Understanding GST on Transit Cargo to Nepal and Bhutan: Implications for Landlocked Nations

Introduction

Goods and Services Tax (GST) has a significant impact on various aspects of trade and commerce, especially for landlocked countries like Nepal and Bhutan. These nations rely heavily on transit cargo for their import and export activities. Understanding the intricacies of GST on transit cargo to Nepal and Bhutan is crucial for stakeholders involved in international trade with these countries.

Implications for Nepal and Bhutan

As landlocked countries, Nepal and Bhutan have unique logistical challenges. They rely on Indian ports for their international trade. The transit cargo passing through India is subject to GST, which can affect the cost and efficiency of trade. However, India's bilateral treaties with Nepal and Bhutan provide certain concessions and exemptions. For example, goods in transit destined for these countries are often exempt from GST, simplifying the process and reducing costs.

In terms of para 2.52 of the Indian Foreign Trade Policy (2015-2020) exports proceeds from Nepal and Bhutan can be realized in Indian rupees. However, in GST law, Export of Goods and Export of Services are treated differently

Rupee Exports of Goods to Nepal and Bhutan will be treated at par with export to any other country as definition of ‘export of goods’ under IGST Law attaches no condition other than ‘taking goods out of India to a place outside India’.

Sec 2(5) of IGST Act : “export of goods” with its grammatical variations and cognate expressions, means taking goods out of India to a place outside India;

However in case of export of services, in case export proceeds are received in Indian rupees, it will not qualify as ‘export’ as the definition of ‘export of services’ mandates receipt of payment in ‘convertible foreign exchange’.

Sec 2(6) of IGST Act : “export of services” means the supply of any service when,––

(i) the supplier of service is located in India;

(ii) the recipient of service is located outside India;

(iii) the place of supply of service is outside India;

(iv) the payment for such service has been received by the supplier of service in convertible foreign exchange; or in Indian rupees wherever permitted by the Reserve Bank of India, and

(v) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8;

Because of this controversy & confusion over payment realization for service exports, trade is representing for quite some time. For example for export of goods to these countries transport services are provided to Nepal / Bhutan importers by Indian transport companies and also for their exports to India. When these services are being provided to a place outside India from a place in India, a qualifying condition attached to in the definition of Export of Services is realization of payment in freely convertible currency. If the payment is not received in freely convertible currency, then such services will not be treated as exports and in such situations the service provider has to discharge the tax liability. Whereas as per treaty between these countries payments can be made in Indian Rupee.

Exemption on Supply of Services Associated with Transit Cargo to Nepal and Bhutan

To remove the confusion a Notification No. 30 / 2017, Central Tax (Rate), 29th September, 2017 was released to amend the Notification No. 12/2017- Central Tax (Rate), dated the 28th June, 2017 by exempting tax on Supply of services associated with transit cargo to Nepal and Bhutan (landlocked countries). But this notification served limited purpose.