How Does GST Affect Foreign Payments?
In India, the implementation of the Goods and Services Tax (GST) in July 2017 marked a significant shift in the country's tax regime. While its impact on domestic transactions is well-documented, its implications for foreign payments are equally profound yet often overlooked.
If you have a business or provide services to foreign clients, it is important to understand how GST can affect foreign remittances.
What is Goods and Services Tax in India?
In India, the Goods and Services Tax (GST) is a crucial revenue source for the central and state governments. GST is levied on the supply of goods and services, ensuring a broad tax base. The revenue generated from GST contributes significantly to government finances, funding various developmental initiatives and public services across the country.
Goods and Services Tax (GST) is structured as follows in India:
- Central Goods and Services Tax (CGST): Levied and collected annually by the central government.
- State Goods and Services Tax (SGST): Levied and collected annually by state governments and union territories having state legislatures.
- Union Territory Goods and Services Tax (UTGST): Levied and collected by union territories without state legislatures. The tax is applicable on intra-state supplies of goods and services.
- Integrated Goods and Services Tax (IGST): Levied and collected by the central government on inter-state supplies of goods and services.
Does GST apply to foreign clients?
No, the Goods and Services Tax (GST) does not apply to a foreign client if you receive foreign remittance for your services in a foreign currency and not INR.
For example, suppose you are a freelancer with multiple foreign clients in different countries. They pay you in their native foreign currency, deposited into your Indian bank account in INR after conversion. In that case, you have no liability to pay GST on the received amount.
As per the ‘Export of Services’ head defined under Section 2 (6) of the IGST Act, 2017, the following conditions must be fulfilled for an Indian exporter/service provider not to be liable to pay GST when dealing with foreign clients.
- The supplier of the goods/services is located in India.
- The recipient of the goods/services is located outside India.
- The place of supply of the goods/services is located outside India.
- The payment for the goods/services is received by the supplier in convertible foreign exchange (foreign currency).
- The foreign client does not remit the payment for the goods/services through an Indian bank account and in INR.
However, you must request and receive a foreign remittance certificate from your bank or your digital currency platform for foreign remittance for compliance and tax purposes.
Although a foreign payment may not come with the liability to pay GST, fees related to foreign remittances may be subject to GST, depending on the nature of the service provided.
- Service Charges: If a financial institution or a service provider levies service charges for facilitating foreign remittances, such charges may be considered a taxable service under GST.
- Conversion Fees: If foreign remittances involve currency conversion services provided by banks or other financial institutions, any conversion fees charged may also attract GST.
GST Implications For Different Scenarios
1. Inward Remittances
Inward remittances refer to funds transferred or sent into a country from abroad.
No GST applies for entities in India receiving inward foreign remittances in foreign currencies.
For example, if you are a freelancer and a client has paid you $1,200, you are not liable to pay any GST on the amount. This arrangement benefits businesses and service providers as there's no additional GST burden on transactions with foreign clients.
2. Compliance Handling & Certifications (FIRC, BRC)
FIRC stands for Foreign Inward Remittance Certificate, while BRC stands for Bank Remittance Certificate. Banks in India issue both certificates to provide proof of foreign currency remittance. GST applies to compliance handling and certification services.
3. Forex Transactions
These forex transactions related to foreign currency conversion attract 18% GST on forex, called GST on currency exchange. If the forex transactions are between banks and designated authorised dealers, there is no liability to pay GST. However, the bank may charge you 18% GST as the service of conversion is still taxable.
Conclusion
While GST on international transactions generally does not apply to the inward remittance amount itself, it may impact related services such as compliance handling, certifications, and currency conversion fees.
It is important for businesses and service providers such as freelancers to deeply understand the implications of tax on currency exchange and GST on foreign payments to streamline their billing process. It also ensures compliance with tax regulations and minimises any potential financial implications for themselves and their foreign clients.
Q1. Which foreign transactions are subject to GST?
Ans: Here are the foreign transactions that are subject to GST if the payment is received in INR rather than in a foreign currency.
- Export of Services
- Export of goods under LUT/Bond or through the payment of IGST.
- Import of goods as stated under the Customs Act, 1962.
- Import of services for business or non-business purposes.
- Supply of goods before they are cleared for home consumption.
- Sale or purchase of goods without them entering into Indian borders.
- Online Information Database Access and Retrieval services (OIDAR) services for business or non-business purposes.
Q2. Can GST invoices be raised in foreign currency?
Q3. How do you calculate GST on foreign remittances?
Q4. What is the limit for foreign remittance?
