Common Mistakes and Hidden Pitfalls Before Filing Refund Applications for Export of Services

Refund of unutilised ITC on export of services is often perceived as a straightforward GST compliance exercise. In practice, however, refund claims are among the most litigated and frequently rejected applications—not because exports did not occur, but because documentation, timing, and interpretation misalignments creep in at the filing stage.

This article highlights practical errors and overlooked risks that exporters of services must consciously address before pressing the “submit” button on the refund application.

1. FIRC / BRC: Not Just a Procedural Attachment

One of the most common misconceptions is that any inward remittance certificate suffices for refund purposes. In reality, refund officers examine FIRCs/BRCs with far greater scrutiny than anticipated.

Common pitfalls include:

a. FIRC issuance is stopped as per the RBI Circular and banks are used to give Foreign Inward Remittance Advice (FIRA) in its place. While the rule says FIRC/E BRC, there is a tendency of the authorities to reject the claim for want of the document as per rule. It is important to recheck the document that’s getting submitted.

b. It is important to select the appropriate code for inward remittance which represents the transactions done with overseas customers. Use of “Salary Payments” code in place of  “Software Services” code is a common example of a mistake made by an entity billing its Cost plus method to its overseas parent company.

c. Partial realizations without clear allocation against specific invoices.

d. Non-update of realization records by bank may call for larger implications in the FEMA perspective.

Practical takeaway:
Always maintain a reconciliation statement mapping invoice numbers, dates, and values with each inward remittance. Relying solely on bank certificates without internal mapping invites queries or rejection.

2. Place of Supply (POS): Where Refund Claims Often Collapse

Many refund rejections stem not from GST rate or ITC issues, but from incorrect understanding of Place of Supply for services.

Errors commonly arise when:

a. Services are performance-based but treated as recipient-based.

b. Intermediary services are incorrectly classified as exports. Look out for the good move that is suggested by the GST council to change the place of supply for intermediary services which makes the transaction not taxable – This is pending the needed amendment to IGST Act for intermediary Place of Supply provision.

c. Location of recipient is assumed based on incorporation rather than contractual establishment.

Why this matters:
If POS is held to be in India, the transaction ceases to qualify as export—making the entire refund claim untenable leading to demand of GST on said transaction.

Practical takeaway:
POS analysis must be contract-driven, not assumption-driven. Each service category should be tested independently under Section 13 of the IGST Act before refund filing. A thorough study of Master Service Agreement, further agreements and Purchase orders is essential before filing your claim of refund.

3. Realization Timelines: A Silent Disqualifier

Export of services is recognised only when foreign exchange is realised within prescribed timelines of 1 year as per GST provisions.

Frequent issues include:

a. Assuming invoice date as sufficient proof of export.

b. Filing refund applications before realization is completed, which will disentitle the claim.

Practical takeaway:
Refunds should be filed only after realisation, or after ensuring valid FEMA extensions are on record. Premature filings often lead to outright rejection rather than curable defects.

4. Set-off of Payables Against Receivables: Commercially Logical, Legally Risky

In group company arrangements, it is common to net off receivables against payables—for example, management fees adjusted against reimbursements.

However, from a GST refund perspective:

a. Netting without actual forex inflow can be viewed as non-realisation.

b. Authorities may insist on documentary proof that FEMA permits such adjustments.

Practical takeaway:
If set-off mechanisms are used, maintain:

a. Board approvals or inter-company agreements

b. AD bank confirmation

c. FEMA-compliant adjustment documentation

Absent this, refund claims become vulnerable despite genuine exports.

5. Relevant Date for Limitation: Often Misunderstood

The two-year limitation period is frequently miscomputed due to confusion around the “relevant date”.

Common errors:

a. Treating invoice date as the starting point.

b. Ignoring the date of receipt of foreign exchange.

c. Applying a uniform date across multiple invoices.

d. Don’t forget to check the status of the refund claim once submitted. Sometimes, the officer may issue a “Deficiency memo” requiring you to refile the claim, in which case such next filing date will count for a limitation of 2 years!

Practical takeaway:
For export of services, the relevant date generally aligns with the date of receipt of payment, not invoice issuance. Each invoice must be tested independently for limitation compliance.

6. ITC Checks: Refund Is Not an Automatic Consequence of Accumulation

Refund officers increasingly examine the quality and eligibility of ITC, not just quantum.

Risk areas include:

a. ITC claimed expenses having indirect nexus with export services.

b. Common credits not properly apportioned.

c. Credits blocked under Section 17(5) inadvertently included.

Practical takeaway:
Before filing a refund, conduct an ITC hygiene review—treat it like a due diligence exercise rather than a clerical check. Your refund rejection for disallowed ITC claims wouldn’t just stop at rejection. It may continue to demand notice for recovery of such ineligible credits.

7. Capital Goods ITC: A Subtle Yet High-Risk Area

A frequent oversight is including capital goods ITC while computing refund of unutilised ITC for export of services.

While capital goods credit may be legitimately availed, its eligibility for refund is restricted, and incorrect inclusion can derail the entire claim.

Practical takeaway:
Clearly segregate:

a. Input services ITC

b. Input goods ITC

c. Capital goods ITC

Refund computations should exclude components not expressly permitted, even if availed correctly in returns.

Closing Thought: Refund Filing Is a Legal Exercise, Not a Form-Filling Task

Export of services refund claims sit at the intersection of GST law, FEMA regulations, contractual interpretation, and accounting discipline. Most rejections occur not due to fraud or misstatement, but due to avoidable technical lapses.

A pre-filing diagnostic—covering contracts, forex realization, ITC eligibility, and limitation—can significantly reduce litigation and cash-flow blockage.

In refund matters, prevention is always cheaper than appeal as cost of capital today is palpable which can make or break it!

For any clarifications or queries, please feel free to reach out to us at:
admin@fintracadvisors.com

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