When Dollars Don't Come Home: Export Of Services in The Digital Age Under GST And FEMA

The Borderless Professional - A New GST Reality

The contemporary professional environment has transcended traditional geographical limitations. A software developer based in Gurugram today could be programming for a client in California; similarly, an IT consultant situated in Pune might be managing systems hosted in New York. The digital economy has subtly eliminated borders; however, tax legislation continues to delineate precise boundaries. Within this dynamic commercial context, complex legal questions arise- particularly when an Indian resident provides services to international clients and receives payments outside India. The case of Mr. Anish Kapoor exemplifies this transition.

Previously conducting operations in the United States, Anish Kapoor now resides in India and continues to provide information technology and software development services to clients in the United States. The stipulated remuneration is directly deposited into his U.S. bank account. Although this arrangement initially appears to be commercially straightforward, it warrants a thorough and disciplined analysis from the perspectives of Indian indirect tax laws and foreign exchange regulations . The enquiry in this matter extends beyond merely determining whether the transaction qualifies as an "export of services" under the Integrated Goods and Services Tax (IGST ) framework; it also encompasses related issues such as foreign exchange realisation under the Foreign Exchange Management Act (FEMA) and the requirement for Goods and Services Tax (GST) registration despite the absence of local clients.

Accordingly, this analysis adopts a comprehensive regulatory perspective- evaluating the transaction against the five statutory conditions for the export of services, assessing the GST registration threshold, and briefly considering the FEMA implications where export proceeds are retained outside India.

The Statutory Framework - Understanding Section 2(6) of the IGST Act

The export of services is defined in Section 2(6) of the IGST Act, 2017. The law is carefully structured, requiring the fulfilment of five specific conditions simultaneously. This deliberate design means that missing even one condition disqualifies the service from being considered an export and could subject the transaction to GST at the relevant rate. In today's digital economy, where services are often provided remotely and payments can pass through multiple banking channels, each condition becomes critically important. Therefore, analysis must be carried out step by step and precisely, ensuring that the transaction is evaluated against statutory requirements rather than solely on commercial judgment.

Condition One - Supplier of Service Must Be Located in India

The initial statutory requirement appears deceptively straightforward: the service provider must be located in India. In the case of Anish Kapoor , this condition assumes foundational importancebecause his tax position changed fundamentally upon relocating to India in FY 2024- 25. Under the Goods and Services Tax (GST) legislation, the "location of the supplier" is not determined by nationality or the initial negotiation site of the contract; rather, it is anchored to the place of business or fixed establishment from which the service is supplied.

The term "place of business," as outlined in Section 2(85) of the Central Goods and Services Tax (CGST) Act as under:

(85) "place of business" includes-

(a) a place from where the business is ordinarily carried on , and includes a warehouse, a godown or any other place where a taxable person stores his goods, supplies or receives goods or services or both; or

(b) a place where a taxable person maintains his books of account; or

(c) a place where a taxable person is engaged in business through an agent, by whatever name called;

Additionally, Section 2(50) of t he CGST Act, 2017 defines a "fixed establishment" as under:

(50) "fixed establishment" means a place (other than the registered place of business ) which is characterised by a sufficient degree of permanence and suitable structure in terms of human and technical resources to supply services, or to receive and use services for its own needs;

Collectively, these provisions underscore that GST focuses on the supplier's actual operational base rather than on formal or historical associations.

When Anish relocates his operations to India and begins providing services from there, equipped with the necessary personnel and technical resources, the indicators of a supplier based in India are clearly met. Under Section 2(85), the location where he now regularly conducts his professional activities in India is considered his place of business, especially when client communication, contract execution, and record-keeping are done within the country. Additionally, having the required human and technological resources at this Indian site characterises it as a fixed establishment under Section 2(50), which requires a certain level of permanence and the ability to deliver services.

Viewed through this statutory perspective, the relocation of Anish’s operational base to India constitutes not merely a change of residence but a significant jurisdictional event under the GST framework. It is important to recall that Section 1(2) of the Integrated Goods and Services Tax (IGST) Act, 2017, explicitly states that the Act shall extend to the whole of India. Hence, during the period in which Anish Kapoor provided services in the United States, the territorial criterion for the application of IGST provisions was not met, and the transactions fell outside the scope of GST.

Nonetheless, the moment his operational hub was transferred to India, and the supply originated from his Indian place of business- supported by the necessary structural and functional criteria- the statutory reach of the IGST Act became fully effective. This relocation thus marks the point at which the transaction falls within the jurisdiction of GST. Accordingly, the initial condition outlined in Section 2(6) is met without ambiguity.

Condition Two - The Recipient of Service Must Be Located Outside India

The second condition necessitates that the recipient of the service is situated outside India. While this requirement may appear straightforward on its face in cross-border information technology engagements, the statute adopts a structured test to determine the location of the recipient of services . Section 2(14) of the IGST Act provides as follows:

(14) "location of the recipient of services" means-

(a) where a supply is received at a place of business for which the registration has been obtained, the location of such place of business;

(b) where a supply is received at a place other than the place of business for which registration has been obtained (a fixed establishment elsewhere), the location of such fixed establishment;

(c) where a supply is received at more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the receipt of the supply; and

(d) in absence of such places, the location of the usual place of residence of the recipient.

A meticulous application of the aforementioned statutory framework to the present facts corroborates the export nature of the transaction. In the case of Anish Kapoor, the services are provided directly to independent clients located in the United States under principal-to-principal agreements. There exists no record indicating that the services are being received at any establishment within India, nor that the arrangement constitutes an intra-entity cross-charge. Conversely, the services are procured contractually and commercially at the U.S. clients' business premises.

Accordingly, the determination of recipient location squarely falls within clause (a) of Section 2(14), namely, the place of business where the recipient receives the supply. Since the place of business is situated outside India, the statutory requirement is satisfied. The definition thus aligns with the transaction's commercial reality and supports the conclusion that the recipient of services is located outside India. The relative clarity of this limb further strengthens the export nature of the supply.

Condition Three - Place of Supply Must Be Outside India

The third criterion is frequently decisive in the context of service exports, as even a transaction that appears to be cross-border may fail the export test if the place of supply is statutorily considered to be within India. It is essential to understand the legislative framework: whenever either the supplier or the recipient of services is situated outside India, the determination of the place of supply must be made in accordance with Section 13 of the IGST Act, rather than Section 12, which applies only when both parties are located within India. In the present case, since the recipients of Anish Kapoor’s services are based in the United States, the relevant provision is Section 13.

Within this framework, sub-section (2) of Section 13 functions as the default or residuary rule for determining the place of supply of services, stipulating that the place of supply shall be the location of the recipient, except where specifically covered by sub-sections (3) to (13). Information technology and software development services generally fall within this residuary domain, as no specific carve-out applies to the present facts. By applying this statutory principle and considering that the recipients are located in the United States, the place of supply correspondingly shifts outside India. This statutory interpretation robustly underscores the export nature of the transaction.

Equally important is the negative analysis. Anish Kapoor neither arranges nor facilitates the supply of services between two or more parties; rather, he provides information technology services on his own account to overseas clients. In this context, it is instructive to refer to Section 2(13) of the IGST Act, which defines an intermediary to mean "a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account ."

The statutory exclusion is as significant as the main limb of the definition. A person who supplies services on his own account stands expressly carved out of the intermediary net.Tested against this legislative yardstick, Anish Kapoor’s role remains that of an independent service provider operating on a principal-to-principal basis with his U.S. clients. There is no tri-partite arrangement, no facilitation between two contracting parties, and no evidence of broking or agency functions. It is also pertinent to note that the Finance Bill, 2025, has proposed the omission of Section 13(8)(b) of the IGST Act, which presently deems the place of supply of intermediary services to be the location of the supplier. Upon such omission being enacted and brought into force the place of supply of intermediary services would also fall to be determined in accordance with the default or residuary rule contained in Section 13(2).

Even viewed through this prospective legislative lens, the position in the present case remains unchanged. Since Anish Kapoor provides services on his own account and not in a facilitative capacity, the transaction does not assume the character of intermediary services at the threshold.

Accordingly, the supply squarely falls within Section 13(2), and the place of supply continues to align with the overseas recipient's location. The absence of intermediary characteristics thus preserves the cross-border character of the supply and eliminates any unintended domestic tax exposure. Overall, the third statutory condition stands duly satisfied.

Condition Four - Receipt of Consideration in Convertible Foreign Exchange

This limb has generated considerable debate among professionals. Section 2(6) requires that payment for the service be received in convertible foreign exchange or in Indian rupees wherever permitted by the Reserve Bank of India. Controversy typically arises where the consideration is credited to a foreign bank account rather than being remitted to India. In the case of Anish Kapoor, the agreed consideration is deposited directly into his U.S. bank account. At first glance, one might hastily assume that the export condition fails because the funds have not physically entered India; however, such an inference does not flow from the statutory language.

The provision mandates receipt in convertible foreign exchange; it does not expressly require that the funds be credited to an Indian bank account. From a strictly GST standpoint, the relevant enquiry is whether the supplier has, in fact, received the consideration in foreign currency. Documentary evidence, such as foreign bank credit advice, SWIFT confirmation, bank statements, and the underlying contractual records, can adequately substantiate such a receipt. The commonly followed practice of relying on FIRC or BRC issued by an authorised dealer bank in India is essentially evidentiary in nature and not a statutory precondition under Section 2(6).

That said, the foreign exchange dimension does not end with mere receipt. The broader regulatory discipline governing realisation and repatriation under the FEMA framework assumes independent significance and is examined separately in the succeeding discussion. Confined strictly to the requirements of Section 2(6), however, the receipt condition stands duly satisfied on the present facts , subject to the maintenance of proper documentary evidence.

The FEMA Overlay - Realisation and Repatriation Discipline

While the GST analysis largely supports the export character of the services, the foreign exchange dimension warrants parallel attention. Under the Foreign Exchange Management framework and the RBI Master Directions on Export of Services, a person resident in India who exports services is generally expected to realise and repatriate the export proceeds to India within the period prescribed by the Reserve Bank of India (presently up to twelve months in many cases, subject to regulatory modifications ), unless specific permission for retention abroad has been obtained. The mere fact that consideration is initially credited to a foreign bank account does not, by itself, negate export status under GST; however, prolonged or unauthorised retention outside India may invite scrutiny under FEMA and could, in practice, trigger closer examination by GST authorities.

Accordingly, exporters operating in a cross-border digital environment would be well advised to maintain comprising the underlying service agreement, foreign currency invoices, bank credit advice or SWIFT confirmation, and evidence of compliance with RBI realisation norms. Where retention of funds abroad is commercially necessary, appropriate consultation with the Authorised Dealer bank and adherence to permitted foreign currency account regulations becomes essential to preserve overall regulatory harmony.

Practical Risk Matrix - Who Contracts, Who Invoices, Who Receives?

In cross-border service arrangements, the legal robustness of export treatment is substantially enhanced when the commercial and banking documentation maintains internal consistency. The subsequent matrix delineates the relative risk exposure associated with various structuring patterns.

From a compliance and defensibility standpoint, the contracting entity, invoicing entity, and foreign-exchange receiving entity should, to the extent possible, remain the same. Structural alignment significantly reduces avoidable friction under both GST and FEMA.

Condition Five - Supplier and Recipient Should Not Be Merely Establishments of the Same Person

The fifth and final statutory requirement in Section 2(6) states that " the supplier of service and the recipient of service are not merely establishments of a distinct person as per Explanation 1 in section 8." This requirement serves as an anti-avoidance measure to prevent internal cross-border arrangements within the same legal entity from being misclassified as exports.

For a proper appreciation of this limb, reference must be made to Explanation 1 to Section 8 of the IGST Act, which provides as under:

Explanation 1.- For the purposes of this Act, where a person has,-

(i) an establishment in India and any other establishment outside India;

(ii) an establishment in a State or Union territory and any other establishment outside that State or Union territory; or

(iii) an establishment in a State or Union territory and any other establishment registered within that State or Union territory, then such establishments shall be treated as establishments of distinct persons.

The legislative intent underlying this deeming fiction is unequivocal: when the supplier and recipient are simply different establishments of the same legal entity, the transaction does not possess the fundamental nature of an external commercial supply and, accordingly, cannot be classified as an export of services.

Applying the statutory test to Anish Kapoor's case clearly shows that the deeming provision does not apply. Anish Kapoor, who now operates from India, provides services to independent clients in the United States. There is no evidence indicating that these clients are branch offices, project offices, or any other type of establishment linked to Kapoor. Additionally, there is no internal arrangement where services are being cross-charged between different parts of Kapoor's organisation.

In other words, the transaction is a genuine principal-to-principal engagement between legally separate persons and not an internal movement of services within the same organisational structure. Consequently, the deeming fiction contained in Explanation 1 to Section 8 remains wholly untriggered on the present facts. T he supplier and the recipients cannot be regarded as establishments of a distinct person, and the fifth condition prescribed under Section 2(6) therefore stands fully satisfied.

The Registration Question - Is GST Registration Required in Such Cases?

A common misconception in professional practice is that GST registration is not requireif no services are provided within India. However, the statutory framework does not set this as the criterion. According to Section 22 of the CGST Act, the key factor is the total turnover of an Indian-based person involved in taxable supplies . Even though service exports are zero-rated, they are still considered taxable supplies and count towards the turnover for thresholds. If Anish Kapoor’s export earnings exceed the specified limit, GST registration is mandatory, even without domestic clients. On the other hand, if the turnover is below the threshold and no other registration requirements apply, registration might not be legally necessary. Still, many exporters register voluntarily to simplify LUT filing and to secure timely input tax credit refunds.

The essential point is both nuanced and important : the requirement for registration does not hinge on whether services are rendered "in India," but rather on whether an individual situated in India is making taxable supplies (including zero-rated exports) whose total turnover exceeds the legal threshold.

Having examined the statutory framework in detail, the position in Anish Kapoor's case now emerges with greater clarity.

When Borders Blur but the Law Still Speaks

The detailed statutory examination undertaken above brings the position in Anish Kapoor’s case into sharp focus. Once the supplier is located in India, the transaction must withstand the cumulative tests embedded in Section 2(6), the place of supply framework under Section 13, the intermediary exclusion, the foreign exchange realisation discipline, and the registration trigger under Section 22 of the CGST Act. Applied to the present facts, these provisions operate coherently rather than in conflict. The services rendered by Anish Kapoor to his U.S. clients continue to retain the character of export of services under GST, subject to the maintenance of proper documentary evidence and adherence to FEMA requirements governing realisation and repatriation.

The broader professional takeaway is both practical and timely. When engaging in cross-border digital transactions, the key issue is not where the consideration is temporarily located, but whether the legal framework of GST and FEMA has been properly followed, both in substance and form. If contractual independence is clearly established, the place of supply is overseas, foreign exchange is correctly accounted for, and threshold obligations are met, then the protection of zero-rating remains accessible. When the statute is properly understood and faithfully applied, it continues to accommodate the realities of modern, borderless professional activities.