Understanding the Interplay Between Export Incentives and GST

Export incentives in the form of duty-credit scrips (MEIS/SEIS) and GST input tax credits create a complex but beneficial framework for exporters. This guide explains how these mechanisms work together and how to optimize their benefits while maintaining compliance.

1
Export Goods/Services
↓
2
Claim MEIS/SEIS Scrips (2-7% of FOB value)
↓
3
Use scrips to pay customs duties or sell to others
↓
4
Reverse proportionate ITC on scrip transactions

1. Export Incentives Under Foreign Trade Policy

1.1 MEIS/SEIS Duty-Credit Scrips

Duty Credit Scrips (DCS) are financial instruments granted to exporters as a percentage of the FOB value of exports:

  • MEIS (Merchandise Exports from India Scheme): 2% to 7% of FOB value for specified goods
  • SEIS (Service Exports from India Scheme): 3% to 5% of net foreign exchange earned

1.2 GST Zero-Rated Exports & ITC

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

  • Option 1: Export with payment of IGST and claim refund
  • Option 2: Export without payment under bond/LUT and claim ITC refund
A
Purchase Inputs (Pay GST)
↓
B
Claim Full ITC in GSTR-3B
↓
C
Export Goods/Services (Zero-rated)
↓
D
File Refund (RFD-01) for IGST or Unutilized ITC

2. Combining MEIS/SEIS with GST Input Tax Credit

2.1 Stacking Benefits

While you can claim both ITC and MEIS/SEIS benefits, there are important restrictions:

  • No double benefit on the same tax element
  • ITC must be reversed for exempt supplies (scrip transactions)
  • Section 17(2) of CGST Act mandates proportionate reversal

2.2 ITC Reversal Mechanism

When you sell or use duty-credit scrips:

  1. Calculate total ITC claimed on inputs/services
  2. Determine proportion attributable to exempt supplies
  3. Reverse this amount in GSTR-3B under "Other reversals"
X
Sell/Use MEIS/SEIS Scrip
↓
Y
Calculate ITC attributable to exempt supply
↓
Z
Reverse ITC in current month's GSTR-3B
↓
ZZ
Disclose in GSTR-9 (Annual Return)

3. Impact on Cost of Goods Sold (COGS)

3.1 Accounting Treatment

Export incentives can be recognized in two ways:

Method Journal Entry Financial Impact
Other Income Dr. Scrips Receivable
Cr. Other Income		 Increases operating income
COGS Reduction Dr. COGS
Cr. Scrips Receivable		 Improves gross margin

3.2 Practical Example

Consider an exporter with ₹10 lakhs FOB value shipment:

  • MEIS scrip @ 5% = ₹50,000
  • ITC claimed on inputs = ₹1,20,000
  • ITC to reverse on scrip sale = ₹6,000 (5% of total ITC)

4. GST Compliance Requirements

4.1 Reporting in Returns

  • GSTR-1: Export invoices in Table 6A
  • GSTR-3B: ITC reversal under "Other reversals"
  • GSTR-9: Scrip transactions in exempt supplies

4.2 Refund Process

  1. File shipping bill/export report
  2. Submit refund application (RFD-01)
  3. Provide supporting documents
  4. Receive refund within 60 days

Key Takeaways

  • MEIS/SEIS scrips and GST ITC can be combined but with ITC reversal on scrip transactions
  • Exports must be properly reported in GSTR-1 Table 6A
  • Choose accounting method (other income vs COGS reduction) based on financial reporting objectives
  • Maintain detailed documentation for refund claims and potential audits

Use our free online invoice generator to create customized invoices with your preferred payment terms in minutes.