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For Indian GST, a payment to an overseas supplier is not automatically taxable merely because the supplier has no GST registration in India. First establish that the transaction is an import of services: the supplier must be outside India, the recipient in India, and the place of supply in India. Then check whether the service falls within a reverse-charge notification in force for the transaction date. If it does, the Indian recipient becomes liable for IGST, generally pays that tax in cash, issues recipient-side documentation where required, reports the liability in the appropriate return field, and considers input tax credit only after payment and an ordinary eligibility review.
The procedure below is for Indian GST. Reverse-charge categories, rates, place-of-supply provisions and documentation rules can change, so map the exact service and transaction date to the current Integrated Goods and Services Tax Act, notifications and CGST Rules before filing.
Start with the legal test, not the supplier’s registration status
Section 2(11) of the Integrated Goods and Services Tax Act, 2017 defines an import of services through three cumulative conditions:
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- The recipient is located in India.
- The place of supply of the service is in India.
All three conditions must be documented for the particular service. A foreign supplier’s unregistered status is a reason to perform this review; it is not, by itself, a conclusion that GST is payable.
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What each condition means in the file
- Supplier location: retain the overseas entity’s legal name, address, contract details and invoice. A payment routed through an intermediary does not by itself change who supplied the service.
- Recipient location: identify the Indian legal entity or GST-registered establishment that receives and uses the service. Keep the relevant GSTIN and contracting entity consistent across the purchase order, invoice and books.
- Place of supply: apply the place-of-supply rule for the actual service. Record why the result is India and retain evidence for any rule that gives a special result. Do not infer place of supply solely from the currency, bank account, email domain or location of an employee who happened to use the service.
Use a decision matrix before booking reverse charge
| Finding | GST conclusion to test | Accounting action |
|---|---|---|
| Supplier outside India, recipient in India and place of supply in India; service is in a notified reverse-charge category | Import of services with recipient liability for IGST under reverse charge | Determine time of supply, prepare required recipient documents, pay IGST in cash, report it and assess ITC separately |
| Supplier outside India and recipient in India, but place of supply is outside India | The three-part import definition is not met on those facts | Do not book import reverse charge without another applicable charging provision; retain the place-of-supply analysis |
| All three import conditions are met, but the service is not covered by a reverse-charge notification for the transaction date | Import classification alone does not make the recipient liable under section 5(3) | Check the current notification and any other applicable levy before creating an IGST payable |
| Indian unregistered supplier sells to an Indian registered person | This is not an overseas import; section 5(4) concerns specified supplies from unregistered suppliers and is notification-dependent | Apply the domestic rule only if the particular supply is notified; do not copy the foreign-service workflow |
| Foreign supplier has some Indian registration or presence | Registration status alone still does not replace the import and reverse-charge tests | Identify the actual supplier, recipient and place of supply, then determine who must charge and report GST |
Section 5(3) of the IGST Act authorizes the Government to notify categories for which the recipient pays IGST under reverse charge and is treated as the person liable. Section 5(4) addresses specified supplies from an unregistered supplier to a registered person. Neither provision makes every foreign-vendor payment, or every unregistered-vendor payment, taxable in the same way.
Step 1: Build an evidence pack for the service and place of supply
Before calculating tax, create a short transaction memo linked to the invoice and contract. It should identify:
- the supplier’s country and legal entity;
- the Indian recipient and GST registration;
- what was supplied, including deliverables, service period and contract description;
- the invoice date, payment dates, currency and amount;
- the applicable place-of-supply rule and the facts supporting an Indian result;
- the notification or entry that places the service under reverse charge, if applicable; and
- the person responsible for approving the classification.
Keep the commercial invoice even when a self-invoice is required. The supplier’s invoice proves the commercial consideration and service; a recipient-issued document performs the Indian GST documentation function. A remittance record, contract, statement of work and correspondence can help demonstrate what was actually supplied.
Step 2: Confirm the reverse-charge notification
Once the import conditions are met, look up the reverse-charge notification applicable on the transaction date and match the service description and classification. Do not rely on a broad label such as software, subscription, consulting, advertising, cloud, support or professional fee. The contractual deliverable and the notified category control the analysis.
Record the notification reference, effective date and classification used. If the service has several components, separate them when the contract and invoices support separate treatment. If the classification is uncertain, escalate it before posting; a tax rate or reverse-charge decision chosen only because it was used for a previous vendor can create an underpayment or an avoidable cash outflow.
Step 3: Determine the time of supply and reporting period
Time of supply determines the return period in which the reverse-charge liability belongs. For reverse-charge services, the practical rule is generally the earlier of the relevant payment event or the statutory 60-day point after the supplier’s invoice, subject to the rule applicable on the transaction date. Capture both dates in the tax workpaper rather than relying on the date the invoice was uploaded to an accounting system.
Dates to capture
- supplier invoice date and invoice receipt date;
- date on which the recipient records or approves the service, where relevant to the organization’s controls;
- each advance or settlement payment date, including partial payments; and
- the date on which the 60-day period expires.
If an invoice is amended, cancelled or replaced, preserve the original and explain how the time-of-supply conclusion changed. For a series of invoices or a standing subscription, calculate each invoice or payment event separately unless the applicable rule permits another treatment.
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Step 4: Issue the recipient documentation on time
Where the reverse-charge rules require recipient documentation because the foreign supplier is not registered in India, issue a self-invoice in the recipient’s name with the prescribed particulars. The document should tie back to the supplier invoice and identify the supplier, description, value, currency conversion, taxable value, tax rate, IGST amount, place of supply and reverse-charge basis.
The Rule 47A procedure described for supplies from 1 November 2024 uses a 30-day deadline for issuing the recipient invoice in covered cases. Confirm the current text, effective date, exceptions and whether the particular transaction is within that rule before filing. A deadline in a practitioner workflow is not a substitute for checking the rule that applies to the transaction.
A payment voucher may also be required for a reverse-charge payment. Configure the accounting system to generate it when the applicable rule calls for one, and retain proof of payment. The self-invoice and payment voucher are separate from the overseas supplier’s commercial invoice; neither should be used to alter the agreed commercial amount.
Step 5: Measure the taxable value, currency and rate
Start with the consideration for the service and apply the foreign-currency conversion rule applicable at the time of supply. Document the conversion source and date, especially where the invoice, payment and bank settlement use different exchange rates. Keep the foreign-currency amount and the resulting Indian-rupee value visible in the workpaper.
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GST is calculated using the rate notified for the service classification. There is no universal percentage for every imported service. The rate can differ by classification and can change through a notification, so do not carry a generic rate from another service or an earlier period into the current return.
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For a multi-currency invoice, use one documented conversion method for the taxable event and explain any difference between the tax value and the amount settled by the bank. If the supplier grants a credit, debit or volume adjustment, assess its effect under the valuation and time-of-supply rules instead of netting it informally in the ledger.
Step 6: Post the liability and pay IGST in cash
Reverse-charge tax is paid through the cash ledger; it is not set off against an existing input-tax-credit balance. Your chart of accounts may differ, but an illustrative sequence is:
- Record the commercial purchase: debit the imported-service expense or capital-asset account and credit the foreign supplier payable for the agreed consideration.
- Recognize the reverse-charge obligation: debit a reverse-charge tax clearing or tax expense account and credit IGST payable under reverse charge for the calculated amount.
- Discharge the liability: debit IGST payable and credit the GST cash ledger or bank when the tax is paid through the return process.
- Recognize eligible credit separately: after payment and the normal ITC checks, debit the input-IGST credit account and credit the reverse-charge tax clearing account, or use the equivalent reclassification in your ERP.
The entries above are a control model, not a mandatory chart of accounts. Make sure the ledger shows both the cash payment and the later credit claim; a net journal that hides the cash payment can produce an incorrect return reconciliation.
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Step 7: Report the liability in the correct return period
Report the reverse-charge IGST in the applicable reverse-charge inward-supply field of GSTR-3B for the period determined by time of supply. Reconcile the return to the self-invoice, payment voucher where required, tax challan and general ledger. The return should show the gross reverse-charge liability even if the same tax later becomes eligible for ITC.
Keep a month-by-month register with at least:
- supplier and invoice number;
- service description and classification;
- foreign-currency consideration and converted taxable value;
- time-of-supply date and return period;
- IGST rate and amount;
- self-invoice and payment-voucher numbers;
- cash payment reference; and
- ITC claimed, deferred or denied, with the reason.
This register helps identify invoices received late, payments made before invoices, amended invoices and services that span several reporting periods.
Step 8: Test input tax credit only after tax payment
Payment of reverse-charge IGST and entitlement to input tax credit are separate decisions. After the tax has been paid, test the ordinary ITC conditions: possession of the required documentation, receipt of the service, use or intended use in the course or furtherance of business, timely compliance with applicable restrictions and absence of a blocked-credit rule. The fact that a service is imported, or that the tax was paid in cash, does not guarantee credit.
Questions for the ITC review
- Was the service actually received by the Indian entity claiming the credit?
- Does the self-invoice, supplier invoice and payment record agree on supplier, value and service?
- Is the expense wholly, or proportionately, connected with taxable business activity?
- Does the service fall within a blocked or restricted credit category?
- Was the tax paid and reported in the period required by the applicable rules?
- Does the claimed amount reconcile to the reverse-charge register and electronic credit ledger?
Defer or deny the credit when a condition is not met, and document the reason. A later claim should be supported by the same evidence rather than by a retrospective change to the original classification.
Worked example using variables rather than an assumed GST rate
Assume an Indian company receives a foreign consulting invoice for 8,000 units of a foreign currency. The supplier is outside India, the company is in India, and the documented place-of-supply analysis concludes that the place of supply is India. The service is then matched to a reverse-charge notification in force on the invoice and payment dates.
- Determine the time of supply from the applicable payment and 60-day invoice tests.
- Convert 8,000 foreign-currency units to Indian rupees using the prescribed conversion rule. Call the resulting taxable value V.
- Identify the notified rate for that classification. Call it r. The IGST payable is V × r; no assumed percentage should be inserted merely to complete the example.
- Issue the required self-invoice within the applicable Rule 47A period and create a payment voucher if required.
- Post the consulting expense or asset, recognize IGST payable of V × r, pay that amount in cash and report it in the correct GSTR-3B period.
- Claim up to V × r as input IGST only after confirming documentation, business use, blocked-credit rules and every other ITC condition.
If the place-of-supply analysis instead concludes that the place of supply is outside India, the import definition is not satisfied on these facts and the above reverse-charge entry should not be created without another applicable charging provision.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Records to retain for an audit or internal review
A complete file should allow another reviewer to reproduce the tax result without asking the original buyer what happened. Retain:
- executed contract, purchase order and statement of work;
- foreign supplier invoice, credit notes and correspondence;
- supplier-location and recipient-location evidence;
- place-of-supply memorandum and supporting operational facts;
- reverse-charge notification and classification analysis effective on the transaction date;
- currency conversion source and calculation;
- time-of-supply worksheet showing invoice and payment dates;
- self-invoice and payment voucher, where required;
- bank remittance and GST cash-payment evidence;
- GSTR-3B reconciliation and ledger postings; and
- ITC eligibility review, including any apportionment or denial.
Apply the business’s retention policy and any longer period required by GST law. Restrict access to contracts and invoices that contain confidential pricing or personal information.
Common errors and how to correct them
Treating every foreign payment as reverse charge
Why it fails: the import definition requires an Indian place of supply, and recipient liability requires a notified category. Fix: complete the three-condition test and attach the notification mapping before posting tax.
Using the vendor’s invoice date as the only date
Why it fails: the reverse-charge time-of-supply rule compares payment and the statutory invoice-period point. Fix: record every payment and the 60-day calculation in the tax register.
Claiming ITC without first paying cash
Why it fails: reverse-charge tax is discharged in cash and ITC is a subsequent eligibility decision. Fix: reconcile the cash payment reference before moving the amount into the input-credit account.
Applying a familiar rate from another service
Why it fails: rates follow the notified service classification and can change. Fix: save the rate source and effective date with each transaction.
Missing recipient documentation
Why it fails: a foreign supplier’s invoice does not remove recipient-side GST documentation requirements. Fix: configure a self-invoice and payment-voucher workflow with deadline alerts, and verify Rule 47A and exceptions for the transaction date.
Netting tax against the supplier payable
Why it fails: the GST cash payment and the commercial amount are different obligations. Fix: keep supplier settlement, IGST payable and cash-ledger payment as separate ledger events.
Ignoring blocked-credit or mixed-use rules
Why it fails: import status does not override ordinary ITC restrictions. Fix: perform a documented business-use and blocked-credit review before claiming.
A monthly control checklist
- Extract all overseas service invoices and payments for the period.
- Match each item to the supplier, recipient and place-of-supply evidence.
- Confirm whether the service is in a reverse-charge notification effective on the relevant date.
- Calculate time of supply and assign the return period.
- Calculate taxable value using the prescribed currency rule and verify the current rate.
- Issue self-invoices and payment vouchers within the applicable deadlines.
- Post the expense or asset and the IGST payable separately.
- Pay the liability in cash and retain the payment reference.
- Report the gross liability in the correct GSTR-3B field.
- Review ITC eligibility and reconcile any claim to the paid tax and supporting documents.
- Have a reviewer sign off exceptions, uncertain classifications and late documents.
When to obtain specialist advice
Escalate before filing when the contract has several service components, the supplier and recipient are related parties, the place-of-supply rule is unusual, invoices and payments cross different tax periods, the supplier later registers in India, or a notification changed during the service period. Also obtain advice where the service is partly used for exempt activities or appears to fall under a blocked-credit rule. The cost of a documented classification review is usually lower than repeatedly correcting returns, interest and credit reversals.
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