Comprehensive Guide to GST and Income Tax Implications on Software Purchases from Foreign Vendors Without PE in India (2025 Edition)
Comprehensive Guide to GST and Income Tax Implications on Software Purchases from Foreign Vendors Without PE in India (2025 Edition)
In today’s hyper-connected global economy, Indian businesses, startups, freelancers, and even individuals routinely acquire software solutions from international vendors who do not maintain a Permanent Establishment (PE) in India. Whether it’s a cloud-based CRM, AI-powered analytics tool, design software, or enterprise resource planning (ERP) system, seamless payment gateways like credit cards (Visa, Mastercard, Amex) or digital wallets (PayPal, Stripe) have made cross-border procurement effortless. However, beneath this convenience lies a complex web of tax obligations under India’s Goods and Services Tax (GST) and Income Tax Act, 1961. As of November 2025, such transactions are classified as imports of services, triggering liabilities primarily through the Reverse Charge Mechanism (RCM) for GST and potential Tax Deducted at Source (TDS) under income tax provisions.
1. Transaction Classification: Import of OIDAR Services
Under Section 2(17) of the IGST Act, 2017, any service received by a person in India from a supplier located outside India constitutes an import of service. When the software is delivered electronically—via download, cloud access, or API integration—and involves minimal human intervention, it qualifies as Online Information and Database Access or Retrieval (OIDAR) services as defined under Section 2(16) of the IGST Act.
Key Triggers for OIDAR Classification:
- Automated delivery
- Internet-dependent
- Impractical without IT infrastructure
Examples include:
- SaaS platforms (Salesforce, Zoom, Canva)
- Licensed software (Microsoft 365, Adobe Creative Cloud)
- API subscriptions (Google Maps, Twilio)
- Downloadable tools (Antivirus, CAD software)
Since the foreign vendor has no PE in India, it is not required to register under GST. Consequently, the place of supply is deemed to be India (recipient’s location), making the transaction taxable under IGST.
2. GST Liability: Reverse Charge Mechanism (RCM) in Detail
The cornerstone of taxation here is the Reverse Charge Mechanism under Notification No. 10/2017-Integrated Tax (Rate) and Section 5(3) of IGST Act. Normally, the supplier charges and remits GST. But in inter-state or import scenarios with unregistered foreign suppliers, the recipient (Indian buyer) becomes liable to pay GST directly to the government.
Applicable GST Rate (Post-2025 Reforms)
As per the 53rd GST Council Meeting (September 2025), digital services are now streamlined into two primary slabs:
| Service Type | GST Rate | ITC Availability |
|---|---|---|
| Merit-rated digital services (e.g., basic productivity, education) | 5% | No ITC |
| General digital services (SaaS, enterprise software, custom tools) | 18% | Full ITC (if used for taxable supplies) |
Default Rate: 18% IGST on most B2B and B2C software imports.
Compliance Process
- Self-invoicing: Buyer issues invoice to self.
- Payment: Deposit IGST via GSTR-3B (monthly/quarterly).
- ITC Claim: Available only if:
- Buyer is GST-registered
- Software used for furtherance of business
- Supplies are taxable (not exempt)
Penalty for Non-Compliance: 100% of tax + interest @18% p.a. + late fee.
3. Income Tax Implications: TDS, Royalty, and Equalisation Levy
While GST is transactional, income tax focuses on the source and nature of payment.
A. Is It Royalty or Business Income?
The characterization determines TDS applicability.
| Nature of Payment | Tax Treatment | TDS Rate |
|---|---|---|
| Shrink-wrapped/off-the-shelf software | Purchase of goods (not copyright) | No TDS |
| Custom software with source code transfer | Royalty | 10% + surcharge + cess |
| SaaS/Cloud access | Service fee | Generally no TDS unless FTS |
| Technical support bundled | May be FTS | 10% TDS |
Landmark Judgment: Engineering Analysis Centre of Excellence Pvt Ltd v. CIT (2021) – Supreme Court ruled that payment for standardized software without transfer of copyright is not royalty. This ruling remains authoritative in 2025.
B. Equalisation Levy (EL) – Seller’s Burden
Introduced in 2016 and expanded in 2020, the 2% Equalisation Levy applies to e-commerce supply of services by non-residents to Indian residents if annual revenue > ₹2 crore.
Good News: EL is deducted and paid by the foreign vendor, not the Indian buyer. Example: A US SaaS company earning ₹5 crore from Indian clients pays ₹10 lakh EL.
The 6% EL on digital advertising was abolished w.e.f. 1st April 2025, reducing compliance for ad-tech imports.
C. TDS Practicality via Payment Gateways
When paying via credit card or PayPal, physical withholding is impossible. However:
- Form 15CA/CB required if aggregate annual payment to non-resident > ₹5 lakh.
- Self-declaration (Part A) or CA certificate (Part B/C) mandatory.
- Non-filing attracts ₹1 lakh penalty under Section 271-I.
Workaround: Many buyers route high-value payments via bank TT (Telegraphic Transfer) to enable TDS deduction.
4. Payment Gateway Nuances: Credit Card vs. PayPal
| Aspect | Credit Card | PayPal |
|---|---|---|
| Currency Conversion | Bank rate + markup | PayPal rate + 3–4% fee |
| TDS Feasibility | Not possible | Not possible |
| GST Invoice | Rarely provided | Sometimes provided |
| RBI LRS Compliance | Counts toward $250,000 limit | Same |
| Documentation for Audit | Bank/CC statement | PayPal transaction ID |
RBI Liberalised Remittance Scheme (LRS): Individuals can remit up to USD 250,000 per year for current account transactions (including software). TCS @5% applies above ₹7 lakh (refundable).
5. Real-World Examples with Calculations (2025 Rates)
Example 1: Startup Buying SaaS (B2B)
- Buyer: Mumbai-based fintech startup (GST-registered)
- Software: Annual Notion subscription
- Cost: USD 1,200 (~₹1,01,000 @ ₹84/USD)
- Payment: Via corporate credit card
| Component | Amount (₹) |
|---|---|
| Base Price | 1,01,000 |
| IGST @18% (RCM) | 18,180 |
| Total Outflow | 1,19,180 |
| ITC Claim | (18,180) |
| Net Cost | 1,01,000 |
Verdict: No additional cost due to full ITC.
Example 2: Freelancer (Personal Use)
- Buyer: Delhi-based graphic designer
- Software: Adobe Creative Cloud (₹4,000/month)
- Annual Cost: ₹48,000
- Payment: PayPal
| Component | Amount (₹) |
|---|---|
| Base Price | 48,000 |
| IGST @18% (RCM) | 8,640 |
| Total Cost | 56,640 |
Verdict: ₹8,640 (18%) is pure additional cost — no ITC.
Example 3: Enterprise Custom Software (Royalty Case)
- Buyer: Bangalore IT firm
- Software: Custom AI module with source code
- Cost: ₹25,00,000
- Payment: Bank TT
| Component | Amount (₹) |
|---|---|
| Base Price | 25,00,000 |
| TDS @10% + 4% cess | 2,85,000 |
| IGST @18% | 4,50,000 |
| Total Outflow | 32,35,000 |
| ITC on GST | (4,50,000) |
| TDS Credit (to vendor) | Adjustable |
| Net Cost to Buyer | 25,00,000 + interest on TDS |
TDS deposited with IT dept; vendor claims credit via Form 16A.
6. Is It an Additional Cost? A Balanced View
| Scenario | GST Cost | TDS Cost | Net Impact |
|---|---|---|---|
| GST-registered business, taxable supply | Neutral (ITC) | Neutral | Zero additional cost |
| Exempt business / individual | 18% extra | N/A | High cost |
| Royalty payment | 18% (ITC) | 10–11.7% | Cash flow strain |
2025 Budget Relief: ITC on RCM now allowed even for intra-group shared services via ISD registration.
7. Strategic Compliance Tips for 2025
- Register for GST (even if turnover < ₹20 lakh) to claim ITC.
- Use accounting software (Zoho Books, Tally) with RCM automation.
- Obtain invoices from foreign vendors (mandatory for ITC).
- File GSTR-1, GSTR-3B on time.
- Consult CA for 15CA/CB in high-value deals.
- Leverage DTAA (India-US, India-Singapore) to reduce TDS (Form 10F).
- Explore volume licensing — some vendors absorb GST.
Conclusion: Plan, Don’t Panic
Purchasing software from foreign vendors without PE in India is not tax-free, but it’s manageable. The 18% IGST under RCM is the primary levy, fully offsettable via ITC for businesses. Income tax (TDS) applies only in royalty/FTS cases, and Equalisation Levy remains the seller’s headache.
With India’s digital economy projected to touch $1 trillion by 2030, such transactions will only grow. By understanding these rules—updated through the 2025 GST reforms and judicial precedents—importers can transform compliance from a burden into a strategic advantage.
Pro Tip: Budget an 18–20% tax buffer in RFPs. Negotiate with vendors to invoice in INR or absorb GST for long-term contracts.
In the end, while taxes add friction, they fund India’s infrastructure—and with smart planning, your software investment remains a growth driver, not a cash drain.