ITC is required to be reverse in case of export of Goods outside India on FOC basis.

[Anand Lobo]

Whether input tax credit (ITC) reversal is required under GST laws in case goods are exported free of cost (FOC) without any consideration by Indian Company.

[Sadanand Bulbule]

Where goods are exported free of cost to a related person or a distinct person outside India, the transaction is deemed to be a supply under Schedule I. Being an export, it qualifies as a zero-rated supply, and therefore no reversal of input tax credit is required.

Conversely, where goods are exported free of cost to an unrelated person and the transaction does not fall within Schedule I, it does not constitute a supply. Such disposal is akin to free samples or gifts covered under Section 17(5)(h), and accordingly ITC attributable to such goods must be reversed.

In this context, double check the facts and take a final call accordingly.

[Abhijeet Mane]

Dear Sir,

Thank you very much — this is really helpful. In the case of goods exported on an FOC (Free of Cost) basis to a related party, I understand that ITC reversal is not required since it qualifies as a zero-rated supply. However, as per Section 15 read with Rule 28, we are also required to assign an ‘open market value’ to such exports. What is your view on this?”

[YAGAY and SUN]

Under the Central Goods and Services Tax Act, 2017 (“CGST Act”), input tax credit is admissible in respect of inputs, input services and capital goods used or intended to be used in the course or furtherance of business in terms of Section 16. Export of goods, even where supplied free of cost (FOC) without consideration, qualifies as “export of goods” under Section 2(5) of the Integrated Goods and Services Tax Act, 2017 and constitutes a “zero-rated supply” under Section 16 thereof, provided the goods are taken out of India to a place outside India. Zero-rated supplies are not treated as exempt supplies for the purposes of Section 17(2) of the CGST Act; accordingly, ITC attributable to such exports is not liable to reversal merely on the ground that no consideration is received, subject to the transaction qualifying as a supply in the course or furtherance of business and not falling within Schedule I without satisfying export conditions.

From a compliance standpoint, the exporter must undertake such FOC exports either under bond or Letter of Undertaking (LUT) without payment of integrated tax, or on payment of IGST with subsequent refund claim, in accordance with Section 16(3) of the IGST Act read with Rule 96A of the CGST Rules. Proper documentation including tax invoice (notwithstanding zero consideration, declaring assessable value as per valuation provisions), shipping bill, bill of lading/airway bill, export general manifest, and reflection in GSTR-1 and GSTR-3B is imperative. Valuation shall be determined in terms of Section 15 of the CGST Act read with the applicable valuation rules to substantiate zero-rated status and to obviate any dispute regarding wrongful availment or reversal of ITC.

Check your facts meticulously before indulging in such activities.

[Sadanand Bulbule]

Plz refer the following:

DHL Express (India) Private Limited Vs Union of India & Ors. (Delhi High Court) - 2026 (3) TMI 74 - DELHI HIGH COURT

[Sadanand Bulbule]

Plz refer Discussion ID No. 117281 dated 15/06/2021. The exact query has been well settled by the experts.

[KASTURI SETHI]

Reversal is required.

[Shilpi Jain]

Need further facts. Why is it sent FOC? In some cases ITC is eligible. So full facts will help for better answers.

AI Summary

Zero-rated supply: FOC exports to related parties do not require ITC reversal; unrelated disposals may require reversal.
FOC exports taken out of India qualify as zero-rated when they constitute a supply; transfers to related or distinct persons fall under Schedule I and therefore attract zero-rated treatment with no ITC reversal, subject to compliance. FOC disposals to unrelated persons that do not amount to a supply are treated as non-supply gifts or samples and require reversal of attributable ITC. Exporters must follow bond/LUT or IGST payment/refund routes, maintain export documentation, and apply valuation/open market value rules to support zero-rated status.