This article discusses the GST implications for freelancers providing services to their Indian or foreign clients through various platforms like Upwork, Fiverr, Freelancer.com, PeoplePerHour, Remote.co, Uplers, Flexjobs, etc. In this type of supply, three parties are involved: (1) the freelancer, (2) the platform, and (3) the client/customer. If freelancers provide services from India, they are bound by the GST law, whereas foreign clients receiving services from outside India are not subject to the GST law. Similarly, platforms that do not have a physical presence in India or are not liable for GST registration are also not bound by the GST law.
GST law applies only if the freelancer is registered under GST. Unregistered freelancers are not required to follow the provisions of the GST law.
Every person providing services must obtain GST registration if their aggregate turnover exceeds Rs. 20 lakhs in a financial year (Rs. 10 lakhs for special category states – Mizoram, Tripura, Manipur, and Nagaland).
Freelancers fall under this general turnover limit of Rs. 20/10 lakhs, and they do not have separate exemptions under the GST law. They are treated the same as other business entities or proprietors operating in India.
To calculate the aggregate turnover, freelancers should keep the following points in mind:
1. Turnover is calculated based on the PAN (Permanent Account Number). Sales from the same PAN, including across all platforms and offline sales, are combined to determine the limit.
2. Turnover includes exempt supplies, nil-rated supplies, and export sales.
3. In the case of export sales with invoices denominated in foreign currency, the sale value is converted at the exchange rate prevailing in India on the date of the invoice, and the converted sale value is considered for determining the turnover.
4. Turnover should be computed on a gross basis before deducting platform fees/commission and other charges, but excluding the GST component. Many freelancers mistakenly consider the net amount received in their bank account as the sale value, but that is incorrect. The amount received is after deducting platform fees/commission and other withdrawal charges, and the converted amount is based on the exchange rate prevailing on the date of withdrawal, not the date of the invoice.
If the aggregate turnover, calculated considering the above points, exceeds Rs. 20 lakhs/Rs. 10 lakhs, GST registration is mandatory for freelancers. They must follow the GST law by issuing invoices as per the GST law, maintaining books of accounts, filing monthly/quarterly returns, and paying taxes, among other obligations. However, if the turnover does not exceed the mentioned limit, freelancers are not required to register for GST, even if they are selling services to overseas clients on platforms. There is always the option to voluntarily register under GST.
This is the main question that freelancers face, and many freelancers in their early stages fail to implement GST-compliant invoicing as they believe that the invoice provided by platforms to the client is sufficient for GST compliance. However, that is not the case.
Platforms that are not registered under Indian GST law will not collect GST from clients on behalf of freelancers. It is the responsibility of freelancers to collect GST from their clients. As a freelancer, you must prepare a GST-compliant invoice that shows the split of taxable value and GST on the taxable value. GST authorities will not consider the invoice generated by the platforms. Your invoice should be addressed to the actual client, not the platform. The invoices generated through the platform have the client’s details in the “To” section and the freelancer’s details.
When invoicing overseas clients, the invoice is usually denominated in USD. Freelancers can prepare a USD-denominated invoice under the GST law as well. For overseas clients, sales will be treated as export sales only if they satisfy the conditions of export as defined under the GST law, which will be discussed later. The advantage of claiming sales as export sales is to avoid collecting GST from overseas clients. This is because exports under the GST law are treated as zero-rated supplies, and there is no GST on export sales. Therefore, the client needs to pay only the basic value of your service without any GST. However, it’s important to note that you will have to file a Letter of Undertaking (LUT) to the GST authorities before issuing a GST-free invoice to overseas clients, and the validity of the LUT is only for a financial year. You will need to apply for a fresh LUT for each new financial year. Additionally, your invoice should contain other details required under the GST law, such as the name, address, GSTIN of the service provider and recipient, taxable value, SAC code, place of supply, location of the supplier and recipient, etc. If you are issuing an invoice under LUT without IGST, the invoice should also mention, “Export of Services without payment of IGST under LUT filed on [Date] having ARN [ARN].”
For Indian clients, your invoice should be denominated in Indian Rupees. The invoice shared by the platform to Indian clients is usually in USD and does not mention the taxable value (sale value), GST on the sale value, and other details required under the GST law. You will have to determine on your own the rate of GST on services provided to Indian clients and accordingly collect GST from them.
Indian clients may be reluctant to pay GST in addition to your basic service charge. You can explain to them that they will receive the due GST credit (subject to eligibility rules) if they are also registered under the GST law. However, if they are not registered or do not agree to pay GST, you will have to charge them by adding GST to your basic service charge in a manner that the total invoice value, including GST, matches the amount you have agreed upon with your client. You will then need to pay the GST collected to the government. In short, you will have to bear the GST component from your own pocket.
It is generally not advisable for freelancers to opt for the composition scheme to pay 6% GST on turnover because composition taxable persons cannot make inter-state supplies. Even export supplies are treated as inter-state supplies under GST. In addition to the restriction in claiming Input Tax Credit (ITC), the restriction of not supplying services to other states is something that freelancers do not like as they wish to sell their services globally.
According to the GST law, any person engaged exclusively in the business of supplying goods or services that are not liable to tax or wholly exempt from tax is not required to register, even if their aggregate turnover exceeds the threshold limit of registration.
Even though exports under LUT are not taxed, it cannot be assumed that since they are not liable to tax, GST registration is not mandatory in the case of 100% export sales. This is because the export of service is primarily taxed under GST if the aggregate turnover exceeds the threshold limit of registration. They are not taxed when the supplier files an LUT, and an LUT cannot be filed without GST registration. In the absence of an LUT, the export of service is liable for GST.
Therefore, if the aggregate turnover exceeds the threshold limit of registration, GST registration is mandatory even if a freelancer has 100% export of service.
What is Export of Service as per GST Law?
The sale of service is treated as the export of service when ALL conditions are satisfied:
1. The supplier (freelancer) is located in India.
2. The recipient (client) is located outside India.
3. The place of supply is outside India (determined as per GST rules).
4. Payment for the service has been received by the supplier in convertible foreign exchange or in Indian Rupees wherever permitted by RBI.
5. The supplier and recipient are not merely establishments of distinct persons.
Usually, all the conditions except point (d) are satisfied for overseas clients. For point (d), you will have to obtain an FIRC (Foreign Inward Remittance Certificate) from the bank to show to the GST authorities that you have received funds in convertible foreign exchange.
Common withdrawal options available to Indian freelancers are:
1. Direct to a local bank in INR.
3. Wire Transfer in USD.
4. Direct to US Bank Account in USD.
In the case of a direct transfer to a local bank, your local bank may not provide you with an FIRC as they might have received funds from foreign banks in INR. Therefore, it is not advisable to use this option if you wish to claim export benefits. Wire transfer is the best option to get an FIRC from your bank for the amount received in your bank account. You can also use PayPal or Payoneer or other similar apps to receive money in your bank account, as they may also provide an FIRC.
In the case of a long-term contract, it is advisable to create a written contract with the client clearly mentioning the rate of service, addresses of both parties, a description of work, and other terms. This will ensure that the client is actually a foreign client, and freelancers can share the contract with GST authorities in the future if any legal consequences arise. The platform usually does not validate the address provided by the client, so it can be incorrect or not the latest one, and freelancers can be held responsible for any discrepancies found in invoices regarding the rate, location of the client, or other information mentioned in the invoice.
If platforms assess that they are liable for GST registration in India, then under the GST law, the platform will be known as an electronic commerce operator (ECO). The GST law defines the term ‘Electronic commerce operator’ as any person who owns, operates, or manages a digital or electronic facility or platform for electronic commerce. Registered ECOs (not being an agent) are liable to collect Tax Collected at Source (TCS) under GST at a rate of 1% (0.5% CGST + 0.5% SGST or 1% IGST) from sellers (freelancers) if the ECO collects consideration of sales on behalf of freelancers. ECOs will deposit this TCS to the government. Therefore, 1% TCS under GST will be collected from sellers, and after deducting this 1% and other platform charges and fees, the remaining amount will be available to freelancers for withdrawal.
The amount of TCS collected by the ECO will be available to freelancers in their GST Electronic Cash Ledger (on the GST portal) and will be utilized to discharge GST liability. Therefore, the 1% TCS will not become a cost for freelancers, but they can use this amount to discharge other GST liabilities.
1. Where the supply is exempt under GST, nil-rated supply, or non-taxable supply.
2. Where the supply of service is notified under Section 9(5) of the CGST Act (discussed later).
3. In cases where the client, as a recipient, is required to pay GST on reverse charge.
4. Where the supplier (freelancer) is not registered under GST.
Irrespective of whether the platforms are registered under GST or not, the liability of freelancers to register under GST will not be affected. As per Section 24(ix) of the CGST Act, 2017, every person supplying goods or services through an ecommerce operator is mandatorily required to register. However, vide Notification 65/2017 – Central Tax dated 15th November 2017, a person supplying services, other than the supplier of services under Section 9(5) of the CGST Act, 2017, through an e-commerce platform was exempted from obtaining compulsory registration provided their aggregate turnover does not exceed Rs. 20 lakhs (or Rs. 10 lakhs in the case of specified special category States) in a financial year.
A composition taxpayer cannot make supplies through an e-commerce operator. It also means that freelancers are not eligible for the composition scheme if they are supplying goods or services through an ECO.
In the case of services notified under Section 9(5) of the CGST Act, which are supplied through an ECO, the ECO is liable to collect the entire GST from clients, and there is no liability on freelancers to collect GST from clients. Therefore, the liability to raise an invoice, discharge GST, file GST returns, etc., is legally cast on the ECO for the services notified under Section 9(5). These services include:
1. Services by way of transportation of passengers by a radio-taxi, motorcab, maxicab and motor cycle, omnibus, and any other motor vehicle.
2. Services by way of providing accommodation in hotels, inns, guest houses, clubs, campsites, or other commercial places meant for residential or lodging purposes except where the supplier is liable for GST registration.
3. Services of house-keeping, such as plumbing, carpentering, etc., except where the supplier is liable for GST registration.
4. The supply of restaurant service (other than the services supplied by restaurants, eating joints, etc. located at specified premises).
It is important to understand that the TCS under GST (1%) is different from the Tax Deducted at Source (TDS) (1%) deducted by the platform under Section 194-O of the Income Tax Act. There may be a possibility that the platform will collect 1% TCS under GST and will also deduct 1% TDS under Income Tax on the same earnings.
In conclusion, the GST on freelancing income earned by freelancers from various online platforms has undoubtedly presented challenges. While it brings a formalized tax structure and enhances transparency, it also requires freelancers to navigate GST obligations and keep track of their earnings diligently. Any non-compliance on part of freelancers can bring unwanted litigations and hamper smooth functioning of business. As freelancing continues to thrive in the digital era, it becomes crucial for freelancers to stay informed, seek professional guidance, and adapt to the evolving tax landscape. By understanding and complying with GST regulations, freelancers can ensure a sustainable and compliant future while harnessing the full potential of their online endeavors.
Disclaimer: The information provided in this article is for general informational purposes only and does not constitute legal, tax, or financial advice. The implications of GST for freelancers may vary depending on individual circumstances, jurisdiction, and specific platform policies. Readers are encouraged to consult with qualified professionals or tax authorities to obtain personalized advice tailored to their unique situations. While enough care has been taken to ensure the accuracy of the information presented, we make no warranties or representations regarding its completeness, reliability, or suitability for any particular purpose. The use of any platforms is subject to their respective terms and conditions, and any contractual agreements between freelancers and clients. Further, the GST law is subject to frequent changes and so freelancers should consult professional before taking any decision. The author disclaims any liability for any loss or damage incurred by readers as a result of reliance on the information provided in this article.