Rishabh Goel
Co Founder & CEO
Oct 21, 2024
|
7
min
Why is India Important
India holds a significant position in the global SaaS economy. It is one of the largest and fastest-growing major economies with its GDP forecasted to be more than $4T by 2024.
Most importantly, India has a strong population of more than 1.4 billion consumers, which is a significant market for investment and commerce. This demographic advantage also translates into a diverse workforce that drives innovation and economic growth.
India specifically has a very strong and vibrant tech ecosystem which has the third largest number of unicorns only after the United States and China. Clearly, India is an important market for any SaaS or Global business.
Source: Statista (as of 30th March 2022)
What is Sales Tax
Sales tax is a crucial aspect for any Software as a Service (SaaS) company. In other words, Sales tax is one type of consumption tax charged by the government on any product or service that is sold across the country.
For SaaS companies, this means that if it is included in the company’s sales mix to sell software solutions to customers, the company may have to collect sales tax on their products.
In India the GST legislation has changed the way that sales tax works with the introduction of the Goods and Services Tax. In GST, both the goods and services are taxed under the same regime which makes it easier for SaaS companies.
Over the years, there have been many updates and changes regarding the rules for the payment of sales tax in India, which is why SaaS companies must familiarise themselves with their current responsibilities in this domain in order to stay compliant and avoid the imposition of fines. These businesses must obtain a GST registration number if their turnover crosses a certain limit and accurately levy and pay this tax to the government on the bills. Further, bookkeeping and filing of returns are also important principles concerning the Indian sales tax legislation.
More importantly, it advises managing sales tax regulations as the digital economy evolves within India, ensuring that SaaS businesses can meet financial obligations while promoting sustainable development in a competitive landscape.
What is GST
Also known as the goods and services tax, GST was rolled out on July 1, 2017, to consolidate multiple state and central taxes into one.
The Indian GST is divided into multiple tax brackets that classify goods and services depending on their importance in people’s lives. It is important for consumers and businesses to understand these tax slabs because they define the tax that is to be charged on a particular product or service.
The slabs include:
0% - Agricultural products and other goods
5% - Essential goods and services
12% - Daily living products and services
18% - Consumer goods and services (including SaaS)
28% - Luxury, non-essential and sin goods
Some of the commodities and services like an legal fee, alcohol, aviation turbine fee etc are outside the ambit of GST and can have their own taxes. For instance, Alcohol is one of the commodities that attract VAT.
India follows the HSN (Harmonized System of Nomenclature) code which is an international classification for the identification of tax rates. For instance, HSN Code 8517 is for mobile phones and the rate of rejection is 18%.
This is particularly important for Software as a Service (SaaS) companies that are operating under this framework. SaaS offerings are mostly categorized as services under the GST regime, implying that they attract a certain percentage rate based on the type of service. In most cases, SaaS products are categorized under 18% GST rates.
When a SaaS company sells its service to customers within India, it must charge the applicable GST rate on top of its pricing. This collected tax is then remitted to the government. Additionally, businesses can claim input tax credits for any GST paid on inputs used in providing their services, which helps reduce their overall tax burden.
Furthermore, interstate transactions incur Integrated Goods and Services Tax (IGST), while intrastate sales involve Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST). For SaaS companies operating across multiple states, maintaining meticulous records of these transactions is essential for accurate filing and compliance with state-specific regulations.
GST for Indian SaaS Companies
For Indian SaaS companies, GST applies to the supply of software services provided to customers in India. These companies are required to register for GST if their annual turnover exceeds the prescribed threshold limit.
The current annual limit for GST for SaaS companies is INR 20 Lacs or USD 23k.
Once registered, companies must charge GST on their services at the applicable rate—generally 18% for most software services. GST requires companies to file taxes every month.
The process begins with SaaS providers issuing invoices that include GST details. They collect this tax from their customers and are responsible for remitting it to the government. Furthermore, these companies can claim input tax credit on any GST paid for business-related purchases, which helps reduce their overall tax burden.
GST for Non-Indian SaaS Companies
For non-Indian SaaS companies, GST is defined under OIDAR (Online Information Database Access and Retrieval), introduced in 2017.
OIDAR defines digital goods is any product or service that operates through the Internet, is primarily automated, and requires minimal human intervention. Under OIDAR, SaaS companies are subject to 18% GST.
For example, you are a California based SaaS company and are charging USD 20 for monthly subscription. Under OIDAR regulations, you need to collect 18% GST ie. $3.6 additional from Indian customers. In fact, OpenAI collects $23.6 from Indian customers for it’s $20 monthly subscription.
In 2023, OIDAR had a three updates with a major consequences for non-Indian SaaS Companies.
Broadened scope of digital goods by removing the requirement for "minimal human intervention".
Revised the definition of "non-taxable online recipient" to include unregistered users, making them subject to GST.
Amendments eliminated the exemption for OIDAR services provided to government entities and individuals for non-business purposes.
Most importantly, these amendments mean that foreign companies have to register for GST with the local tax authorities as soon as they have their first Indian customer.
Unlike Indian customers, there is no threshold for GST.
GST Notices on key non-Indian SaaS companies
Late 2023 after the changes in OIDAR, GST authorities sent notices to a bunch of foreign companies such as Facebook, Google, Netflix and Spotify, to ensure compliance with new GST regualtions, Business Standard reported.
These notices were sent to around 70 digital companies including advertising firms, edtech and online gaming firms in line with requirements for 18 percent Integrated GST (IGST). The new regulation became effective as of October 1 2023, irrespective of whether the services are for personal or business use.
With India requiring GST compliance for non-Indian SaaS companies from the very first sale, it is imperative to ensure you are GST compliant.
How to become GST-compliant
The process of dealing with GST compliance in India can be a daunting task given the overwhelming complexity of the subject. The number of regulations, constant changes in policies, and the ambiguous nature of rules governing digital services make it almost impossible for foreign companies to penetrate the market. The process requires not only knowledge of the Indian tax legislation but also time, effort, and possibly local knowledge.
However, the consequences of non-compliance are much higher than in the case of compliance. Any non-compliance to the GST laws is subject to severe consequences such as fines, interest, and even a business operations ban in the Indian market. The costs associated with non-registration and non-compliance with GST can cause a company more harm than the actual costs of registration and compliance. As such, non-Indian SaaS companies must pay utmost diligence and care towards GST compliance as the stakes are very high.
To become GST compliant in India as a non-Indian SaaS company, follow these steps:
1. Appoint a GST representative:
- As a foreign entity, you need to appoint a person residing in India as your authorized representative for GST purposes.
2. Register for GST:
- Use the official GST portal (www.gst.gov.in).
- Fill out form GST REG-10 for registration of non-resident taxable persons.
- Provide details like company incorporation documents, proof of business address in your home country, and your Indian representative's details.
3. Obtain GSTIN:
- After verification, you'll receive your GSTIN, usually within 3-7 working days.
4. Implement GST-compliant invoicing:
- Ensure your invoicing system can generate GST-compliant invoices for Indian customers.
- Include details like GSTIN, SAC (Service Accounting Code) for your services, and applicable GST rates.
5. Understand Place of Supply rules:
- For SaaS services, the place of supply is typically the location of the recipient.
- This determines the type of GST (IGST, CGST+SGST) to be charged.
6. File monthly returns:
- As a non-resident supplier, you'll need to file monthly returns (GSTR-5).
- Returns must be filed by the 20th of the month following the tax period.
7. Pay monthly GST:
- Collect and pay the appropriate GST on your services.
- IGST (Integrated GST) is typically applicable for services provided by foreign companies.
8. Maintain meticulous records:
- Keep detailed records of all transactions with Indian customers.
In conclusion, GST compliance represents a substantial burden for SaaS companies, requiring significant investment in time, resources, and expertise to navigate the complex Indian tax system. This compliance process often necessitates ongoing attention and adaptation, potentially diverting focus and resources from core business activities and innovation.
For many SaaS companies or startups, these compliance requirements can pose a major challenge to entering and competing effectively in the Indian market, underscoring the need for careful consideration and potentially expert guidance when expanding operations into India.
Why MoR is the right solution
To ensure you meet Sales Tax compliance requirements, you may consider a Merchant of Record.
A Merchant of Record is a legal entity that handles all aspects of payments on your behalf. In addition, it takes on the liability related to every transaction to an end customer, be it the selling of goods or services. It arranges all due tax payments, ensures PCI compliance, and takes care of any refunds and chargebacks.
Most importantly, it manages all aspects of Sales Tax compliance on your behalf. Once you onboard a Merchant of Record, their legal entity will handle all the taxation compliance requirements and as a merchant, you do not need to be concerned about GST compliance.
Dodo Payments is one such Merchant of Record, built for global SaaS companies. We have a strong team that manages all aspects of payments including 300+ local payment methods, and tax compliance across 190+ countries, and has all payment tools in-built (such as billing, subscription, invoicing, payouts, etc).
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