We paid a foreign vendor for software/services — do we pay GST under reverse charge?

Your company has paid a foreign vendor. It may be a US software subscription, a design agency abroad or a consultant in Singapore. The invoice has no Indian GST on it. Your accountant says, "There is nothing to pay." Often that is wrong. This article explains when the GST comes back to your company, how the clock runs, and what to book each month.

This is a general explanation. The rate and the exact list of services covered sit in a government notification. Check the current entry on the CBIC portal before you file.

Your situation: the vendor is abroad and bills you without GST

A foreign vendor is not registered in India. It will not charge Indian GST on its invoice. That does not mean no GST is due. The law can move the duty to pay the tax from the supplier to you, the recipient. That move is called reverse charge.

The Central Goods and Services Tax Act, 2017 defines reverse charge in section 2(98). It is the liability to pay tax by the recipient of a supply, instead of the supplier, under section 9(3) or 9(4) of that Act, or under section 5(3) or 5(4) of the Integrated Goods and Services Tax Act, 2017 (the IGST Act).

For services bought from abroad, the relevant provision is section 5(3), IGST Act. It says the Government may, on the Council's recommendation, notify categories of supply on which the recipient pays the tax. When it does, the recipient is treated as the person liable to pay the tax, and all provisions of the Act apply to the recipient on that basis.

So the question is not "did the vendor charge GST?" The question is "does this purchase fall in a category notified under section 5(3)?"

Step 1: is it an "import of services"?

The IGST Act defines "import of services" in section 2(11). All three conditions must hold:

the supplier of the service is located outside India;
the recipient of the service is located in India; and
the place of supply of the service is in India.

Take each in turn.

Supplier outside India. A US company selling you cloud software qualifies. A foreign group company also qualifies.

Recipient in India. Your company is registered and operates in India, so it is located in India.

Place of supply in India. Section 13 of the IGST Act sets the place of supply when the supplier or the recipient is outside India. The general rule is in section 13(2). The place of supply of services (other than those listed in section 13(3) to (13)) is the location of the recipient of services. If the recipient's location is not available in the ordinary course of business, the place of supply is the location of the supplier.

For a typical subscription, consulting or design service bought by your Indian company, the place of supply is therefore your location in India.

Section 13 also carves out special cases. A few examples:

Services directly tied to immovable property are taxed where the property is (section 13(4)).
Events such as conferences or exhibitions are taxed where the event is held (section 13(5)).
Services to an individual that need that person's physical presence, or work on goods made physically available to the supplier, are taxed where they are performed (section 13(3)).
Online information and database access or retrieval services are taxed at the recipient's location (section 13(12)).

If your service falls in one of the carve-outs and the place of supply is outside India, it is not an import of service at all. Check this before you assume reverse charge applies.

Step 2: it is an inter-State supply, so IGST applies

Section 7(4) of the IGST Act says that a supply of services imported into the territory of India is treated as a supply of services in the course of inter-State trade or commerce. So the tax is integrated tax (IGST), not CGST and SGST. You do not split it between the Centre and your State.

Step 3: who pays under the notification

Under section 5(3), the notified category decides whether you pay. Which foreign-vendor services are covered, and who among recipients must pay, is fixed only by the notification. Check the entry in the Integrated Tax (Rate) notification issued under section 5(3), and check the rate that applies to the specific service in the Integrated Tax rate notification for services. The number and text of those entries are not reproduced here. Read them on the CBIC portal for the current position.

A common error is to mix this up with another notification of the same number series. Notifications under the same number can cover entirely different subjects, such as exemption from registration for small inter-State service suppliers. Always check the notification's title, not only its number.

The deadline clock: time of supply

You pay the tax in the month in which the time of supply falls. For reverse charge on services, section 13(3) of the CGST Act, 2017 sets the time of supply as the earlier of:

the date of payment, being the date the payment is entered in your books or the date it is debited in your bank account, whichever is earlier; or
the date immediately following sixty days from the date of the supplier's invoice (or any other document issued in its place).

There are two safety valves.

If neither date can be determined, the time of supply is the date you enter the supply in your books.
Where the supplier is a foreign associated enterprise (for example, your overseas parent), the time of supply is the date of entry in your books or the date of payment, whichever is earlier. The sixty-day period does not help you here.

Practical meaning: do not wait for the money to leave the bank. If the foreign vendor's invoice is dated 10 January (a non-leap year) and you have not paid earlier, the sixtieth day is 11 March and the time of supply is 12 March, the day immediately following. The tax falls into that month's return, even if you have not paid the vendor.

Registration: you may need GST registration

Section 24(iii) of the CGST Act makes registration compulsory for persons who are required to pay tax under reverse charge, notwithstanding the usual turnover threshold. A company that is not otherwise registered should check this before it pays a foreign vendor. If you are already registered, the point does not arise.

Step by step: what to do each month

List foreign payments. Pull every payment to a vendor outside India from your books and bank. Include software subscriptions, advertising platforms, professional fees and group recharges.
Test each one against Step 1. Is the place of supply in India? If it falls under a carve-out in section 13 and the place of supply is outside India, record it and keep your reasoning on file.
Raise a self-invoice. Section 31(3)(f) of the CGST Act requires a registered person who is liable to pay tax under section 9(3) or 9(4) to issue an invoice for goods or services received from a supplier who is not registered on the date of receipt. Section 31(3)(g) separately requires a payment voucher at the time of making payment to the supplier. Your own invoice is the document that supports the entry in your return.
Pay the tax in cash. Output tax, as defined in section 2(82) of the CGST Act, excludes tax payable on reverse charge. The electronic credit ledger can be used for output tax under section 49(4). So reverse charge tax is paid from the cash ledger, not from credit you already hold.
Report it in GSTR-3B. Declare the supply in Table 3.1(d), "Inward supplies liable to reverse charge". The CBIC advisory on the GSTR-2B statement also says that supplies on which tax is paid under reverse charge are declared in Table 3.1(d) for payment of tax.
Claim the credit. Credit goes in Table 4(A)(3) of GSTR-3B, after you have paid the tax.

Claiming input tax credit

Section 16(1) of the CGST Act allows credit of input tax on supplies used in the course or furtherance of business. Rule 36(1)(b) of the CGST Rules, 2017 lists, as a document for claiming credit, the invoice issued under section 31(3)(f), "subject to the payment of tax". So the order matters: pay first, then claim.

Two points that catch companies out:

Your service must be used in the course or furtherance of business. Personal or blocked-credit items do not become eligible just because you paid under reverse charge.
The 180-day payment rule in section 16(2) does not apply to supplies on which tax is payable on reverse charge. The proviso in section 16(2) excludes them.

Check the current rules on the credit you can claim before you file. Rules and provisions change by notification.

What not to do

Do not rely on "the vendor did not charge GST". The vendor cannot charge Indian GST. You owe it, if the supply is notified.
Do not wait for the payment to leave the bank. For reverse charge, the time of supply can fall on the sixtieth day after the invoice, even if you have not paid.
Do not book the self-invoice in the wrong month. The month of the time of supply governs the return period.
Do not claim credit before paying the tax. Rule 36(1)(b) makes the self-invoice usable for credit only subject to payment of tax.
Do not copy last year's treatment blindly. The notified list and rate entries change. Read the current notification.
Do not skip the self-invoice. It is a statutory document under section 31(3)(f), not a convenience.

What to do now

Next step: Export all foreign vendor payments for the last twelve months and test each against section 2(11) and section 13, IGST Act. (Section 2(11) and section 13, IGST Act 2017.)
Deadline: Tax falls due in the month of the time of supply: the earlier of payment, or the day after sixty days from the vendor's invoice. For an associated foreign enterprise, the earlier of the books entry or payment. (Section 13(3), CGST Act 2017.)
Consequence of missing it: Unpaid tax carries interest under section 50 of the CGST Act, and credit cannot be claimed until the tax is paid. (Section 50 and Rule 36(1)(b).)

Have a CA review your facts before you act or file.

Frequently asked questions

1. The vendor's invoice shows no tax. Can we ignore reverse charge?
No. The vendor is outside India and cannot charge Indian GST. If the service is an import of service in a notified category, the recipient pays IGST under section 5(3) of the IGST Act.

2. Is reverse charge tax a cost or can we recover it?
If the service is used in the course or furtherance of business, you can usually claim credit (section 16(1), CGST Act) after paying the tax. The credit is shown in Table 4(A)(3) of GSTR-3B.

3. Which return table shows the tax?
Pay the tax through Table 3.1(d), "Inward supplies liable to reverse charge", in GSTR-3B. Claim the credit in Table 4(A)(3).

4. Do we need to be registered to pay it?
Section 24(iii) of the CGST Act makes registration compulsory for persons liable to pay tax under reverse charge. Confirm your position before you pay a foreign vendor.

5. Does it matter if the vendor is a group company?
Yes. For a foreign associated enterprise, the time of supply is the date of entry in your books or the date of payment, whichever is earlier (second proviso to section 13(3), CGST Act).

6. Can we pay the tax from our credit ledger?
No. Output tax excludes tax payable on reverse charge (section 2(82), CGST Act), and the credit ledger is used for output tax (section 49(4)). Reverse charge tax is paid in cash.

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