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GST & TDS Rules on Foreign Software Purchases

GST and TDS rules on foreign software purchases determine how Indian businesses must pay tax when buying SaaS, cloud tools, or digital software from overseas vendors. Under GST, most foreign software is taxed through the Reverse Charge Mechanism (RCM), while TDS applies when payments qualify as royalty or technical services. Understanding these rules helps businesses stay compliant, manage costs, and avoid penalties.

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GST & TDS Rules on Foreign Software Purchases

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  1. Start Your Business 069 Call Experts 8881-069- Helps you start business hassle free www.e-startupindia.com

  2. Start Your Business Call Experts 8881-069-069 GST & TDS Rules on Foreign Software Purchases Freelancers and Indian businesses are very dependent on foreign software- SaaS software, cloud computing, design suites, automation programs, CRM and others. These tools enhance productivity, yet the taxation that surrounds them usually complicates the buyers. Not everyone realizes that the Indian law treats foreign vendors as a tax-free enterprise, although that is not the case. This guide covers the concept of GST, RCM, ITC, TDS and Income Tax implication in simple and clear terms, as per the normal industry practice and relevant legal frameworks- so that you can stay within the law, evade fines and better manage your cash flow. www.e-startupindia.com

  3. Start Your Business Call Experts 8881-069-069 Why foreign software attracts Indian tax? The purchase of computer software with a foreign vendor who does not have an India office or Permanent Establishment (PE) is, under GST law, an import of service. This is made evident by a few important points: You, the buyer, are in India → Place of supply is India. The overseas supplier is unregistered in GST. Thus, GST is passed to the buyer via Reverse Charge Mechanism (RCM). On the side of the income-tax, the TDS is determined by the nature of pay. This is what many people fail to see and they end up having compliance problems in future. GST rules for foreign software purchases GST classification & rate The foreign software usually belongs to either: OIDAR (Online Information and Database Access or Retrieval Service) – is it online, cloud-based or subscribe-based. Import of service — of downloadable or license-based software. www.e-startupindia.com

  4. Start Your Business Call Experts 8881-069-069 The GST rate is usually 18%. A lower rate can be charged on some special categories, although in most cases, the practical standard is 18%. Reverse Charge Mechanism (RCM) When the vendor in this case does not register under GST. The department will calculate GST on the value of the software. Pay RCM IGST out of your own pocket. Report it in your GST returns. Input Tax Credit (ITC) The issue of whether ITC is permitted is based on use: ITC is allowed in a situation where you are using the software in a business context and you are generating a taxable output. ITC is not allowed in a situation where you are using the software on personal work, exempt supplies, and non-business purposes. This is a critical distinction among freelancers or small proprietors. When the tool is utilized in personal activities, the GST paid would be a final price. www.e-startupindia.com

  5. Start Your Business Call Experts 8881-069-069 Documentation Maintaining records: Keeping clean records helps during audits A receipt of invoice or subscription. Proof of payment Vendor details Purpose of use (useful during the claiming of ITC) TDS rules on foreign software purchases How TDS applies The Income Tax act section 195 mandates Indian consumers to pay tax to foreign suppliers in case such payment is treated as a taxable income in India. The software is based on the nature of the tax treatment: Off-the-shelf or standard software → This is typically not regarded as royalty. Cloud-based/SaaS services → Can be viewed as mere service payments. Customized software, copyrights transferred to it → Can be approached as royalty. This is the category that determines the application of TDS. www.e-startupindia.com

  6. Start Your Business Call Experts 8881-069-069 Typical TDS rates If treated as: Royalty or Fees Technical Services (FTS) → 10% (plus surcharge and cess where required). Simple service payment → TDS may not be applicable at all. Governments can further cut down rates with Double Taxation Avoidance Agreements (DTAA) which take up appropriate paperwork. Paying by means of credit card or PayPal. Even in the case of international cards payment or through gateways: The fact remains that you are supposed to assess TDS TDS does not apply in most instances where it is just a simple SaaS and no copyright issue is involved. In case TDS is applicable, it has to be subtracted and deposited manually. Forms and compliance Depending on the quantity and character of payment, you require: www.e-startupindia.com

  7. Start Your Business Call Experts 8881-069-069 Form 15CA Form 15CB (certification of CA needed) In the case of TDS where you have failed to deduct, the tax department will consider this as one who is liable. How GST and TDS work together Both systems practically interact in the following way: Under RCM, GST always relies on location and status of vendors and not the nature of software. TDS only relies on the type of payment (royalty, FTS, service). In some cases, both apply. GST is the only applicable method in a number of SaaS instances. Example: One of the U.S. cloud platforms sells a subscription to a business. GST: Pay 18% under RCM. TDS: Is typically none, with no transfer of copyright, of standard SaaS. www.e-startupindia.com

  8. Start Your Business Call Experts 8881-069-069 Example: A firm purchases a fully customized ERP and also acquires the IP rights. GST: Pay 18% under RCM. The department might regard this amount—after deducting 10% TDS—as royalty. Practical compliance tips Ensure that the vendor has a PE in India (unusual among SaaS companies). Determine the type of software off-the-shelf, SaaS, customized, licensed. Retain ITC claims and audits records. If you use TDS, then make sure you put it on time to avoid fines. Do not think that the payment through the card or PayPal evades taxation. Keep a basic internal checklist on all foreign software purchases. Common mistakes buyers should avoid Rejecting GST in RCM on the grounds that this is optional. Failure to understand SaaS payments as royalty. ITC claim on non-business or personal software. Lacks of Form 15CA/CB requirements. Omission of monitoring minor recurrent scaled up SaaS subscriptions. www.e-startupindia.com

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