GST in India: How it affects foreign payments

The implementation of GST in India has significantly transformed how businesses handle international transactions and payments. Since its nationwide rollout in 2017, this comprehensive tax system has standardised the process for both domestic and international financial dealings, making it essential for businesses to understand its implications for foreign payments.

The Goods and Services Tax (GST) system encompasses various components, including specific provisions for the import of goods and services, e-invoicing requirements, and specialised GST rates in India for international transactions. This article examines how GST affects foreign payments, explains the necessary documentation requirements, and outlines the compliance procedures businesses must follow when dealing with international transactions.

Understanding GST in India

The Goods and Services Tax (GST) represents a landmark reform in India's indirect taxation system, marking a significant shift from the previous complex tax structure. The journey of GST implementation began in 2000 when Prime Minister Atal Bihari Vajpayee formed a committee to draft the GST law. After years of deliberation and multiple amendments, GST was finally implemented on July 1, 2017.

Brief history of GST implementation

The path to GST implementation involved several crucial milestones. In 2004, a task force reported the need to improve India's indirect tax system. The initial implementation was scheduled for April 2010 but faced postponement due to structural challenges. The breakthrough came in 2014 when the Constitution Amendment Bill was introduced in Parliament, followed by its passage in 2016. GST operates on a multi-tiered structure with tax slabs of 5%, 12%, 18%, and 28%.

Key features of GST

The GST system in India operates on a multi-tiered structure with the following tax slabs:

Key features of the system include:

• Input Tax Credit (ITC) mechanism to prevent tax cascading
• Digital compliance through the GST portal
• E-way bill system for tracking goods movement
• Unified tax structure replacing multiple indirect taxes

Types of GST (CGST, SGST, IGST)

India follows a dual GST model where tax is levied by both central and state governments. The system comprises three main components:

Central GST (CGST): Levied by the central government on intra-state transactions, replacing various central taxes like service tax and excise duty.

State GST (SGST): Collected by state governments on intra-state supplies, subsuming former state-level taxes, including VAT and entertainment tax.

Integrated GST (IGST): Applicable to inter-state transactions and imports, designed to ensure seamless credit flow across state borders. The revenue from IGST is shared between central and state governments based on the consumption state.

The GST framework operates as a destination-based tax, meaning the tax revenue accrues to the state where goods or services are consumed rather than where they are produced. This system has streamlined the taxation process, making it more efficient and transparent for businesses operating across state boundaries.

GST implications for foreign payments

Foreign payments under India's GST regime follow specific rules and regulations that differ significantly from domestic transactions. Understanding these implications is crucial for businesses engaged in international trade and services.

GST on inward remittances

When businesses receive foreign currency through inward remittances, the GST applicability depends on several factors. For services provided to foreign clients, no GST applies when payment is received in foreign currency. However, if the payment is received in INR, the entire transaction value attracts 18% GST. March 2023 witnessed a significant 13% growth in GST revenues, marking the second-highest monthly collection in indirect tax history, amounting to ₹1.6 lakh.

Reverse charge mechanism

The reverse charge mechanism alters the traditional GST payment structure for international transactions. Under this system:

• The recipient of services becomes responsible for GST payment instead of the service provider
• Foreign clients must directly remit GST to the Indian government
• Service providers are exempt from GST liability on such transactions

This mechanism applies specifically to services like compliance handling and certification services provided to foreign entities.

GST on foreign exchange transactions

Foreign currency conversion transactions have been subject to GST since July 2017. The GST rates for forex transactions follow a structured format:

Important Considerations:

• Currency conversion services between banks and authorised dealers are exempt from GST
• Bank charges on foreign transactions attract 18% GST
• Foreign Inward Remittance Certificates (FIRCs) and Bank Realisation Certificates (BRCs) issuance services are subject to GST

For businesses dealing with international clients, the GST implications vary based on transaction type and currency. When receiving payments for exported services in foreign currency, the transaction qualifies as an export of service and benefits from zero-rated supply status. However, associated services such as currency conversion and compliance handling may still attract GST at applicable rates.

The system provides competitive advantages for Indian businesses in global markets, as they can offer services without adding GST to the base price when receiving foreign currency payments. This arrangement particularly benefits sectors like IT services, consulting, and freelancing, where cross-border transactions are common.

Compliance and documentation

Proper documentation and compliance are crucial elements for businesses engaging in international transactions under India's GST regime. The regulatory framework requires specific certificates and registrations to ensure transparent foreign payment processing and tax compliance.

Foreign Inward Remittance Certificates (FIRCs)

A Foreign Inward Remittance Certificate serves as official proof of receiving international payments in India. Banks issue FIRCs electronically through the Export Data Processing and Monitoring Systems (EDPMS). The certificate includes essential details such as:

• Beneficiary's name and account information
• Transaction amount and date
• Purpose of remittance
• Unique Transaction Reference (UTR) number

Since 2016, physical FIRCs have been discontinued except for Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII) cases. Only Authorised Dealer Category I banks can issue e-FIRCs, following Reserve Bank of India (RBI) and Foreign Exchange Dealers Association in India (FEDAI) guidelines.

Bank Realisation Certificates (BRCs)

Bank Realisation Certificates confirm the receipt of export payments in foreign currency. The e-BRC system, introduced by the Directorate General of Foreign Trade (DGFT) in 2012, has digitised the entire process. Banks must transmit BRC data electronically to the DGFT server with digital signatures.

GST registration requirements for businesses

Businesses must comply with specific GST registration requirements based on their operational scope and turnover. The registration thresholds and requirements are structured as follows:

Registration applications are processed through the Goods and Services Tax Network portal and require:

• Form GST Reg-01 completion with tax payer details
• Permanent Account Number (PAN)
• Business incorporation documents
• List of authorised signatories

Valid registrations are typically granted within three working days of application submission . Businesses must register separately in each state where they conduct operations, as India comprises 29 states with distinct jurisdictions. For casual or non-resident taxable persons, registration applications must be submitted five days before commencing business activities.

Monthly returns submission is mandatory through Form GSTR-3B, due by the 20th day of the subsequent month. Additionally, businesses with annual turnover exceeding INR 50 million must file ITC-04 (job work return) semi-annually, while those below this threshold file annually.

The GST framework includes specific provisions for businesses dealing with foreign clients. Companies must maintain proper documentation of all international transactions and submit regular compliance reports through the GST portal. This ensures adherence to both domestic tax regulations and international trade requirements while facilitating smooth foreign payment processing.

Impact on Indian businesses dealing with foreign clients

Since the implementation of the Goods and Services Tax (GST) in India, businesses engaging with foreign clients have experienced significant transformations in their operational dynamics. The comprehensive tax reform has reshaped how Indian companies conduct international business transactions and manage their global competitiveness.

Simplified billing process

The GST framework has streamlined the billing process for international transactions through several key improvements. The elimination of multiple state-level registrations and compliances has made it easier for new businesses to establish operations and expand across states. The uniform tax structure across states has significantly reduced compliance complexity, enabling businesses to save both time and money.

Key improvements in the billing process include:

• Standardised documentation requirements
• Centralised registration system
• Unified tax rates across states
• Streamlined input tax credit claims

Competitive advantage in global markets

The implementation of GST has strengthened India's position in international markets through various mechanisms. The elimination of the cascading effect of multiple taxes has reduced production costs for exporters. This cost reduction has made Indian products more competitive in the global marketplace.

The competitive advantages manifest in several ways:

1. Cost Efficiency: Manufacturing costs have decreased due to the GST implementation
2. Working Capital Management: Enhanced ability to recoup input tax refunds has improved cash flow for exporters
3. Market Access: The uniform tax structure has made it possible for India to function as a truly internal market

Companies can now organise their distribution from a central warehouse instead of setting up separate facilities in each state. This centralization has led to positive macroeconomic effects, including:

• Increased foreign investments
• Enhanced ease of doing business
• Accelerated economic growth

Challenges and considerations

Despite the advantages, businesses face several considerations when dealing with foreign clients under the GST regime. The tax system requires careful attention to specific requirements and procedures.

Key Challenges Table:

The Composition Scheme offers relief for small businesses, allowing those with turnover up to ₹1,40,00,000 to pay a 1% flat rate and file a single annual return. Small service providers with annual turnover up to ₹50,00,000 benefit from a reduced GST rate of 6% instead of 18%.

The GST portal provides a robust IT system for:

• Online registration
• Payment processing
• Tax filing
• Compliance management

Corporate guarantee services from overseas holding companies to Indian entities trigger Integrated Goods and Services Tax (IGST) liability under the reverse charge mechanism. However, co-location services provided to foreign companies are treated as export services and do not bear the GST burden.

For e-commerce operations, GST has introduced uniformity in tax rates and procedures. This standardisation has particularly benefited digital businesses and online service providers engaging with international clients. The Input Tax Credit (ITC) component has significantly mitigated previous tax-related challenges, making Indian goods and services more competitive both domestically and internationally.

The abolition of check-posts across the country post-GST implementation has ensured the free and fast movement of goods, facilitating smoother international trade operations. This improvement in logistics efficiency has enhanced India's attractiveness as a global business destination.

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The GST Revolution: Reshaping India's Global Business Landscape

GST has fundamentally transformed India's approach to international business transactions since 2017. The unified tax structure, with its three-tier system of CGST, SGST, and IGST, has simplified complex cross-border payment processes while ensuring proper tax compliance. This comprehensive reform has particularly benefited businesses dealing with foreign clients through standardised documentation requirements, streamlined billing processes, and clear guidelines for handling international remittances.

Indian businesses now stand better positioned in the global marketplace thanks to reduced operational complexities and enhanced cost efficiency under the GST regime. The elimination of multiple state-level taxes, combined with simplified compliance procedures, has made Indian goods and services more competitive internationally. These improvements signal a significant step forward in India's economic evolution, supporting businesses as they expand their international operations while maintaining regulatory compliance.

Disclaimer: This blog post provides general information about GST in India and its impact on foreign payments. The content is not intended as professional tax or legal advice. Tax laws are subject to change, and readers should consult qualified experts for specific guidance. The authors and publishers are not liable for any actions taken based on this information.

Contributed by Denila Lobo

Denila is a content writer at Winvesta. She crafts clear, concise content on international payments, helping freelancers and businesses easily navigate global financial solutions.