A nuanced issue arises when one examines the concept of “supply” under Section 7 of the CGST Act, 2017. The provision defines supply to include transactions made for a consideration in the course or furtherance of business. 

The term “consideration,” as defined under Section 2(31) of the CGST Act, assumes significance here—it includes any payment made or to be made, whether in money or otherwise, in respect of a supply. The inclusion of the words “paid or payable” makes it clear that taxability does not depend upon actual receipt, but on the existence of an enforceable obligation to pay.

In domestic transactions, this principle operates unequivocally. 

The liability to pay GST arises in case of domestic supplies  once the consideration becomes due, irrespective of whether it is actually received. Even if the recipient defaults, the transaction of supply  continues to qualify as a taxable supply. The law, therefore, taxes the transaction of supply itself and not the realization of money. The mere existence of a legally enforceable right to receive consideration is sufficient to trigger GST.

However, export transactions are treated distinctly under the GST framework. 

The definition of “export of goods” under Section 2(5) of the IGST Act, 2017 refers to taking goods out of India to a place outside India. This definition is purely movement-based and does not hinge upon realization of consideration.

 Similarly, “export of services” under Section 2(6) of the IGST Act requires satisfaction of multiple conditions, one of which is receipt of payment in convertible foreign exchange (or in Indian rupees where permitted by the RBI). 

Thus, while goods exports are complete upon physical movement, service exports are intrinsically linked to realization.

Exports are treated as zero-rated supplies under Section 16 of the IGST Act. 

This special status flows from the nature of the transaction and not from the receipt of consideration. Even where export proceeds are not realized, the goods have already moved outside India, and there is no statutory provision deeming such exports as domestic taxable supplies. The character of export of goods, therefore, remains intact irrespective of realization.

The zero-rated mechanism operates through two routes—either export on payment of IGST followed by refund, or export under a LUT/bond without payment of tax followed by refund of unutilized input tax credit. Both routes are conceptually aligned, as they seek to neutralize the tax burden on exports by granting refund of taxes already suffered.

In the case of export of services, refund of input tax credit under Rule 89(4) of the CGST Rules, 2017 is linked to the realization of foreign exchange. The formula itself ensures that only realized turnover is considered for refund, thereby restricting benefits to the extent of actual inflow.

The distinction becomes sharper when one examines the consequences of non-realization of export proceeds. 

Rule 96A of the CGST Rules, 2017 governs exports made under LUT/bond. In the case of export of services, if the proceeds are not realized within one year (or such extended period as may be permitted), the exporter is required to pay IGST along with interest. This liability arises due to the specific condition embedded in the LUT/bond. Thus, upon non-realization of foreign exchange, IGST becomes payable in case of services.

In contrast, for export of goods, Rule 96B of the CGST Rules, 2017 provides for recovery of refund where sale proceeds are not realized within the prescribed period. Notably, there is no provision requiring payment of IGST merely on account of non-realization. The law only contemplates withdrawal of benefits already granted.

Therefore, upon non-realization of export proceeds, no IGST is payable in the case of goods exported; instead, the refund availed is liable to be recovered.

A combined reading of the statutory provisions reveals a clear conceptual distinction. 

In domestic supplies, taxability arises from consideration being payable, even if not received.

 In export of goods, the transaction is complete upon movement outside India and remains an export irrespective of realization. In export of services, however, realization of foreign exchange is a defining condition, and failure to satisfy it triggers consequences under the LUT/bond framework.

The GST law, therefore, does not convert exports into taxable domestic supplies merely due to non-realization. Instead, it adopts different mechanisms—imposition of IGST liability in the case of services due to breach of LUT/bond conditions, and recovery of refunds in the case of goods. 

In essence, non-realization of foreign exchange leads either to enforcement of LUT/ bond conditions to pay IGST in case of service exports or withdrawal of benefits of refunds  for failure to receive foreign exchange on goods exported.

Read More: MCA Proposes Sweeping Post-Tenure Ban on Non-Audit Services