Input Tax Credit on Imported Services Under GST: Eligibility, Conditions and Examples

Input Tax Credit (ITC) on imported services allows a registered business to claim credit for the Integrated Goods and Services Tax (IGST) paid on services imported from a supplier outside India. The services must be used for business purposes.

These services are generally taxable under the Reverse Charge Mechanism (RCM), under which the recipient in India pays the applicable IGST instead of the foreign supplier, provided the transaction qualifies as an import of services under Section 2(11) of the IGST Act.

The recipient may claim Input Tax Credit (ITC) on the tax paid under RCM, subject to the eligibility and conditions prescribed under Section 16 of the CGST Act, 2017. The liability to pay tax under reverse charge arises in accordance with Section 5(3) of the IGST Act and the relevant notifications issued under it.

What is Input Tax Credit on imported services and how does it work?

When a business imports services, it generally pays IGST under reverse charge. Once the applicable legal conditions are satisfied, the tax paid can be claimed as ITC.

• Qualifying as an import of services

Under IGST Act Section 2(11), a transaction qualifies as an import of services when the supplier is situated outside India, the recipient is in India and the place of supply of the service is in India. All three conditions must be met together. A service billed by an overseas entity but actually used outside India may therefore not qualify as an import of services.

• Paying GST under reverse charge mechanism

Imported services are taxable under the RCM as notified under Section 5(3) of the IGST Act, read with Notification No. 10/2017-Integrated Tax (Rate). The recipient in India can pay IGST through the Electronic Cash Ledger, issue a self-invoice where applicable under GST provisions and claim eligible ITC after meeting the prescribed conditions.

• Determining who can claim ITC

CGST Act Section 16(1) sets out the conditions for claiming ITC on imported services. A registered person must use the service for business purposes, pay the tax under RCM, retain a valid tax invoice or prescribed self-invoice and file the relevant GST returns. 

An unregistered business or one that has opted for a composition scheme cannot avail this credit even if the underlying service was actually used for business.

• Recognising conditions that may restrict ITC

There might be some restrictions applied even after tax is paid. Blocked credits listed under Section 17(5) of the CGST Act may apply depending on the nature of the service, such as certain hospitality or personal use categories. 

Services used for personal consumption, exempt supplies or non-business purposes do not qualify for ITC. Where a service supports both taxable and exempt supplies, the credit may need to be apportioned under the applicable rules.

Under Section 16(4), ITC must be claimed by the applicable deadline: no later than 30 November following the end of the financial year to which the invoice pertains, or before filing the annual return for that year, whichever is earlier.

What conditions must businesses meet before claiming ITC?

Paying GST under RCM does not automatically make ITC available. Here are a few additional requirements:

Maintaining valid documentation

Businesses should retain the supplier invoice, payment records and, where required, a self-invoice under GST provisions. They should also keep proof of tax paid under RCM and accounting records that clearly link the transaction to the tax payment. This can make it easy to respond to any query raised by the department later.

Using the service for business purposes

ITC is available only for the portion of the service used for business purposes. Where a service has mixed use, such as a shared cloud subscription used across departments, credit may be restricted to the business proportion and purely personal use of an otherwise business-related service does not qualify for credit at all.

Reporting and paying GST correctly

The IGST payable under RCM should be reported accurately in the relevant return. Businesses disclose RCM liability and the ITC claim in Goods and Services Tax Return (GSTR) 3B using the table meant for eligible credit, so that the payment and the claim are properly reconciled. Any mismatch between these two can invite scrutiny during assessment. Therefore, periodic reconciliation between accounting records and return filings should be prioritised.

Examples of ITC on imported services 

Businesses import a wide range of services, but the availability of ITC always depends on business use and correct GST compliance for each transaction.

Conclusion

Businesses importing services should make GST compliance a part of their regular accounting process instead of leaving it until return filing. TallyPrime can help in recording imported service transactions and GST entries and maintaining accurate books while supporting ITC reporting. Following the reverse charge provisions and meeting the prescribed conditions before claiming ITC can also help businesses avoid mistakes and stay GST compliant.