GST reverse charge on foreign software bills: when the input credit is available

Almost every company now pays a foreign vendor for something: a design tool, a cloud server, a code repository, an online course platform, an advertising account. Most of these bills carry no Indian GST, and many finance teams are unsure whether they owe tax on them and whether they can take it back. The short answer on reverse charge on foreign software is: yes you owe it, yes you can usually take the credit, but only if the paperwork and the payment are done in the right order.

Reverse charge on foreign software: import of services

When a business in India buys a service from a supplier outside India, it is an import of services. Under section 5(3) of the IGST Act and the reverse charge notification (Notification 10/2017-Integrated Tax (Rate)), the Indian business that receives the service pays the IGST itself.

That includes most software subscriptions and cloud services sold online. These are OIDAR services (online information database access and retrieval) under GST. A foreign OIDAR supplier collects GST itself only when it sells to an unregistered buyer in India, such as an individual. When it sells to a registered business, the business pays under reverse charge.

Import of services ITC: the conditions

Import of services ITC is available under section 16 of the CGST Act like any other credit, subject to the usual limits:

• The company must be the recipient. The contract, the account and the invoice should be in the company's legal name.
• The service must be used for business, and not for exempt supplies (section 17(2)) or for something on the blocked list (section 17(5)).
• The tax must actually be paid. This is where most mistakes happen.

Section 17(5) blocks credit on things like food and beverages, club memberships and goods or services for personal consumption, among others. Business software is not on that list, but an online subscription bought for an employee's personal use would be. We discussed how the blocked list catches canteen costs in the meal perquisite post.

Pay first, in cash

Reverse charge tax cannot be paid out of the electronic credit ledger. The credit ledger pays only "output tax", and output tax, as defined in section 2(82), excludes tax payable under reverse charge. So:

1. The reverse charge IGST is paid in cash, through the electronic cash ledger, in the return for the month.
2. The same tax is claimed as credit in the same return.

The net cash effect over a month is nil for a fully taxable business, but only if both steps happen. Many companies pay the reverse charge and forget to claim it, or claim it without paying it.

Self invoice under reverse charge

A foreign vendor's invoice is not a GST invoice. The document on which the credit is taken is the company's own self invoice under reverse charge, required by section 31(3)(f) of the CGST Act and recognised for credit by rule 36(1)(b).

From 1 November 2024, rule 47A requires the self-invoice to be issued within 30 days of receiving the supply. CBIC Circular 211/5/2024-GST of 26 June 2024 clarified that the time limit for claiming the credit runs from the financial year in which the self-invoice is issued, with interest payable if it is issued late.

GSTR-3B Table 4(A)(2) and the liability side

In GSTR-3B, the two halves go in different tables:

• The tax payable on inward supplies under reverse charge goes in Table 3.1(d).
• The credit on import of services goes in GSTR-3B Table 4(A)(2). Other reverse charge credits go in 4(A)(3).

If your accountant reports import-of-services credit in 4(A)(5) as "all other ITC", the numbers will not match what the system expects, and you may receive a mismatch notice later.

A worked example

A Pune engineering firm buys an annual licence for a simulation tool from a US vendor for US $2,400. At an exchange rate of ₹85, the value is ₹2,04,000.

The firm's cost stays at ₹2,04,000. If it skipped the self-invoice or paid the tax from the credit ledger, the credit would be at risk and the cost would rise by ₹36,720.

Use the exchange rate the GST valuation rules require, and keep the bank advice with the self-invoice. The income-tax question, whether tax has to be withheld on the payment abroad, is separate and is one for your CA.

When a foreign bill gives no credit

The case we see most often in expense claims: an employee buys a $20-a-month tool on a personal card, in a personal account, and claims it back. The vendor treats the employee as a consumer and charges GST at checkout. The invoice is in the employee's name. The company is not the recipient, there is no reverse charge, and there is no input credit for the company. The GST is simply part of the cost.

Three habits fix this:

1. Buy subscriptions on a company account, in the company's name, ideally on a company card.
2. Ask the vendor to record your GSTIN, so it treats the sale as business-to-business.
3. In expense claims, test whether the bill is in the company's name, not whether a GSTIN is printed. Foreign invoices often carry no GSTIN at all, even when they are properly addressed to the company.

A monthly routine for finance

1. List every foreign bill received in the month, from the bank statement as well as from claims.
2. Issue self-invoices within 30 days.
3. Pay the reverse charge IGST in cash in GSTR-3B.
4. Claim the credit in Table 4(A)(2) in the same return.
5. Exclude blocked or personal-use items.
6. Keep vendor invoice, self-invoice and payment proof together.

The same discipline helps at audit time for software and IT assets generally; see tracking bulk IT accessories for the asset side.

In Vatsin Expense, a claim line marked as reverse charge goes to the input credit register with the note that the credit is eligible only after the company pays the tax in cash and issues a self-invoice within 30 days. The filing itself stays with your accountant.