GST Treatment for Software and SaaS Exports to International Clients

For Indian MSME owners in the technology sector, the global market offers boundless opportunities. Whether you are a freelance developer, a boutique design agency, or a growing SaaS provider, your clients are just as likely to be in London or New York as they are in Mumbai. However, cross-border transactions bring a specific set of compliance challenges, particularly regarding the Goods and Services Tax (GST).

Understanding these regulations is vital to avoiding unnecessary tax liabilities and unlocking refunds.

This blog post breaks down GST rules for software and SaaS exports from India, helping your business stay compliant while improving profitability.

Is your software service an 'export'?

Before determining tax liability, you must establish whether your service legally qualifies as an 'Export of Service'. In the world of GST, simply billing a client abroad does not automatically exempt you from tax.

According to Section 2(6) of the IGST Act, a supply qualifies as an export of services only when all the following conditions are met:

1. Supplier location: The supplier of the service is located in India.
2. Recipient location: The recipient of the service is located outside India.
3. Place of supply: The place of supply of the service is outside India.
4. Payment currency: The payment is received in convertible foreign exchange (or in Indian Rupees wherever permitted by the RBI).
5. Distinct persons: The supplier and recipient are not merely establishments of a distinct person (e.g., a branch office billing its head office).

If your transaction meets these five criteria, it is classified as a Zero-Rated Supply.

The concept of Zero-Rated Supply

Under the GST law, exports are treated as 'Zero-Rated Supplies'. This is distinct from 'Nil-Rated' or 'Exempt' supplies.

• Zero-Rated: The tax rate on the output is 0%, but you can still claim Input Tax Credit (ITC) on the goods and services you purchased to run your business (like laptops, server costs, or office rent).
• Exempt: You pay no tax on output, but you generally cannot claim ITC on inputs.

For software exporters, this distinction is crucial. It means you do not burden your foreign clients with Indian taxes, yet you can still recover the GST you pay on your business expenses.

The distinction is critical for profitability. Unlike 'Exempt' supplies (where tax sticks to your costs), 'Zero-Rated' exports allow you to claim a full refund of the GST paid on your business expenses. This ensures that Indian taxes are not exported to your foreign clients, keeping your pricing competitive.

What is the standard rate?

If you fail to meet the export criteria (for instance, if you receive payment in INR from a non-qualifying source), your service may be treated as a domestic supply. For most IT and software services falling under SAC Code 9983, the standard GST rate is 18%.

Two ways to manage GST for exports

Since valid exports are classified as Zero-Rated Supplies, the government provides two distinct methods to handle the tax compliance:

1. Export under Letter of Undertaking (LUT)

This is the most popular option for MSMEs and SaaS businesses because it prevents cash flow blockages.

• How it works: You file a Letter of Undertaking (Form GST RFD-11) at the start of the financial year.
• The benefit: You can issue invoices to international clients without charging any IGST.
• The result: You pay zero tax upfront. You can then apply for a refund of the unutilised ITC accumulated on your business purchases.

2. Export on payment of IGST

This option allows exporters to pay tax upfront on export supplies and later recover the amount through the refund mechanism.

• How it works: You charge IGST (usually 18%) on your export invoice and pay this amount to the government.
• The benefit: You can subsequently claim a full refund of the IGST paid.
• The result: This option is generally used by exporters who have a large amount of accumulated ITC they wish to liquidise, but it does require blocking working capital until the refund is processed.

Documentation and compliance essentials

To substantiate your export claims during an audit, you must maintain impeccable records. Ensure you have the following:

• Foreign Inward Remittance Certificate (FIRC) or BRC: This is proof from your bank that payment was received in foreign currency.
• Export invoice: Your invoice must be compliant with GST rules, clearly stating the currency and containing an endorsement if you are exporting under LUT (e.g., “Supply meant for export under Bond or Letter of Undertaking without payment of Integrated Tax”).
• Service agreement: A contract providing the scope of work and the foreign recipient's details.

Streamlining exports with TallyPrime

Managing multi-currency invoices, tracking FIRCs, and ensuring accurate return filing can be overwhelming manually. TallyPrime simplifies this process by integrating export-specific compliance features directly into your billing workflow.

Automated multi-currency invoicing

TallyPrime allows you to generate professional invoices in any foreign currency (USD, GBP, EUR) while automatically handling the exchange rate calculations for your books. It ensures your invoice format meets all legal requirements for exports.

Seamless GSTR-1 and GSTR-3B filing

Reporting exports correctly in your GST returns is critical to avoid notices.

• Table 6A of GSTR-1: TallyPrime automatically populates export details into the correct fields (Table 6A) based on your voucher entries.
• LUT Management: You can configure your company details within TallyPrime to reflect your LUT validity period, ensuring the tax calculation logic (Zero tax vs 18%) is applied correctly automatically.

Input Tax Credit (ITC) tracking

Since claiming refunds on ITC is a key benefit for exporters, TallyPrime helps you track exactly how much tax credit you have accumulated against your purchases, making the refund application process smoother and data-backed.

Conclusion

For Indian software and SaaS companies, the world is truly your marketplace. The GST regime, with its zero-rated provision, is designed to make your services competitive globally. By choosing the right compliance route, typically the LUT model and using a powerful GST software to manage your documentation, you can focus on writing code and acquiring clients rather than worrying about tax notices.

Ensure you consult a GST rate finder if you are unsure about specific service codes, and leverage automation to keep your compliance spotless. Growth is waiting; make sure your paperwork is ready for it.