How Much GST on Foreign Remittance? A Clear Guide for Indian Businesses

You send money abroad to pay for software, hire a freelancer, or buy raw materials. Then you get hit with the question: how much GST on foreign remittance? It’s confusing because the rules change depending on who is paying and what they are buying. One day it’s zero, the next day your bank deducts 18% under Reverse Charge Mechanism (RCM). If you don’t understand this, you might overpay tax or face penalties later.

This guide cuts through the jargon. We will look at exactly when GST applies, when it doesn’t, and how to handle the paperwork so you don’t lose sleep over compliance. Whether you are an exporter earning dollars or an importer paying in euros, the logic follows a clear path once you know the key triggers.

The Core Rule: Export vs. Import

Think of GST as a tax on consumption within India. If goods or services leave India, the government usually wants them to be competitive globally, so they often remove the tax burden. If things enter India, the local consumer pays the tax.

When you receive money from outside India for services provided by you, this is typically an "export of services." Under the Integrated Goods and Services Tax (IGST) Act, exports are generally treated as "zero-rated supplies." This means the rate of GST is effectively 0%. You do not charge your foreign client any GST. However, you still need to file returns. Why? Because you want to claim refunds for the GST you paid on inputs (like office rent or software subscriptions).

Conversely, if you are sending money out of India to pay for services received from a foreign entity, the situation flips. The foreign provider does not charge you GST because they are not registered in India. But the Indian government says, "Wait, we should have collected tax on this service consumed here." So, you must pay it yourself. This is where the Reverse Charge Mechanism comes into play.

Receiving Money: When Exports Are Zero-Rated

If you are an IT consultant, a graphic designer, or a manufacturer selling goods abroad, you are likely looking at zero GST. But there are conditions. You cannot just say "it's an export" and skip the tax. You must meet specific criteria set by the Central Board of Indirect Taxes and Customs (CBIC).

• Supplier Location: The supplier (you) must be located in India.
• Recipient Location: The recipient of the service must be outside India.
• Place of Supply: The place of supply of the service must be outside India.
• Payment in Forex: Payment must be received in convertible foreign exchange or in Indian rupees wherever permitted by the Reserve Bank of India (RBI).

If you meet all four, your supply is an export. The tax rate is nil. You issue an invoice without GST. In your GSTR-1 return, you report these transactions under the "Export" column. Later, in your GSTR-3B, you can claim a refund of the input tax credit (ITC) you accumulated on expenses related to that export. Alternatively, you can choose to pay IGST on exports and then claim a full refund. Most small businesses prefer the Letter of Undertaking (LUT) route to avoid blocking cash flow by paying tax upfront.

Sending Money: The Reverse Charge Trap

Now, let’s talk about the scenario that catches most people off guard: paying for foreign services. Imagine you hire a marketing agency in London or subscribe to a US-based cloud server. The invoice says $500. No GST line item. You transfer the funds via wire transfer. Done?

No. Not quite. Since the service was used in India, GST applies. But since the foreign vendor isn't registered in India, they can't collect it. Therefore, the liability shifts to you, the recipient. This is the Reverse Charge Mechanism (RCM). You must calculate 18% GST on the value of the import and deposit it directly with the government using Form DRC-03. This payment is not an expense; it's a tax liability. However, if you are a regular taxpayer, you can take this amount back as Input Tax Credit (ITC) in the same month, provided you file your returns correctly.

Calculating the Value: What Exactly is Taxable?

A common mistake is calculating RCM only on the principal amount. Suppose you pay $1,000 for software, but your bank charges a $20 transaction fee. Is GST applicable on the $20 too? Yes. The taxable value for RCM includes the cost of the service plus any incidental costs like bank charges, insurance, or freight associated with bringing the service into India.

Furthermore, currency conversion matters. You must use the exchange rate notified by the RBI on the date of the invoice or the date of payment, whichever is earlier. Do not guess the rate. Use the official reference rate published by the RBI. If you underestimate the value, you risk interest and penalties during audits.

Documentation: The Paper Trail Saves You

The Income Tax Department and GST authorities love documentation. If you claim zero GST on exports, you need proof. Keep these documents handy:

1. Invoice: Clearly marked as "Export Invoice." It should state that no GST is charged due to export status.
2. Bank Realization Certificate (BRC): Also known as e-BRC now. This proves the money actually entered India in foreign currency. Without this, your "export" might be reclassified as a domestic sale, triggering 18% GST retroactively.
3. Letter of Undertaking (LUT): File this annually on the GST portal if you want to export without paying IGST upfront. It’s free and takes minutes.
4. Contract/Agreement: Proof that the service was delivered to a foreign entity.

For imports under RCM, keep the foreign invoice, the bank statement showing the debit, and the challan proving you deposited the RCM tax. If you miss the RCM payment deadline (usually the 20th of the following month), you’ll pay interest. Worse, if you don’t report it, you can’t claim the ITC, making the 18% a pure loss.

Special Cases: Freelancers and Small Entities

What if you are a freelancer below the turnover threshold? If your annual turnover is under ₹20 lakhs (or ₹10 lakhs in special category states), you might not even be registered for GST. In that case, you don’t charge GST on exports. But wait-if you import services, do you still pay RCM?

Yes. Even unregistered persons are liable to pay GST under RCM for certain specified services. However, recent notifications have exempted some categories for individuals not in business. For example, if you personally import a service for personal use, you might be exempt. But if it’s for business, the liability sticks. Always check the latest notification numbers, as CBIC updates these frequently.

Another nuance involves "mixed supplies." If you buy a software license that includes both a download (goods) and support (services), the classification might shift. Generally, if the predominant nature is a service, it’s treated as a service import. If it’s predominantly goods, customs duty and IGST apply at the border instead of RCM. Misclassifying this can lead to double taxation or missed credits.

Common Pitfalls and How to Avoid Them

Most errors aren’t malicious; they’re administrative. Here are the top three traps:

1. Ignoring the Place of Supply Rules: Just because the client is abroad doesn’t mean it’s an export. If you provide consulting services to a foreign company but the benefit is enjoyed in India (e.g., improving an Indian factory’s efficiency), the place of supply might be India. Then, you must charge 18% GST. Analyze each contract individually.

2. Missing the LUT Filing: If you forget to file the LUT by April 1st (or within the grace period), you must pay IGST on every export invoice before shipping. This blocks your working capital. Set a calendar reminder.

3. Incorrect ITC Claiming: You can only claim ITC on RCM payments if you have the correct tax invoice details and have filed the relevant returns. If you pay RCM but forget to include it in your GSTR-3B, the credit is lost. It doesn’t roll over indefinitely.

Practical Example: The Digital Agency

Let’s look at "PixelWorks," an agency in Bangalore. They have two transactions in March 2026.

Transaction A: PixelWorks designs a website for a client in New York. Fee: $2,000. Exchange rate: ₹83/$. Total: ₹1,66,000. They file an LUT. Result: 0% GST on invoice. They claim refund for GST paid on their Adobe subscription.

Transaction B: PixelWorks hires a SEO expert in Berlin. Fee: €500. Exchange rate: ₹90/€. Total: ₹45,000. Plus bank fees: ₹500. Total Value: ₹45,500. Result: PixelWorks must pay 18% GST on ₹45,500 = ₹8,190. They deposit this via DRC-03. In their monthly return, they claim ₹8,190 as ITC. Net cash impact: Zero (if they have enough output liability to offset, otherwise they carry forward the credit).

This balance is crucial. If you only export, you accumulate credits and ask for cash refunds. If you only import, you pay cash tax but recover it as credit. If you do both, you net them against each other, simplifying cash flow.

Final Checklist Before Hitting Send

Before you execute any international payment or receipt, run this quick check:

• Is the counterparty clearly identified as a foreign entity?
• Is the place of supply definitely outside (for exports) or inside (for imports) India?
• Do you have a valid LUT if exporting?
• Have you calculated RCM on the total value including bank charges?
• Will you deposit the RCM tax by the 20th of the next month?
• Are you recording the e-BRC for incoming forex?

Understanding these mechanics saves you from surprise bills. The system is designed to be neutral for exporters and fair for importers. Once you map your transactions to these rules, compliance becomes routine rather than reactive.