Exporting comes with a quiet assumption baked into it: the customer abroad will eventually pay. Most of the time they do. But sometimes a buyer goes silent, runs into trouble, or simply turns insolvent — and the money never comes home.
When that happens, most exporters think of it as a commercial loss and move on. The catch is that Indian law doesn’t see it that way. Once your foreign payment fails to arrive, two separate rulebooks — GST and FEMA — start ticking, and both can turn an unpaid invoice into a real tax and penalty exposure.
Here’s what actually happens, and what you can do about it.
First, a simple example
Say you run a business that exported under a Letter of Undertaking (LUT), meaning you didn’t pay any IGST upfront:
- Services worth ₹10 lakh to a UK client, and
- Goods worth ₹20 lakh to a US client.
Both customers turn bad and neither pays. We’ll use this through the article. The first thing to understand is that goods and services are treated very differently — so let’s take them one at a time.
The GST angle
Services: the export can quietly ‘un-export’ itself
Under GST, a service only counts as an “export” if a set of conditions is met — and one of them is that you actually receive payment in foreign currency. No foreign currency, no export.
So if your UK client never pays within one year of the invoice date, that ₹10 lakh stops being a zero-rated export. It becomes a normal taxable supply, and you now owe IGST on it — plus interest at 18% per year. At an 18% rate, that’s roughly ₹1.8 lakh of IGST, and the interest clock keeps running until you pay.
In short: an unpaid service export can convert into a tax bill you have to settle out of your own pocket.
Goods: the export stays valid, but your refund is at risk
Goods are different. For goods, an “export” simply means the goods physically left India. Whether or not the customer pays doesn’t change that — so no fresh IGST becomes due on your ₹20 lakh shipment.
The risk here is the refund. Exporters under LUT usually claim back the input tax credit (the GST paid on purchases) as a refund. If you’ve already received that refund and the sale proceeds don’t come in within the time FEMA allows, the GST law lets the department recover that refund back from you, with 18% interest.
The amount clawed back is the refund you actually received on those goods — not a percentage of the ₹20 lakh. Two bits of good news: if your bank or RBI formally writes off the unrealised amount on genuine grounds, the refund is safe; and if the money eventually does arrive, you can claim the deposited refund back.
The hard truth: GST has no ‘bad debt’ relief
Income tax lets you write off a bad debt and reduce your taxable income. GST has no such mechanism. You cannot reduce your GST, claim it back, or issue a credit note simply because a customer didn’t pay. Once the tax becomes due, it stays due — regardless of what you write off in your books.
Goods vs services, at a glance
What happens | Service export (unpaid) | Goods export (unpaid) |
Is it still an ‘export’? | No — loses export status without payment | Yes — goods left India |
Fresh IGST payable? | Yes, on the invoice value | No |
Refund at risk? | Not the main issue | Yes — refund can be recovered |
Interest | 18% per year | 18% per year (on refund) |
Time trigger | 1 year from invoice | FEMA realisation window |
The FEMA angle
GST is only half the story. Under FEMA — the law that governs foreign exchange — every exporter has a duty to actually bring the export money into India. This isn’t optional, and it applies to goods, software and services alike.
You now have 15 months, not 9
There’s a recent and helpful change here. Until late 2025, export proceeds had to be realised within 9 months. With effect from the RBI amendment of 13 November 2025, that window has been extended to 15 months from the date of export, and it now applies uniformly to all exporters. Your bank (the Authorised Dealer) can also grant a further extension in genuine cases.
What happens if you miss the deadline
If the money still doesn’t come in — and you haven’t got an extension or a formal write-off — the non-realisation becomes a contravention under FEMA. The consequences can include:
- A penalty of up to three times the unrealised amount (so for ₹30 lakh, the theoretical ceiling is large — though the actual amount is decided by an adjudicating officer and can usually be settled).
- An additional ₹5,000 per day for as long as the contravention continues.
- Being placed on the RBI’s ‘caution list’, which makes future exports and export credit much harder to arrange.
The important word above is “up to.” These are maximum figures, not automatic bills. FEMA also allows you to ‘compound’ (settle) the matter by paying a fee, which most genuine cases do.
So what should you actually do?
A bad debt abroad is not the end of the world — but it does need active handling rather than silence. The single most valuable thing you can do is act early and create a paper trail. Here’s a practical sequence:
- Keep evidence of your follow-up. Emails, reminders, legal notices — anything showing you genuinely tried to collect. This is what your bank and RBI will want to see.
- Apply for an extension through your bank. If payment is merely delayed, ask your Authorised Dealer bank for more time before the window closes.
- Apply for a write-off if recovery is truly impossible. Banks can write off limited amounts on their own (and exporters a small portion themselves), especially with proof of buyer insolvency or an insurance/ECGC claim.
- Plan for the GST hit. Don’t be caught off guard — budget for the IGST on unpaid service exports and any refund that may be recovered, so it doesn’t surprise you at year-end.
- Consider export credit insurance going forward. Cover from ECGC or a private insurer turns a future bad debt into a claim rather than a crisis.
The one-line takeaway
An unpaid export invoice isn’t just a commercial loss — it can trigger GST and FEMA consequences with interest and penalties. The exporters who come out fine are the ones who act early, document their efforts, and use the extension and write-off routes the law already provides.
Need help with a bad export debt?
Every situation turns on its own facts — the dates on your invoices, whether a refund was claimed, the GST rate on your service, and how close you are to the FEMA deadline. If you’re dealing with an overseas customer who hasn’t paid, talk to us before the time limits run out. Getting the extension or write-off paperwork in early is often the difference between a clean resolution and an avoidable penalty.
