IGST place of supply change for service exports involving goods: Practical analysis of proposed Section 13 amendment

On 09 October 2026, the Government of India released a set of Frequently Asked Questions (FAQs) on reforms aimed at enhancing export competitiveness. One of the central proposals concerns a targeted amendment to the place of supply rules in Section 13 of the IGST Act, 2017, specifically impacting services that require goods to be physically made available to the supplier in India (for example, testing, repair, research and development, clinical trials, etc.).

This reform is particularly relevant for Indian service providers who work on goods belonging to foreign clients, receive consideration in foreign exchange, but are currently denied export/zero-rating benefits due to the existing place of supply rule in Section 13(3)(a). The proposed legislative change seeks to address this structural issue and align GST treatment with the economic reality of export services.

Default rule under Section 13(2)

Section 13 of the IGST Act, 2017 prescribes the place of supply of services where either the supplier or the recipient is located outside India.

Under Section 13(2), the default rule is:

  • Where the recipient is a registered person – the place of supply is the location of such recipient.
  • Where the recipient is unregistered – the place of supply is determined based on the address on record, and in the absence of such address, the location of the supplier.

In principle, if the recipient of the service is located outside India and other export conditions are satisfied, the service would qualify as an export of service and be zero-rated under the GST law.

Specific rule for services involving goods: Section 13(3)(a)

However, Section 13(3)(a) introduces a specific rule which overrides the default rule in certain cases. This clause presently provides that where:

  • The service is supplied in respect of goods that are required to be made physically available by the recipient to the supplier (or to a person acting on his behalf), and
  • Such goods are physically present in India for the provision of the service,

then the place of supply is deemed to be the location where the services are actually performed.

In effect, under the existing position:

  • Services such as testing, repair, R&D, clinical trials and similar activities carried out on goods located in India, even if these goods belong to a foreign recipient, are treated as supplies made in India, as the place of supply becomes the place of performance (i.e., India).
  • This outcome applies even where:
    • The service recipient is situated outside India; and
    • The consideration is received in convertible foreign exchange (or in such manner as permitted).

As a result, these services do not qualify as export of services under the GST law and therefore do not enjoy zero-rating, which includes:

  • Option to export without payment of IGST under bond/LUT and claim refund of input tax credit, or
  • Option to pay IGST on export and subsequently claim refund of the tax paid.

This framework has been a significant issue for sectors that primarily cater to overseas clients but perform work on goods that must be present in India as part of the service process.

Identified challenge: Impact on export competitiveness

The FAQs issued on 09 October 2026 recognize that the current application of Section 13(3)(a) has led to the following practical problems:

  • Misalignment with economic reality:
    Although the commercial arrangement is essentially that of an export of services (foreign client, foreign exchange inflow), the GST law treats the service as domestic supply merely because goods are physically in India when the service is rendered.

  • Denial of export/zero-rating benefits:
    affected services cannot be treated as exports under GST, leading to:

    • Inability to supply without payment of IGST as an export;
    • No refund of unutilized input tax credit attributable to such supplies;
    • Possible cost build-up in the hands of the service provider, which may need to be factored into pricing.

  • Reduced global price competitiveness:
    Since input taxes get embedded in the cost, Indian service providers may find it difficult to compete with peers in other jurisdictions where such services are treated as exports and supported through tax-neutral structures.