A Simple Guide to GST and ITC for Software Services Exports in India

Software service exports play a significant role in shaping the Indian economy by driving digital growth and creating job opportunities. They also make a substantial contribution to the country’s overall GDP. To support this sector, the Indian government has implemented various measures, including the GST framework, which simplifies tax compliance for exporters.

With the growing digital transformation, it is essential to understand this GST framework and how it applies to these software service exports.

In this blog, you will learn about the GST guidelines and ITC provisions specifically customized for software service exports in India.

Understanding GST on Software Services Exports

GST is a comprehensive indirect tax levied on the supply of goods and services in India. This single tax system was introduced to eliminate the cascading effect of taxes, creating a unified market. For software service providers, GST significantly defines how transactions are taxed and which credits can be availed. Software exports, particularly those categorized as “export of services,” are treated differently under GST.

Moving ahead, let’s explore the unique codes that are applied to software services, ensuring accurate classification and compliance.

HSN/SAC Codes Applicable to Software Services

Harmonized System of Nomenclature (HSN) codes are primarily used for the classification of physical goods. Each product is assigned a unique HSN code based on its nature, type, and application. However, software services do not fall under HSN codes. Instead, software services are classified under Service Accounting Codes (SAC). For software-related services, including SaaS, software development, software maintenance, licensing, and other similar activities, specific SAC codes are applied. According to India Fillings, here are a few common SAC codes for software services:

With a clear understanding of SAC codes, let’s see how GST is calculated on software to ensure proper billing and accurate tax submission.

Calculation of GST on Software

According to the IndiaFilings guide, the development, design, programming, customization, adaptation, upgradation, and implementation of information technology software are considered as the supply of services, which are subject to an 18% GST rate.

Even if the software is purchased in the form of a license, ITC can still be claimed, provided the software is used for business purposes.

The 18% GST is calculated using the following formula:

Formula: Total Cost=Cost of Software+(Cost of Software × GST Rate100)

Example: If the cost of software is ₹10,000 and the GST rate is 18%, so, the GST payable would be ₹1,800, making the total amount payable ₹11,800.

With a comprehensive understanding of GST on software services and how it’s calculated, let’s explore how this tax system impacts the overall software export industry in India.

Impact of GST on the Software Export Industry

The implementation of GST has significantly impacted the software export industry by introducing a unified tax structure. This has streamlined compliance processes, allowing software exporters to file for zero-rated exports and claim refunds more efficiently. However, the shift has also created challenges, particularly in navigating the new regulations related to ITC and managing cross-border transactions. Companies now face increased administrative responsibilities, which may lead to higher operational costs and require careful planning to ensure seamless export operations.

Moreover, GST has both opportunities and challenges for software exporters. The adoption of e-invoicing and digitization has simplified tax compliance and improved transparency in international software trade. At the same time, uniform taxation across states has led to higher costs for export-oriented units, particularly for those reliant on outsourcing services. This has increased the burden on companies to ensure compliance while managing cash flows. Ultimately, the impact of GST on the software export industry highlights the need for careful strategy planning to effectively adapt to the new tax framework.

Following the discussion on the impact of GST on the software export industry, it is essential to understand how zero-rated supply functions in this sector offers a valuable solution to simplify compliance with the tax framework.

Zero-Rated Supply for Software Services

Zero-rated supply refers to the provision of goods or services that are subject to a tax rate of 0%. In the case of software services, no tax (such as GST or VAT) is charged on the services provided. However, the supplier can still claim input tax credits for any expenses incurred in delivering those services. This type of supply is often used for software exports or in scenarios where tax does not apply. It allows businesses to reduce their tax burden while still recovering applicable taxes on inputs.

Zero-rated supplies differ from exempt supplies, where no tax is charged, and no input tax credits can be claimed. In contrast, zero-rated supplies ensure tax neutrality, allowing businesses to avoid bearing the tax cost, while still maintaining proper compliance and reporting. It is important for businesses offering software services to understand the specific regulations around zero-rated supplies in their jurisdiction, as this can impact pricing, financial reporting, and overall compliance.

To fully benefit from the zero-rated supply provisions, software exporters must meet specific conditions to ensure seamless ITC claims. Let’s explore how these requirements help ensure compliance and maximize the advantages of zero-rated supplies.

Key Conditions to Avail ITC for Software Exports

In India, the eligibility for claiming ITC for software services under the GST regime depends on several factors. Section 16 of the CGST Act specifies the conditions that GST-registered buyers must fulfill to claim ITC. Below are the key eligibility requirements:

• Invoice and Payment: A registered supplier must issue the invoice for the software service in order to claim ITC. Additionally, payment for the service must be made within the prescribed time limits to avail the credit.

• Tax Invoice: The supplier of the software services must issue a tax invoice as per the GST law, showing the details of the GST charged on the services. This invoice is crucial documentation for claiming ITC and maintaining proper records.
• Reverse Charge Mechanism (RCM): If the software service is provided by an unregistered supplier and the reverse charge mechanism (RCM) applies, the recipient (business) is liable to pay the tax. In such cases, the recipient can claim ITC on the tax paid under RCM.
• Prohibited ITC Claims: Taxpayers cannot claim ITC on goods and services used for personal consumption, non-business activities, or exempt supplies, ensuring compliance with tax regulations.
• GST Returns: In order to claim ITC, businesses must file regular GST returns, such as GSTR-3B and GSTR-1, which will show the ITC details, including the GST paid on purchases and the credit claimed.

For precise ITC claims, ensuring eligibility and proper documentation is essential. Having reviewed the eligibility criteria, let’s examine the essential documents necessary for successfully claiming ITC.

Documentation Required for ITC Claims

To claim ITC for software services under the GST, you need to provide specific documentation. Here’s a list of the required documents:

• Tax Invoice or Debit Note: The supplier of software services must issue a tax invoice or debit note, which should mention the GSTIN of both the supplier and recipient, along with other relevant details like the taxable value and amount of tax.
• GST Registration Details of Supplier: ITC can only be claimed if the supplier is registered under GST.
• Proof of Payment: You must maintain payment records such as bank statements or transaction receipts to confirm that you have paid for the software service. ITC claims are valid only when you make the payment.
• Contract/Agreement: A signed agreement between you and the software service provider should outline the scope, terms, and duration of the services.
• Payment to Government: You must provide evidence that the tax paid on software services has been deposited with the government, as ITC claims are only valid if the tax has been remitted to the government.
• Software Service Details: You must maintain records of the services, such as licenses, subscriptions, or consultancy, ensuring that the ITC claim is for services directly related to your business and qualifies under GST rules.

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After confirming eligibility and gathering the necessary documentation, the next critical step is understanding the refund mechanism under GST, which provides exporters the opportunity to reclaim any unutilized input taxes, including those accrued from software services.

Refund Mechanism for Input Taxes

The refund mechanism for input taxes on software services exports allows businesses to claim a refund of the GST paid on input services used in the provision of export services. Since exported software services are considered “zero-rated supplies,” they are exempt from GST. However, businesses can still apply for a refund on the taxes paid for inputs that directly contribute to the provision of these services.

Steps in the Input Tax Refund Process

1. Filing the Refund Application: Businesses must submit an application to the tax authority along with necessary documentation that proves the eligibility of the input tax claims.
2. Verification: The tax authorities review the application, invoices, and supporting documents to ensure compliance with regulations.
3. Approval: Once verified successfully, the refund claim is approved.
4. Refund Payment: The approved refund amount is paid via bank transfer or other agreed methods.

Exporters facing unutilized ITCs can first claim refunds, and once that’s addressed, they can further simplify their exports by filing a Letter of Undertaking (LUT), enabling them to export goods without upfront IGST payments. Let’s take a closer look.

Letter of Undertaking (LUT)

A Letter of Undertaking (LUT) is a declaration filed by exporters who wish to export goods or services without paying IGST at the time of export. To qualify for a LUT, exporters must have a proven track record of GST compliance and an export turnover not exceeding ₹1.5 crores for small exporters or ₹5 crores for medium exporters in the previous financial year. Exporters with turnover exceeding these thresholds are required to furnish an export bond instead.

Steps to File LUT

1. GST Portal: Log in to the official GST Portal.
2. Form GST RFD-11: File LUT online through Form GST RFD-11. You need to declare that you will export goods or services without payment of IGST.
3. Documents Required: Ensure you have the necessary documents ready, including export invoices, bank details for export payments, and a self-declaration certifying compliance with export provisions.
4. Approval: Once the LUT form is submitted, the GST department conducts a review. The department may either approve the form or seek clarifications if any details are found to be incomplete or unclear.

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While LUT is suitable for exporters operating within specified turnover limits, those exceeding these thresholds or handling high-value exports must follow the Bond procedure. Let’s explore the bond process for exporters in detail.

Bond Procedure for Exporters

Exporters with a turnover exceeding ₹5 crores in the previous financial year, or those seeking IGST exemption for high-value exports, must furnish a bond to customs. This ensures compliance with GST regulations while providing financial security for such transactions.

Steps to File Bond

1. Determine the Need: Assess whether your exports exceed ₹5 crores. If so, check if it is necessary to provide a bond for GST compliance.
2. Online Registration: Register for the bond through the GST Portal by filing Form GST RFD-11. This form acts as the official submission of your bond for GST compliance.
3. Execution of Bond: Provide an undertaking or a financial guarantee, such as a bank guarantee to the customs authorities.
4. Declaration of Intent: Clearly declare your intent to export software services, ensuring full compliance with GST regulations.

While compliance with GST regulations is crucial for exporters, as a software service provider, you can elevate your GST management processes with Pazy. Let’s see how this innovative platform automates your ITC claims and ensures seamless compliance for your business.

Pazy: Streamlining GST Compliance and ITC Claims for Software Services Exports

Pazy is an all-in-one automation platform that simplifies GST compliance for businesses. By automating invoice capture, GST validation, and 2A/2B reconciliation, it ensures accuracy and reduces manual effort. With real-time alerts and seamless integration, Pazy helps software service providers optimize their GST ITC claims and maintain compliance efficiently.

• Automated GST Reconciliation

Pazy’s automated GST reconciliation ensures that all transactions are matched accurately, eliminating manual errors and saving valuable time. It streamlines the entire process, making it faster and more efficient for businesses.

• Real-Time Error Alerts

Pazy provides real-time alerts for any discrepancies or errors in GST filings, allowing businesses to address issues promptly. This proactive approach ensures compliance and minimizes the risk of costly mistakes during audits.

• Accurate 2A/2B Reconciliation

With Pazy, businesses can automatically reconcile GST 2A and 2B data, ensuring accurate claims and minimizing discrepancies. This feature ensures that all input tax credits are correctly accounted for and compliant with tax regulations.

Pazy simplifies ITC claims for software services exports, improving compliance and cash flow. Integrating with accounting tools simplifies processes for finance teams and enhances audit readiness. Industry-specific businesses and startups benefit from efficient ITC management, ensuring compliance and supporting growth.

Conclusion

The GST system in India presents both opportunities and challenges for software service exporters. By understanding input tax credit for software exports and ensuring compliance with GST rules, businesses can avoid penalties and enhance cash flow through legitimate credit claims.

By adopting Pazy‘s dedicated GST advisory services, exporters can simplify GST compliance and automate ITC claims. This automation helps businesses to focus on growing their global reach while ensuring seamless financial operations.

Stay compliant and make the most of your exports with Pazy’s automation. Let us help you optimize your credit claims and streamline your operations for seamless software exports. Contact us to learn more!

FAQs

1. What happens if ITC is wrongly claimed for exported software services under GST?

If ITC is wrongly claimed, businesses may face penalties and interest, along with possible scrutiny by GST authorities, leading to legal consequences.

2. Can ITC be carried forward if software services exports are zero-rated under GST?

Yes, ITC can be carried forward if exports are zero-rated, and the unutilized ITC can be used in future tax periods or claimed as a refund.

3. Is there any difference in ITC treatment for domestic vs. exported software services under GST?

Yes, ITC on inputs used for exported software services is allowed, whereas ITC on software used for domestic services might be partially restricted based on input-output linkage.

4. What happens if GST is charged mistakenly on exported software services?

If GST is mistakenly charged on exports, the exporter can claim a refund of the wrongly paid tax, provided they have sufficient supporting documentation.

5. Can ITC be availed on expenses related to marketing activities for exported software services?

ITC can be availed on marketing expenses directly related to the promotion of exported software services, provided they are linked to the export activity.