Reverse Charge and Input Tax Credit on Software Bought from Foreign Vendors
This article sets out how GST applies to software subscriptions billed by foreign entities to GST-registered Indian businesses, covering liability under reverse charge, valuation, self-invoicing, payment, return reporting and the claim of input tax credit.
Many foreign vendors issue no Indian GST invoice. Businesses commonly either pay no reverse charge or pay it and never claim the matching credit. The first creates a liability that surfaces on audit, and the second creates a cost that should not exist.
Which invoice are you looking at
Where the invoice shows an Indian GSTIN, as when the vendor bills through its Indian subsidiary, the transaction is a domestic purchase like any other: GST is charged by the vendor, GSTR-2B reflects the invoice, and credit follows in the usual way. Which entity bills can vary with how the account was opened, which is why every invoice needs a look.
An invoice from a foreign entity that has no Indian GSTIN signals an import of services, and that is the case the remaining sections address. A card statement is not an invoice, and any "tax" shown on the vendor's invoice may be foreign VAT or sales tax and not Indian IGST.
Liability falls on the recipient
Where the recipient is registered, the recipient and not the vendor must pay the IGST on an imported service, by way of reverse charge. The source of the rule is Notification No. 10/2017-Integrated Tax (Rate), issued under Section 5(3) of the IGST Act. Its coverage extends to any person in the taxable territory who imports a service, except a non-taxable online recipient.
The Finance Act, 2023 amended the definition with effect from 1 October 2023. A non-taxable online recipient is now simply an unregistered person, and the older test based on the purpose of use has gone. An unregistered buyer is outside reverse charge: the foreign vendor is expected to register and charge IGST, and no credit arises for the buyer.