Place of supply: the GST mistake export-heavy startups keep making

There is a specific failure mode that catches export-heavy Indian SaaS, services and consulting companies. The contract is with a foreign client. The deliverable goes abroad. The payment lands in foreign currency. The company files the supply as a zero-rated export under Section 16 of the IGST Act, claims the LUT benefit, gets the refund of accumulated ITC.

Two years later the audit team arrives. They open Section 13 of the IGST Act, run the place-of-supply test, and reclassify some — sometimes all — of those exports as taxable supplies under CGST and SGST. The LUT does not apply. The zero-rating does not apply. 18% GST is now demanded, plus interest under Section 50 (18% per annum), plus penalty under Section 73 or 74.

We have seen this number cross ₹4 crore on a single audit for a 50-person services firm. The mistake is almost always one of five fact patterns.

What Section 2(6) actually requires

Export of services under Section 2(6) of the IGST Act has five cumulative conditions. Miss any one and the supply is not an export.

The supplier is in India. The recipient is outside India. The place of supply is outside India. The payment is received in convertible foreign exchange (or INR where permitted by the RBI). The supplier and recipient are not merely establishments of a distinct person.

The first two and the fifth are usually clear. The third — place of supply — is where the audit usually hits. The fourth — foreign exchange receipt — has its own trap.

Fact pattern 1: NRI customer paying in INR

An Indian consulting firm signs an engagement with a UK-resident Indian citizen for personal financial planning. The customer is non-resident, the service is to a non-resident. The customer pays from their NRO account in Indian rupees.

The supplier treats this as an export, claims zero-rating. The auditor disagrees: payment was received in INR, which is permissible for export only where the RBI specifically allows it (essentially Nepal and Bhutan). Payment from an NRO account does not satisfy Section 2(6)(iv). The supply is not an export. The supply gets reclassified — and because the recipient is outside India but the supplier is in India, it becomes an inter-state supply liable to IGST at 18%.

Solution: insist on payment from an NRE account or directly from a foreign-currency account abroad. Document the FIRC (Foreign Inward Remittance Certificate) and keep it with the invoice.

Fact pattern 2: services consumed by the foreign entity's Indian subsidiary

An Indian software firm signs a master services agreement with a Delaware parent. The deliverable — say, a custom CRM build — is used by the Delaware parent's Indian subsidiary. The Indian subsidiary's employees access the software, log tickets, request changes.

Section 13(2) of the IGST Act treats the place of supply as the location of the recipient for most services. Section 13(8) creates specific carve-outs. But the substance test still applies — who is the actual recipient of the service?

If the engagement is with the Delaware parent but the service is performed for the Indian subsidiary, the place of supply analysis flips. The audit team will examine the access logs, the user accounts, the ticket history. If 90% of the consumption sits in India, they will argue the recipient is the Indian subsidiary.

Solution: either structure the contract directly with the Indian subsidiary (charging GST domestically and letting them claim ITC), or genuinely route the consumption through the Delaware parent's systems before the Indian subsidiary uses the output.

Fact pattern 3: intermediary services

Section 13(8)(b) of the IGST Act treats the place of supply for intermediary services as the location of the supplier — that is, India. Even if the foreign principal is abroad and the foreign customer is abroad.

What is an intermediary? Section 2(13) defines it as a broker, agent or any other person who arranges or facilitates the supply of goods or services between two or more persons but does not include a person supplying such goods or services on his own account.

Indian sales-and-marketing arms of foreign principals get caught here regularly. The team in Bangalore introduces the foreign principal to Indian customers, helps negotiate, supports the closing. The commission is paid by the foreign principal to the Indian entity. The Indian entity treats it as export.

Audit position: intermediary service. Place of supply is India. IGST applies on the commission. The Match Holdings case and a series of AAR rulings have hardened this position.

Solution: structure as principal-to-principal if commercially possible (Indian entity buys from foreign principal and sells to Indian customer, taking the margin); or accept the GST cost and price accordingly.

Fact pattern 4: advance received vs services billed crossing the financial year boundary

Less famous than the others but a frequent audit hit. Section 13 of the CGST Act sets the time of supply. For an export, the time of supply triggers GST liability — and the zero-rating depends on whether the conditions of Section 2(6) are met as at that time.

An advance is received in March 2025. The service is performed and invoiced in May 2025. The FIRC for the advance comes through in March; the invoice is dated in May. If the LUT was filed for FY 2024-25 but lapsed before being renewed for FY 2025-26, the advance falls under the LUT but the supply spans both years. The auditor will treat the May portion as a non-LUT supply and demand IGST.

Solution: file the LUT renewal in March, before the year ends. Cost: zero. Audit risk reduction: meaningful.

Fact pattern 5: payment in INR from a foreign credit card

A foreign customer pays the Indian SaaS company's invoice using a Stripe or PayPal merchant account. The settlement to the Indian company arrives in INR after Stripe's currency conversion.

Section 2(6)(iv) requires payment in convertible foreign exchange. The RBI has clarified that where the payment is received in INR through normalised channels (e.g., from a Vostro account of a foreign bank, or through payment gateways that convert FX abroad), the foreign-exchange condition is satisfied.

Solution: get the Stripe/PayPal contract documenting that the conversion happens before INR settlement. Get the bank's FIRC showing the inward remittance was originally in foreign currency.

What we do at engagement

Three things, every time. First, audit the past two financial years' export invoices against the five Section 2(6) tests, fact pattern by fact pattern. Build a remediation list ranked by exposure. Second, file the LUT for the current and forthcoming year proactively. Third, instal a 12-month reconciliation discipline: for every export invoice, match the FIRC, the bank statement entry and the GSTR-1 disclosure.

Place of supply is the single largest source of avoidable GST exposure for export-led services firms. The contracts that look cleanest on paper are often the ones that fail the fact-pattern test under audit.

The export industry assumes zero-rating is automatic. Section 13 of the IGST Act says it is not. Read the section, run your invoices against it, fix what does not pass before the auditor finds it.