Understanding GST on Imported Services: Applicability, Tax Rates, and HSN Classifications

When an Indian entity obtains services from a foreign supplier, this transaction is categorized as an import of services. Similar to previous service tax regulations, these imported services are subject to taxation under India's Goods and Services Tax (GST framework). This article explores the GST implications for imported services in India, including their applicability, relevant tax rates, and associated exemptions.

Defining Import of Services Under GST

Consider a standard transaction where both the service provider and recipient are located and registered in India for GST purposes. In this scenario, the service provider issues an invoice that includes GST charges.

However, if a service provider is based outside India and offers services to an Indian entity, with the place of supply also being within India, this arrangement is specifically defined as an import of services under GST regulations.

Criteria for Classifying a Transaction as Imported Services Under GST

To determine if a transaction qualifies as an import of services, the following criteria must be met:

Location of Supplier and Recipient

The service supplier must be situated outside India, while the service recipient must be located within India's taxable territory.

Place of Supply

Section 13 of the Integrated Goods and Services Tax (IGST) Act, 2017, provides guidelines for determining the place of supply when either the supplier or recipient is located outside India. Generally, the place of supply is the recipient's location. If the recipient's location cannot be determined, the supplier's location is considered the place of supply.

Consideration

There must be a monetary or non-monetary exchange (consideration) between the two parties. However, if services are received without consideration from a related party located outside India, the transaction may still be considered an import of service under GST.

Purpose of Services

GST is typically applied only to services imported for business purposes. If an individual imports services for personal use, even with consideration, these services are generally exempt under GST.

Therefore, for a transaction to be classified as an import of service:

• The service supplier must be located outside India.
• The service recipient must be located in India.
• The place of supply must be in India.
• Consideration (monetary or non-monetary) must be exchanged, though transactions between related parties are considered supplies even without consideration.
• The services should be utilized for business objectives.

For instance, if an Indian company purchases cloud services from a UK-based IT firm for INR 1,00,000, this fulfills the criteria. The recipient is in India, the supplier is abroad, and according to Section 13 of the IGST Act, the place of supply is India. With consideration involved, this transaction qualifies as an import of services.

GST Applicability on Imported Services

The applicability of GST on imported services hinges on two primary factors: the purpose of the service and the presence of consideration. An imported service is deemed a supply for GST purposes if it is acquired for business activities and involves a consideration.

An exception applies to transactions between related parties, where GST remains applicable even if no consideration is involved.

In these instances, the service recipient in India is obligated to pay GST through the reverse charge mechanism. The GST liability arises at the earlier of two points: the date the services are received or the date payment is made to the service provider.

Furthermore, if an entity not registered under GST imports services for business purposes from outside India, that entity is still required to pay GST under the reverse charge mechanism. This necessitates obtaining GST registration as per Section 24(iii) of the CGST Act.

Continuing with the previous example, the Indian company receiving cloud services from the UK firm must pay IGST on INR 1,00,000 via the reverse charge mechanism.

GST Rates and HSN Codes for Imported Services

The GST rate imposed depends on the specific nature and type of services imported. For most professional services, a standard GST rate of 18% is applied to the value of the service, which corresponds to the consideration paid. The HSN code for such services typically falls under Chapter 99.

Exemptions and Specific Scenarios

Certain services imported are exempt from GST applicability, as detailed below:

• Exempted Persons: Services imported by specific entities are exempt, including:
• Central and state governments, local authorities, and individuals for personal use.
• Charitable Trusts.
• Any person located in a non-taxable territory.
• OIDAR Services: Online information and database access or retrieval (OIDAR) services, such as online movie subscriptions, e-books, or cloud services, have specific rules. If these services are provided by a foreign supplier, that supplier is usually responsible for registering and paying GST.
• Related Party Transactions: Import of services from related parties is subject to GST, regardless of whether consideration is involved. If there is no consideration, GST valuation rules are applied to determine the tax liability based on the derived value.
• Personal Use by Individuals: If an individual in India imports services strictly for personal, non-business purposes, GST is generally not applicable.

Input Tax Credit (ITC) on Imported Services

As established, GST is applicable on a reverse charge basis, making the service recipient liable for payment. Importantly, the GST paid under this mechanism can be claimed by the service recipient as an input tax credit. This is subject to meeting other applicable conditions, such as the requirement that the services must be used for business purposes.