A practical guide for Indian businesses using foreign tools, subscriptions and professional services.
Indian businesses today rely heavily on foreign service providers. Software subscriptions, advertising tools, cloud hosting, design platforms, and specialised consulting are often purchased from companies outside India. These payments qualify as import of services under GST, which means the recipient in India is responsible for paying GST under the reverse charge mechanism (RCM).
Many businesses pay for foreign subscriptions on autopilot without realising that GST liability applies. Others know about RCM but do not know how to claim input tax credit (ITC) for the tax they pay. If handled correctly, GST paid on imported services does not become a cost. It can usually be offset against the business’s output GST liability.
This guide explains how GST applies to imported services, how reverse charge works, how to claim input tax credit and how to maintain documentation for audit proof compliance.
When Foreign Services Become Taxable Under GST
A service is treated as an imported service when three conditions are met:
- The supplier is located outside India.
- The recipient is located in India.
- The place of supply is in India.
Most cross border digital services satisfy these conditions. Examples include:
- Cloud hosting such as AWS or Google Cloud
- SaaS tools such as design, CRM and analytics platforms
- Advertising services
- Foreign consultants, designers or developers
- Licensing fees and royalty based tools
Once these conditions are met, the recipient in India must pay GST through reverse charge.
How GST Is Paid Under the Reverse Charge Mechanism (RCM)
Under reverse charge, the liability to pay GST shifts from the supplier to the recipient. Since the foreign service provider is outside India and not registered under GST, the Indian business must discharge the GST on its own.
The process is:
- Calculate GST on the invoice value.
- Pay the GST in cash through reverse charge.
- Report the liability in the GST return.
- Claim input tax credit in the same return if eligible.
RCM ensures that the tax regime remains complete even when the supplier is outside India.
When Input Tax Credit (ITC) Is Allowed for Imported Services
Most imported services used for business purposes qualify for Input Tax Credit. Input credit is allowed when:
- The service is used for business operations.
- The GST under RCM is paid in cash.
- The recipient possesses supporting documentation.
- The inward supply is not blocked under Section 17.
- The service is not used for exempt supplies.
For example, a digital marketing agency purchasing design tools or analytics software can claim full input credit because these tools help deliver taxable services.
Documents Required for Claiming ITC on Imported Services
For audit and compliance, businesses must maintain:
- The foreign supplier’s invoice.
- Proof of payment such as bank statement or card statement.
- Self generated invoice or payment voucher for RCM.
- GST challan showing RCM tax payment.
- Accounting entries linking the service and the RCM tax.
These documents establish that the service was imported and that GST was correctly discharged.
How to Record RCM and Claim Input Tax Credit in GST Returns
The process is straightforward when followed step by step:
Step 1: Create a self invoice or payment voucher. Since the foreign supplier cannot issue a GST compliant invoice, the Indian business creates its own. This establishes the taxable value for RCM purposes.
Step 2: Calculate GST on the taxable value. For most services, 18 percent GST applies. If the service falls under a different tax rate, that rate must be used.
Step 3: Pay the GST through cash ledger. GST under reverse charge cannot be set off using input tax credit. You must pay it in cash through the electronic cash ledger.
Step 4: Report RCM liability in GSTR 3B. The liability is reported under inward supplies liable to reverse charge.
Step 5: Claim input tax credit. Once the RCM tax is paid, input tax credit becomes available and can be used to offset output GST liability.
This cycle ensures that while you pay tax initially, the credit restores neutrality.
Common Mistakes Businesses Make
- Treating foreign SaaS invoices as tax free.
- Not paying RCM for annual subscriptions charged in foreign currency.
- Claiming ITC without actually paying the RCM liability.
- Missing documentation for invoices paid through saved cards.
- Assuming that personal or mixed use services qualify for ITC.
- Waiting too long to claim ITC, causing timing mismatches during audits.
Proper record keeping avoids these issues.
How Imported Service ITC Interacts with Export Businesses
Exporters often pay GST under RCM for foreign tools and services needed for operations. Because exports are zero rated, businesses frequently end up with accumulated input credit. This can be:
- Set off against domestic GST liability
- Carried forward
- Claimed as refund if exporter conditions are met
For service exporters, inward remittance documentation and proper reconciliation help establish that the foreign service was indeed used for taxable business operations.
How India Focused Platforms Help Maintain a Clean Audit Trail
While platforms do not manage GST directly, clarity in banking documentation helps businesses reconcile imported services with tax records. Clean inward remittance and payout trails support GST filings and refund applications by creating consistent documentation across financial statements.
Final Thoughts
Imported services paid to foreign suppliers are taxable under GST through the reverse charge mechanism. The GST you pay does not have to become a cost, because input tax credit is usually available when the service is used for business purposes. The key lies in maintaining clean documentation, paying RCM correctly and claiming ITC in the proper return cycle.
With structured records and clear reconciliation, imported services become both compliant and tax neutral.
India focused platforms like BRISKPE streamline the onboarding experience by aligning documentation with RBI rules. This makes setup simpler and ensures that every inflow supports the exporter’s compliance trail right from the first transaction.
