GST on Export Freight: What SMEs Should Know

Small and Medium Enterprises (SMEs) that sell and export goods must have a good understanding of their obligations under the Goods and Services Tax (GST) regarding export freight to meet compliance obligations. Freight costs are the expenses incurred to move goods intended for export from India to their final international destination by air, sea, and land.  Since tax obligations are complicated and GST rules and regulations are continually changing, it is essential for SMEs to fully understand their obligations in terms of export freight GST rates, documentation requirements, Input Tax Credit (ITC) eligibility, and obligations to comply overall.

GST Applicability on Export Freight Services

The treatment of GST on export freight is highly dependent on the mode of transport and stage of the supply chain, and this directly affects the GST export freight impact for SMEs.

• Zero-Rated Export Freight: Export freight costs associated with the movement of goods from India are zero-rated under the GST, so that an exporter can claim a refund of the GST paid.
• IGST on Inland Freight: The inland transport of goods, part of the overall supply chain before the movement of goods outside of India, is considered interstate supply. It attracts IGST or CGST + SGST if intrastate and is therefore a key IGST on export freight considerations.
• Export Air Freight: Export freight services provided by an air carrier from an Indian customs location to a location outside of India are subject to GST at 18%.
• Export Ocean Freight: Export ocean freight was previously exempt, but is now being charged a tax of 5% under the reverse charge mechanism, to be paid by the importer (subject to further policy updates).

Export Freight GST Rates and Their Impact on SMEs

The export freight GST rates are an important factor to consider when developing the cost structure for SMEs involved in international shipping. Export freight services typically include both domestic and international logistics activities, which are subject to different GST treatments. There are a number of characteristics of the framework of GST relevant to export freight, such as:

• Zero GST on Export Freight: Freight services that are directly associated with the movement of goods outside India are treated as zero-rated supplies. In the case of export freight, SMEs will not have to pay GST. This will enable lower costs for export and free up cash flow.
• GST on Domestic Freight Services: Inland transport to the customs point attracts GST at rates of either 5% or 18%. This depends on the service provider and whether the service is taxed under the forward charge or the reverse charge mechanism. SMEs can receive input tax credit (ITC) on these GST payments, facilitating recovery of costs and improved cash flow.
• 18% GST on Export Air Freight: Export air freight attracts 18% GST at the origin in India, whereas ocean freight for exports from India is not subject to GST. SMEs will need to include this type of tax when considering costs as well as making ITC claims.
• 5% IGST on Export Ocean Freight via Reverse Charge: In October 2025, ocean freight imports will be impacted by a 5% IGST reverse charge that the importer is required to remit. Exporters are indirectly impacted by this change, given their multi-supplier supply chains. SMEs need to continue monitoring this compliance issue.

GST Documentation for Export Freight: Ensuring Compliance

Thorough documentation is crucial to comply with GST export freight documentation standards and claim tax benefits. Key documents include:

• Invoices: Must comply and include suppliers’ and recipients’ GSTIN, invoice number, and tax rate. Be sure to clarify freight services, including the HSN/SAC codes.
• Shipping Bill and Bill of Lading: These are the government-recorded customs documentation that show goods have been shipped from India to their overseas destinations.
• Export Declarations: To ensure verification of the export shipment, as well as to support zero-rated benefits for GST on export freight.
• GST Returns (GSTR-1, GSTR-3B): Includes freight transactions to support tax authorities’ reconciliation.

Claiming Input Tax Credit on GST Paid for Export Freight

Input Tax Credit (ITC) is an essential element for SMEs to claim GST that has been paid on input services incurred during the course of business. For export freight under GST, there are different eligibility factors based on the nature of the freight service and whether GST was paid on that freight.

• Eligible ITC: SMEs can claim ITC for the GST paid on domestic freight services, i.e., the transportation of goods within India (for example, from their supplier to a port of export). The GST rate applicable on freight services would usually be between 5% under the Reverse Charge Mechanism (RCM) and 18% if the GTA (Goods Transport Agency) opts for forward charge.
• No ITC on Zero-Rated Export Freight: Freight services supplied directly in relation to goods being exported from India would be regarded as a zero-rated supply. Since there is no GST imposed on such freight service supplied for export, SMEs would not be able to claim any ITC on those freight charges.
• Refund of Unutilized ITC: Exporters (including SMEs) can use GST refund provisions to recover unutilized GST credits accumulated from zero-rated exports, including credits on eligible domestic freight, which remains a key element of the ITC claim process.
• Reverse Charge Mechanism (RCM) Implications: In the event that freight services are charged 5% GST under the RCM, the recipient of the freight services can claim input tax credits (ITC).  Small businesses need to keep track of freight invoices to maximize their ITC entitlement in accordance with the ITC claim rules.

Challenges and Solutions for SMEs Dealing with GST Export Freight

SMEs face the following challenges in managing GST on export freight with respect to obtaining proper tax treatment:

• Complex Classification: Moving freight costs between domestic taxable legs and zero-rated export legs requires a quality accounting system and trained professionals. This guarantees fidelity and avoids mistakes that block credit and lead to penalties.
• Heavy Documentation: Documenting and keeping detailed records, like GST invoices, customs export documentation, and contracts, is mandatory, but can consume resources, especially with respect to GST export freight documentation.
• Compliance with Frequent Changes: Small businesses should be informed of any changes to GST legislation to protect against compliance risks.
• Impacts to Cashflow: Refund delays compared to a tax process, such as the processing of reverse charge GST payments, may affect working capital.
• Technology and Advice: Leveraging technology for tax automation and timely expert advice can ease GST compliance.

Streamlining Export Freight GST with Expert Guidance

Exporters often find it challenging to comply with GST regulations related to export freight. The GST on export freight duties, especially if SMEs are aiming to be competitive in the global marketplace while ensuring compliance with GST duties, is particularly burdensome. With prudent treatment of GST, good supporting documentation, and deliberate claims for ITCs, SMEs can drive down the cost of export freight while improving working capital. Credlix provides SMEs with custom-designed solutions on GST and trade finance, using technology and expertise to simplify compliance and create cash flow benefits.

Boost the efficiency of your export freight finance today. Reach out to work with Credlix today for specialized trade and export solutions in GST compliance for SMEs!

Frequently Asked Questions

Q1: Can SMEs receive ITC on GST paid for export freight?

Yes, SMEs can obtain ITC on GST paid for domestic freight before export, but they cannot claim ITC on export freight zero-rated.

Q2: What are the required documents for compliance with GST used on export freight?

Key documents include GST invoices, export documents, shipper contracts, export declarations, and customs documents.

Q3: What is the impact of GST on cash flow for SMEs dealing with export freight?

Even though export freight is zero-rated, cash flow management is affected by GST on domestic freight and the time for refund processing, directly contributing to the GST export freight impact on SMEs.