Do you need to pay GST on Foreign Exchange?
GST applies to everything you purchase, from utilities to professional services. However, if you provide services abroad and receive international transfers and remittances, does GST apply to them? For instance, if you provide IT services to the U.S. from India, should you pay GST on foreign exchange? If yes, how should you go about it?
This blog explains the GST’s applicability to various foreign exchange payments and how to manage such transactions.
GST and Foreign Exchange Transactions
1. Inward Remittances
Under the GST regime, the export of goods and services is considered a zero-rated supply since the consumption of goods or services happens outside India. Therefore, GST isn’t applicable as a separate charge over inward remittances to India.
For instance, if you are an IT services exporter dealing with foreign clients, you're exempt from paying additional GST on the money you receive as payments from your clients abroad.
Some online platforms may charge an 18% transaction fee for certain products during international money transfers. Importantly, this fee doesn't mean there's an additional GST on the foreign remittance transaction itself.
2. Compliance Handling and Certifications (FIRC & BRC)
What makes this situation different is the "reverse charge mechanism." This is where the responsibility of paying GST shifts from the service provider to the foreign clients.
Thus, foreign clients are now directly responsible for remitting GST to the Indian government, relieving the service provider of this financial obligation.
You don’t need to charge GST on international transactions separately on the invoices whenever you provide services to foreign clients. Your clients directly pay GST to the Indian government on the foreign exchange conversion.
This simplified approach streamlines the billing process for both the service provider and international clients.
3. Foreign Currency Conversion
If you receive $1000 for exporting services and convert it into Indian Rupees, 18% GST would apply to the foreign currency conversion transaction.
The value of service in purchases/sales of foreign currency is determined as per the table below, upon which a GST of 18% is applicable.
|GROSS AMOUNT OF CURRENCY EXCHANGED
|VALUE OF SERVICE ON WHICH GST TO BE PAID
|Less than or equal to INR 1,00,000
|1% of the gross amount of currency exchanged, subject to a minimum of INR 250/- i.e., the minimum GST payable is INR 45.
|Greater than INR 1,00,000 and less than or equal to INR 10,00,000
|INR 1000 + 0.5% of the gross amount of currency exchanged
|Greater than INR 10,00,000
|INR 5,500 + 0.1% of the gross amount of currency exchanged, subject to a maximum of INR 60,000/-, which caps GST payable at INR 10,800/-
Transactions amongst banks or authorized dealers are exempt under GST regulations.
What Next: Managing Foreign Exchange Transactions
When engaging in forex transactions, opting for authorised channels to stay compliant with regulations is advisable. Make your financial life easier by creating invoices that separate taxable and non-taxable items.
If you're searching for a reliable payment partner to guide you through complexities, Skydo's automated and compliant solutions can assist.
Visit the blog to learn more about the nuances of handling GST.
Q1. What do “goods” and “services” mean under GST?
Ans. As per Section 2(52), CGST Act, 2017, “Goods” mean any kind of movable property other than money and securities. It includes actionable claims, growing crops, grass, and things attached to or forming part of the land, which are agreed to be served before supply or under a contract of supply.
As per Section 2(102), CGST Act, 2017, “Services” mean anything other than goods, money, and securities. It includes activities relating to the use of money or its conversion by cash or any other mode from one form, currency, or denomination to another form, currency, or denomination for which a separate consideration is charged.
Q2. Is GST applicable on international transactions?
Ans. GST does not apply to international transactions in India. GST is designed for goods and services consumed within the country. International transactions involving the cross-border movement of money are typically exempt from GST.
Q3. What is the meaning of zero-rated supply?
Ans. According to Section 16, IGST Act, zero-rated supply means any of the following supplies of goods and services.
- Export of goods or services or both.
- Supply of goods or services or both to a Special Economic Zone (SEZ) developer or an SEZ unit.