In an increasingly digital world, Indian businesses and individuals often procure software solutions from international providers lacking a Permanent Establishment (PE) in India. Whether it’s cloud-based tools, SaaS subscriptions, or off-the-shelf licenses, payments via credit cards or PayPal gateways make these transactions seamless. However, this ease comes with tax strings attached. As of November 2025, under India’s Goods and Services Tax (GST) regime and Income Tax Act, such imports trigger specific liabilities—primarily GST on a reverse charge basis and potential withholding tax (TDS) obligations. This article explores these implications, assesses if they translate to additional costs for the buyer, and illustrates with real-world examples. Understanding these can help avoid surprises during compliance.
The Transaction Landscape: Import of Digital Services
When an Indian resident (individual or entity) buys software from a foreign company without a PE, it’s classified as an “import of services” under Section 2(11) of the Integrated Goods and Services Tax (IGST) Act, 2017. The place of supply is India if the recipient is located here, making it taxable. Software, whether downloadable or accessed online, falls under OIDAR (Online Information and Database Access or Retrieval) services if automated and reliant on the internet.
Payment gateways like credit cards (e.g., Visa/Mastercard) or PayPal act as intermediaries but don’t alter the tax treatment—the underlying transaction is between the Indian buyer and foreign seller. No PE means the foreign entity isn’t registered for GST in India, shifting the onus to the importer via Reverse Charge Mechanism (RCM).
GST Liability: Reverse Charge and Rates
GST is the primary tax hurdle. Under RCM (Notification No. 13/2017- Central Tax (Rate), the importer must self-assess and pay IGST on the transaction value, treating it as a supply received from a non-taxable person. The applicable rate for most software services is 18%, aligning with the standard slab post the September 2025 GST reforms that streamlined rates to 5% (no ITC) and 18% (with ITC) for merit and general services, respectively. Essentials like basic productivity tools might qualify for 5%, but custom or enterprise software typically attracts 18%.
The importer files this via GSTR-3B, claiming Input Tax Credit (ITC) if the software is used for taxable business supplies. For personal use, no ITC is available, making GST a pure cost. Exemptions are rare—only for specific educational or government-related imports. Recent 2025 updates emphasize ISD (Input Service Distributor) registration for shared services, but for direct purchases, RCM remains straightforward.
Income Tax and TDS: Withholding on Cross-Border Payments
Income tax implications hinge on the payment’s nature. If the software license involves copyright transfer or technical know-how, it’s “royalty” under Section 9(1)(vi) of the Income Tax Act, 1961, taxable in India. However, the Supreme Court’s 2024 ruling in Engineering Analysis Centre of Excellence Pvt Ltd v. CIT clarified that payments for off-the-shelf or shrink-wrapped software aren’t royalties, reducing liability. For SaaS or cloud access, it’s often a service fee, not royalty.
Under Section 195, the payer (Indian buyer) must deduct TDS at 10% (plus surcharge and 4% cess, effective ~11.7%) on the taxable portion if it’s royalty or fees for technical services (FTS). Threshold: No minimum, but applies only if income accrues in India. For non-royalty digital purchases, TDS may not apply, but the foreign seller faces 2% Equalisation Levy (EL) on e-commerce supplies since 2020, paid by them—not the buyer. The 6% EL on digital ads was scrapped from April 2025, easing some digital flows.
For individuals or small buyers using credit cards/PayPal, TDS deduction is impractical—banks/gateways don’t withhold. Instead, the buyer reports via Form 15CA/CB if payments exceed ₹5 lakh annually, certified by a CA. Non-compliance risks penalties up to the tax evaded.
Payment Gateways: Do They Change Anything?
Credit card or PayPal payments are treated as direct remittances to non-residents, triggering the same GST RCM and potential TDS. PayPal, as a foreign entity, may withhold under its terms, but Indian tax rules prevail. No PE simplifies for the seller but burdens the buyer with compliance. In 2025, fintech integrations like UPI-linked cards haven’t altered this—RBI’s Liberalised Remittance Scheme (LRS) caps individual forex at $250,000/year, inclusive of taxes.
Additional Cost for the Buyer? Yes, But Nuanced
Absolutely, these taxes add to the sticker price, but ITC can mitigate for businesses. Without it, it’s a full hit—up to 18% extra on GST alone.
Example 1: Business Purchase A Delhi-based startup buys a $1,000 (≈₹84,000) annual SaaS license from a US firm via credit card. Transaction value: ₹84,000.
- GST: 18% IGST = ₹15,120 (RCM, paid by startup; ITC claimable, netting zero if for business).
- TDS: Not applicable (not royalty). EL: 2% (₹1,680) borne by US firm. Total outlay: ₹84,000 + ₹15,120 = ₹99,120 upfront, but ITC refunds via returns. Net cost: ₹84,000. If no ITC (e.g., exempt supplies), full ₹15,120 extra.
Example 2: Individual Freelancer An Mumbai freelancer grabs a $500 (≈₹42,000) Adobe subscription via PayPal for personal editing.
- GST: 18% = ₹7,560 (RCM; no ITC as personal use).
- TDS: None (small value, non-royalty). Total: ₹42,000 + ₹7,560 = ₹49,560. Here, 18% is pure additional cost, inflating the budget by nearly one-fifth.
Example 3: High-Value Enterprise Deal A Bangalore IT firm imports custom ERP software for ₹10 lakh from a German vendor (no PE). If deemed royalty: TDS @10% = ₹1,00,000 (withheld and remitted). GST: ₹1,80,000 (ITC eligible). Net: ₹10 lakh + GST (offset) + TDS (creditable against seller’s tax, but buyer advances it). Post-2025 presumptive schemes for foreign firms could lower effective rates to 35% corporate tax, indirectly benefiting via DTAA claims.
In all cases, the buyer fronts GST/TDS, recoverable only if eligible. For 2025, Budget tweaks like simplified EL refunds aid, but upfront cash flow dips.
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