Foreign Software Subscriptions Attract GST Reverse Charge With ITC

Foreign Software Subscriptions Attract GST Reverse Charge With Matching ITC for Registered Businesses

Summary: Indian startups and SMEs increasingly pay for software subscriptions billed by foreign entities, creating GST reverse charge and input tax credit compliance requirements. For a GST-registered recipient, IGST on an import of services is payable by the recipient under reverse charge under Section 5(3) of the IGST Act read with Notification No. 10/2017-Integrated Tax (Rate). The time of supply for services under reverse charge is determined under Section 13(3) of the CGST Act, while Rule 34(2) governs conversion of the foreign currency value into rupees. Because the foreign supplier is not registered in India, the recipient issues a self-invoice, with Rule 47A prescribing a thirty-day time limit from receipt of the supply, and Section 31(3)(g) requiring a payment voucher. Reverse charge liability must be paid through the electronic cash ledger and reported in Table 3.1(d) of GSTR-3B. The corresponding input tax credit is claimed in Table 4(A)(2), subject to Section 16 and other applicable conditions. The article also explains the Section 16(4) time limit, blocked credits, personal use, annual subscriptions, employee-card payments, refunds, free trials and software obtained from foreign group companies. A worked example demonstrates the complete cycle from foreign invoice and currency conversion through RCM payment and matching ITC claim.

Introduction

A typical Indian startup or SME now pays for eight to fifteen software subscriptions billed from outside India: analytics, design, CRM, cloud hosting, email and AI tools. Almost none of these vendors issue an Indian GST invoice. In the software catalog we maintain at FindThatSoftware, 112 of the 125 tools that price in a foreign currency, about 90%, do not.

That leaves many businesses in one of two expensive positions. Some pay no reverse charge on these imports at all and carry an unrecognised liability. Others pay the reverse charge in cash every month and never claim the matching input tax credit, because the credit does not appear in GSTR-2B and nobody goes looking for it.

This article walks through the full reverse charge cycle for a foreign software subscription, from reading the invoice to claiming the credit, with a worked example. It is written for GST-registered businesses and the professionals who handle their returns.

Step 1: Check who issued the invoice

Before anything else, look at the invoice itself, not the card statement.

• If the invoice carries an Indian GSTIN (some large vendors bill Indian customers through an Indian subsidiary), this is an ordinary domestic purchase. The vendor charges GST, the invoice appears in GSTR-2B, and credit is taken the normal way. Nothing in the rest of this article applies.
• If the invoice is issued by a foreign entity with no Indian GSTIN, the supply is an import of services and the rest of this guide applies.

A practical point: the same vendor can bill differently depending on how the account was set up. An account created with a GSTIN may be billed by an Indian entity, while one created without it is billed from abroad. Check each invoice rather than assuming by brand.

Step 2: Confirm reverse charge applies

For a GST-registered recipient, IGST on an import of services is payable by the recipient under reverse charge. The charging provision is Section 5(3) of the IGST Act, read with Notification No. 10/2017-Integrated Tax (Rate), which lists services imported by a person in the taxable territory, other than a non-taxable online recipient.

Since 1 October 2023, following the amendments made by the Finance Act, 2023, a “non-taxable online recipient” means an unregistered person. The earlier carve-out based on the purpose of use is gone. The practical result is clean:

• Registered business: you pay IGST under reverse charge on foreign software.
• Unregistered buyer: the foreign vendor is supposed to register in India and charge IGST to you directly. You cannot claim it back.

This guide is about the first case.

Step 3: Work out the time of supply

The time of supply decides which month’s return carries the liability. For services under reverse charge, Section 13(3) of the CGST Act (applied to IGST through Section 20 of the IGST Act) makes it the earlier of:

1. The payment date: the date payment is entered in your books, or the date it is debited from your bank account, whichever is earlier.
2. The 60-day mark: the date immediately after sixty days from the date the supplier issued its invoice.

For a monthly subscription paid by card on the invoice date, the payment date is almost always earlier, so the liability falls in the month the card is charged. For annual plans paid upfront, the full year’s IGST arises in the month of payment, not spread across the year.

Step 4: Arrive at the taxable value in rupees

Foreign software is invoiced in dollars or euros, so the value has to be converted. Rule 34(2) of the CGST Rules provides that for services, the exchange rate is the one determined under generally accepted accounting principles on the date of the time of supply.

Two practical points:

• Use the invoice amount, not the card charge. The card charge includes the bank’s forex markup. That markup is the bank’s own supply to you, not part of the vendor’s service value.
• Apply the rate consistently. Use the rate from your accounting policy for the date of the time of supply, and record it on the self-invoice so the working can be reproduced.

Step 5: Raise the self-invoice and payment voucher

Because the foreign supplier is not registered in India, Section 31(3)(f) of the CGST Act requires the recipient to issue an invoice for the supply received. Most practitioners apply this to imports of services too, through Section 20 of the IGST Act.

From 1 November 2024, Rule 47A of the CGST Rules sets the time limit: the self-invoice must be issued within thirty days from the date of receipt of the supply.

Alongside it, Section 31(3)(g) requires a payment voucher at the time of making payment to the supplier.

The self-invoice should show, at minimum:

• the vendor’s name and address
• the service description
• the date of supply
• the value in rupees
• the exchange rate used
• the IGST at 18%
• your GSTIN, with a clear note that tax is payable on reverse charge

Number these invoices in a separate series so they are easy to trace at audit.

Step 6: Pay the IGST in cash

Reverse charge liability cannot be discharged from the electronic credit ledger. Section 49(4) allows the credit ledger to be used only for output tax, and tax payable on reverse charge is excluded from the definition of output tax. So the IGST is paid through the electronic cash ledger while filing GSTR-3B.

This is the step that makes businesses reluctant. It feels like paying 18% extra. It is not, provided Step 8 happens in the same return.

Step 7: Report it in GSTR-3B

• Liability: report the value and IGST in Table 3.1(d), “Inward supplies (liable to reverse charge)”.
• Credit: claim the same IGST in Table 4(A)(2), “Import of services”.

The portal checks these against each other. If the credit claimed in Tables 4(A)(2) and 4(A)(3) exceeds the reverse charge liability reported in 3.1(d), plus the closing balance of the RCM liability and ITC statement, it shows a warning. Reporting both in the same return keeps the two in step.

Step 8: Claim the input tax credit

Once the IGST is paid, the credit is available in the same return, subject to the usual conditions of Section 16:

• the service is used or intended to be used in the course or furtherance of business
• you hold the self-invoice
• you have received the service
• the tax has been paid

Two conditions that trip people up on normal purchases do not bite here:

• The 180-day payment rule in Rule 37 does not apply to supplies taxed under reverse charge.
• GSTR-2B does not matter. The credit does not depend on the supply appearing there. Self-invoices never do.

What does still apply:

• Time limit. The credit must be claimed within the Section 16(4) time limit: the earlier of 30 November following the end of the financial year and the date you file the annual return for that year. For supplies where the recipient issues the invoice, Circular No. 211/5/2024-GST clarifies that the relevant financial year is the one in which the self-invoice is issued. That is another reason to raise self-invoices on time rather than at year end.
• Blocked credits. Section 17(5) still applies.
• Personal use. If a subscription is used partly for personal purposes, only the business share is eligible.

Worked example

A GST-registered company pays for an analytics tool billed from the United States at $100 a month. The card is charged on 5 March, the same day as the vendor’s invoice. Assume the applicable exchange rate on that date is ₹95.60.

The only unavoidable extra is the card’s forex markup, typically around 3.5% on Indian cards, plus the GST the bank charges on the conversion. On this bill that is roughly ₹335 a month, or about 3.5% over the mid-market rupee value.

If the reverse charge were paid but the credit never claimed, the same subscription would cost about ₹11,675 a month instead of about ₹9,895. That gap, roughly 18% of every foreign software bill, is what gets left behind.

Special cases worth knowing

Subscriptions paid on an employee’s personal card

Founders and developers often sign up on a personal card and claim a reimbursement. The service is still received by the business, so the business raises the self-invoice and pays the reverse charge. Keep:

• the vendor invoice, ideally with the company’s name and GSTIN on the account
• the reimbursement record
• the self-invoice

An invoice in an individual’s name makes the business-use link harder to show, so move recurring tools to a company account.

Refunds and downgrades

If a vendor refunds part of an annual plan, the reverse charge paid on the refunded portion can be adjusted. How the adjustment is documented matters, so treat it with your CA rather than simply netting it off in the next month’s figures.

Free plans and trials

A genuinely free plan has no consideration, so there is no value to tax. Once the trial converts to a paid plan, the normal cycle starts from the first paid invoice.

Software bought from a foreign group company

Some Indian subsidiaries use tools licensed by their overseas parent. Import of services from a related person is a supply even without consideration under Schedule I. For recipients eligible for full input tax credit, Circular No. 210/4/2024-GST clarifies:

• the value declared in the invoice can be treated as the open market value
• where no invoice is issued, the value can be treated as nil

This is a narrow area, and the facts of each group arrangement matter.

Mixed business and personal use

A tool used partly for personal purposes, such as a founder’s single account used for both, is eligible only for the business share. Where that is material, keep a reasonable basis for the split.

Common mistakes

Treating the card statement as the invoice

The card statement shows the rupee debit including forex markup. It is not the vendor’s invoice and should not be the basis of the taxable value.

Missing annual plans

An annual plan paid upfront creates the full year’s liability in one month. Businesses that only look at monthly charges miss these entirely.

Assuming the vendor charged GST

Some vendors show “tax” on the invoice. Check whether it is Indian IGST with the vendor’s Indian GSTIN, or a foreign sales tax or VAT that has nothing to do with Indian GST.

Leaving credits to the annual return

Because these credits never appear in GSTR-2B, they are easy to forget until the Section 16(4) deadline has passed.

No register of foreign subscriptions

A simple list of every foreign tool, its billing cycle, invoice entity and card makes the monthly reverse charge routine rather than a year-end hunt.

Conclusion

Foreign software is now part of how almost every Indian business operates. Around nine in ten of these tools will never give you a GST invoice. That is not a gap in the law. It is how imports of services are designed to work: the recipient pays the IGST under reverse charge and takes it back as input tax credit, leaving no net cost.

The cost appears only when one half of the cycle is missed. That happens in one of two ways: no reverse charge paid, or reverse charge paid with the credit never claimed.

The process is mechanical once it is set up:

1. Read each invoice for a GSTIN.
2. Fix the time of supply.
3. Raise the self-invoice within thirty days.
4. Pay the IGST in cash.
5. Report the tax in Table 3.1(d) and the credit in Table 4(A)(2) of the same GSTR-3B.

For a startup running ten foreign tools, getting this right is worth a meaningful share of its software budget every year.

Arjit Jindal is co-founder of FindThatSoftware, which tracks the real India cost of business software, including forex and GST. Catalog figures are as of 27 September 2026. This article is general information, not advice on any specific case.