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.
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.
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.
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.
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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.
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.
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.
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.
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