makes registration mandatory regardless of turnover for any person making an inter-state taxable supply, and exports of goods are treated as inter-state supply.
Is a royalty payment to a foreign parent subject to GST?+
Yes. A royalty for use of the parent's brand or IP is an import of services under Notification No. 10/2017-Integrated Tax (Rate). The Indian entity must raise a self-invoice and pay 18% IGST under reverse charge, though it can simultaneously claim the same amount as input tax credit.
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