Key Highlights of Circular No. 78/52/2018

2025-03-03 09:02:55 02March

02March

Key Highlights of Circular No. 78/52/2018 - GST

<h2>1. Tax Treatment for Outsourced Services in Export Contracts</h2><h3>Scenario Explained:</h3>A company in India (Service Exporter) receives a service contract from a foreign client and outsources part of the work to a service provider located outside India.In such a case, two supplies are happening: 1️⃣ Export of services from the Indian company to the foreign client (for the total contract value). 2️⃣ Import of services by the Indian company from the foreign service provider (for the outsourced portion).<hr><h2>2. GST Applicability on Import & Export of Services</h2><h3>Tax Treatment for the Exported Services:</h3>✅ The total contract value is considered an export of services if all conditions under Section 2(6) of IGST Act and Section 13(2) of IGST Act are met. ✅ Even if the foreign client directly pays the outsourced service provider, it will still be treated as consideration received for export if:<ul><li>The Indian exporter pays IGST on reverse charge for the imported service.</li><li>The Reserve Bank of India (RBI) allows partial retention of foreign exchange outside India.</li></ul><h3>Tax Treatment for the Imported Services:</h3>? The Indian company must pay IGST on reverse charge for the imported portion of services. ? The company can claim ITC for the IGST paid on this imported service.<hr><h2>3. Example Illustration (ABC Ltd. India & XYZ Ltd. Mexico)</h2><h3>Case Details:</h3><ul><li>ABC Ltd. (India) gets a contract worth $500,000 from a US-based client.</li><li>ABC Ltd. outsources 40% of the services (worth $200,000) to XYZ Ltd. (Mexico).</li><li>The US client pays 60% ($300,000) to ABC Ltd. India and 40% ($200,000) directly to XYZ Ltd. Mexico.</li></ul><h3>GST Treatment:</h3>✅ ABC Ltd. India is the exporter of services for the entire contract. ✅ ABC Ltd. must pay IGST on reverse charge for the imported services (40% provided by XYZ Ltd.). ✅ Even though 40% of payment was directly made to XYZ Ltd., the entire contract is still considered an export if:<ul><li>IGST is paid on the imported services.</li><li>RBI allows part of the payment to be retained outside India. ✅ ABC Ltd. can claim ITC for IGST paid on the imported services.</li></ul><hr><h2>4. Key Conditions for Export of Services in Such Cases</h2>For the entire contract value to be treated as export of services, the following must be ensured: ? IGST on imported services must be paid on reverse charge by the Indian exporter. ? RBI must allow part of the payment to be retained outside India. ? The Indian exporter must raise the invoice for the full contract value.<hr><h2>5. Compliance & Trade Notices</h2><ul><li>CBIC has instructed tax authorities to issue trade notices to inform exporters about these clarifications.</li><li>Any implementation challenges should be reported to CBIC.<a href="https://cms.plasament.com/storage/shubham-pathak/circular-no-78.pdf">circular-no-78</a>  </li></ul>