GST for IT & Software Companies

GST Framework for IT & Software Services

India’s IT and software sector contributes over USD 245 billion in revenue and is the country’s largest services exporter. The GST framework for this sector is designed to maintain India’s global competitiveness while ensuring robust domestic compliance. At Virtual Auditor, we serve a large portfolio of IT companies — from bootstrapped startups to large listed enterprises — and understand the nuances that can materially impact tax efficiency.

Classification of IT & Software Services Under GST

IT and software services fall under the following Service Accounting Codes (SAC) for GST purposes:

• SAC 998311: IT consulting and support services
• SAC 998312: IT design and development services (software, websites, applications)
• SAC 998313: IT hosting and infrastructure provisioning services
• SAC 998314: IT infrastructure and network management services
• SAC 998315: Software licensing and subscription services (SaaS)
• SAC 998316: Software maintenance and support
• SAC 998321-998329: Various BPO and KPO services

All these services attract GST at 18% for domestic supplies. The key advantage for IT companies lies in the zero-rating provisions for exports.

Zero-Rated Exports Under IGST Section 16

Section 16 of the IGST Act, 2017, provides the foundational framework for zero-rated supplies, which includes exports of goods and services and supplies to SEZ units/developers. For IT companies, this is the single most important GST provision.

What Qualifies as Export of Services?

Under Section 2(6) of the IGST Act, a supply of services qualifies as “export of services” when all the following conditions are met:

• Supplier located in India: The IT company must be located in India (registered under GST)
• Recipient located outside India: The client must be located outside India
• Place of supply outside India: Determined under IGST Sections 12 and 13
• Payment received in convertible foreign exchange or Indian rupees: Where permitted by RBI (FEMA regulations allow certain INR receipts)
• Supplier and recipient not mere establishments of the same person: Services between a parent and its Indian branch, or between two establishments of the same entity, do not qualify

Two Options for Zero-Rated Export

IT companies have two options for executing zero-rated exports:

Option 1: Export Under LUT (Without IGST Payment)

This is the preferred option for most IT companies. By filing a Letter of Undertaking (LUT) under Rule 96A of the CGST Rules, the company can make zero-rated supplies without paying IGST. The accumulated ITC on inputs can then be claimed as refund under Section 54 of the CGST Act.

Key requirements for LUT filing:

• Filed annually in Form GST RFD-11 before the commencement of the financial year
• No bond or bank guarantee required (for exporters without prosecution history)
• Company must not have been prosecuted for any offence with tax evasion exceeding ₹2.5 crore under CGST Act or the erstwhile law
• LUT is valid for the entire financial year once accepted

Option 2: Export With IGST Payment and Refund

Under this option, the IT company charges IGST on export invoices and subsequently claims refund of the IGST paid. The refund is processed through the shipping bill (for goods) or through a refund application in Form GST RFD-01 (for services).

This option is less favoured because:

• It blocks working capital until the refund is processed (typically 60 to 90 days)
• The refund process involves additional compliance and documentation
• Interest is available only if the refund is not processed within 60 days of application

ITC Refund Mechanism for IT Exporters

IT companies exporting under LUT accumulate ITC on domestic purchases (office rent, technology infrastructure, professional services, etc.) that cannot be utilised against zero-rated output. This accumulated ITC is eligible for refund under Section 54(3) of the CGST Act.

The refund formula under Rule 89(4) is:

Refund Amount = (Turnover of zero-rated supply / Adjusted total turnover) x Net ITC

Key considerations for IT companies claiming ITC refund:

• Refund applications must be filed within 2 years from the relevant date
• Proper reconciliation between GSTR-1, GSTR-3B, and GSTR-2B is essential
• ITC must be validly claimed (matching with supplier’s GSTR-1 filing)
• Documentary evidence of export (foreign inward remittance, contracts) must be maintained

SEZ Benefits for IT Companies Under GST

Special Economic Zones offer IT companies significant advantages under both the SEZ Act, 2005, and the GST framework. At Virtual Auditor, we advise numerous IT companies on optimising their SEZ presence for maximum tax efficiency.

GST Exemptions for SEZ Units

IT companies operating from SEZ units enjoy the following GST benefits:

• Supplies to SEZ are zero-rated: Domestic vendors supplying goods or services to SEZ IT units can do so under LUT without charging IGST, or with IGST which is refundable
• No GST on inter-unit transfers: Transfers within the same SEZ or between SEZ units of the same entity do not attract GST
• Exemption from IGST on imports: SEZ units can import goods and services without payment of IGST
• Simplified refund process: SEZ units enjoy an expedited refund mechanism through the SEZ Online system

Deemed Export Benefits

Domestic supplies to SEZ units are treated as deemed exports under Section 147 of the CGST Act. The supplier (DTA unit supplying to SEZ) can claim refund of the GST paid, or the SEZ unit can claim the refund. This creates a cost advantage for SEZ IT companies procuring from domestic vendors.

DTA Sales by SEZ IT Units

When an SEZ IT unit provides services to a Domestic Tariff Area (DTA) client, the supply is treated as an import into India. The DTA client must pay IGST under reverse charge mechanism, which is then available as ITC. This is an important consideration for SEZ IT companies with both export and domestic clientele.

STPI Benefits and GST Compliance

Software Technology Parks of India (STPI) registered units form the backbone of India’s IT export industry. While STPI registration historically provided income tax benefits (which expired in March 2011), it continues to offer certain procedural advantages under the GST and customs framework.

STPI Registration Advantages Under GST

• Simplified bonding procedures: STPI units can import capital goods without payment of customs duty under the EPCG scheme or STPI bonding facility
• SOFTEX filing: STPI certification of SOFTEX forms is essential for validating software export declarations, which in turn support FEMA compliance and GST refund claims
• Export obligation monitoring: STPI monitors export performance, providing a credible track record useful for LUT renewals and refund processing
• Inter-unit transfers: STPI units can transfer goods between bonded premises with simplified documentation

Transition from STPI to SEZ

Many IT companies evaluate the transition from STPI to SEZ registration. Key GST considerations include:

• ITC balance transfer provisions during transition
• Impact on existing contracts and invoicing arrangements
• Changes in compliance obligations and filing requirements
• Evaluation of net benefit considering both GST and income tax implications

OIDAR Services: GST for Foreign Client Engagements

Online Information and Database Access or Retrieval (OIDAR) services have unique GST implications for Indian IT companies serving foreign clients, and for foreign companies serving Indian consumers.

What Are OIDAR Services?

Under Section 2(17) of the IGST Act, OIDAR services are defined as services whose delivery is mediated by information technology over the internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention.

Common examples in the IT sector include:

• Cloud computing services (IaaS, PaaS, SaaS)
• Web hosting and domain registration
• Software downloads and updates
• Online database access
• Digital advertising services
• Online gaming platforms
• E-learning and digital content delivery

OIDAR Services Supplied by Indian IT Companies to Foreign Clients

When Indian IT companies supply OIDAR services to foreign clients, the treatment depends on the client’s status:

• B2B (Business clients): Treated as export of services if all five conditions under Section 2(6) IGST Act are met — zero-rated, no GST
• B2C (Individual consumers abroad): Also treated as export if conditions are met — the place of supply is the location of the recipient, which is outside India

OIDAR Services Received by Indian IT Companies from Foreign Providers

When Indian IT companies procure OIDAR services from foreign providers (e.g., AWS, Azure, Google Cloud), the GST treatment involves:

• Reverse Charge Mechanism (RCM): Under Section 5(3) of the IGST Act, the Indian recipient must pay IGST at 18% under reverse charge on the import of services
• ITC eligibility: The GST paid under RCM on imported services is eligible for ITC, which can be used against output GST liability or claimed as refund (for exporters)
• Self-invoice requirement: The recipient must issue a self-invoice for the import of services and report it in GSTR-3B

Registration Obligations for Foreign OIDAR Providers

Foreign companies supplying OIDAR services to non-taxable Indian recipients (B2C) must obtain a simplified GST registration under Section 14 of the IGST Act. This registration requires appointment of a person in India for the purpose of paying tax. However, if the OIDAR services are supplied through an intermediary located in India, the intermediary is deemed to be the recipient for tax purposes.

Place of Supply Rules for IT Services

Determining the place of supply is crucial for IT companies to correctly classify their supplies as exports (inter-state/zero-rated) or domestic (intra-state/inter-state).

General Rule for B2B IT Services

Under Section 12(2) of the IGST Act, the place of supply for B2B services is the location of the recipient. For export purposes, the place of supply for services provided to a person outside India is determined under Section 13 of the IGST Act.

Specific Rules Under Section 13

• General rule (Section 13(2)): Place of supply is the location of the recipient — this applies to most IT consulting, development, and support services
• Performance-based services (Section 13(3)): Where services are performed at a specific location, the place of supply is where the service is performed
• Intermediary services (Section 13(8)(b)): The place of supply for intermediary services is the location of the supplier (India), meaning they cannot be zero-rated — this is a critical distinction for IT staffing and recruitment companies

The Intermediary Controversy

One of the most litigated issues in IT sector GST is the classification of services as “intermediary services.” If an IT company’s services are classified as intermediary, the place of supply becomes India (location of supplier), and the service cannot be zero-rated. This affects:

• IT staffing companies providing resources to foreign clients
• IT companies acting as liaisons between foreign clients and Indian subcontractors
• BPO/KPO companies facilitating services between parties

We strongly advise IT companies to carefully structure their contracts and service descriptions to clearly establish that they are providing services on their own account rather than as intermediaries.

GST Compliance Calendar for IT Companies

IT companies must adhere to the following compliance timeline:

• Monthly/Quarterly: GSTR-1 (outward supplies), GSTR-3B (summary return with tax payment)
• Annual: LUT renewal (before 1 April each year), GSTR-9 (annual return), GSTR-9C (reconciliation for turnover above ₹5 crore)
• As applicable: ITC refund applications (RFD-01) — recommended quarterly for cash flow optimisation
• Event-based: E-invoicing for turnover above ₹5 crore, TDS/TCS compliance where applicable

Common GST Mistakes by IT Companies

Based on our extensive experience with IT sector clients, here are the most frequent GST errors:

• Failure to renew LUT annually: Exports made without a valid LUT attract IGST liability with interest
• Incorrect place of supply determination: Especially for services involving multiple jurisdictions or intermediary elements
• Delayed ITC refund filing: Losing refunds due to the 2-year limitation period
• Non-compliance with RCM on imported services: Cloud hosting, SaaS subscriptions, and foreign consultancy often attract RCM
• Inadequate export documentation: Missing FIRC/BRC, contracts, or SOFTEX certifications
• Mixed supply classification errors: Bundling software licence with implementation services without proper valuation

Frequently Asked Questions

1. Is GST applicable on software export from India?

Software exports from India are zero-rated under IGST Section 16, meaning no GST is payable on the export. However, the IT company must meet all five conditions under Section 2(6) of the IGST Act for the supply to qualify as export of services. The company can export under LUT (without IGST payment) or with IGST payment and subsequent refund. In both cases, full ITC on domestic inputs is available. We recommend the LUT route for better working capital management.

2. How do IT companies file LUT for zero-rated exports?

IT companies file LUT in Form GST RFD-11 on the GST portal before the start of each financial year. The process involves logging into the GST portal, navigating to Services > User Services > Furnish LUT, entering the financial year, and submitting with digital signature or EVC. No bond or bank guarantee is required unless the company has been prosecuted for tax evasion exceeding ₹2.5 crore. The LUT remains valid for the entire financial year and must be renewed annually.

3. What are the GST benefits for IT companies in SEZ?

SEZ IT companies enjoy multiple GST advantages: domestic vendors can supply to SEZ units without charging IGST (under LUT), imports into SEZ are exempt from IGST, inter-unit transfers within SEZ do not attract GST, and SEZ units benefit from expedited refund processing. Additionally, DTA sales by SEZ units are treated as imports, with the DTA buyer paying IGST under reverse charge (which is available as ITC). These benefits, combined with income tax exemptions under the SEZ Act, make SEZ a compelling proposition for IT exporters.

4. What is the GST treatment for SaaS companies in India?

Indian SaaS companies providing services to foreign clients benefit from zero-rated export treatment — no GST on output with full ITC refund. For domestic clients, SaaS services attract 18% GST under SAC 998315. SaaS companies receiving cloud infrastructure from foreign providers (AWS, Azure) must pay IGST under reverse charge but can claim full ITC. The key compliance requirement is proper LUT filing, timely ITC refund applications, and correct place of supply determination for each client engagement.

5. How does reverse charge mechanism work for IT companies importing services?

When Indian IT companies procure services from foreign providers (e.g., cloud hosting, software licences, consultancy), they must pay IGST at 18% under reverse charge mechanism as per Section 5(3) of the IGST Act. The company issues a self-invoice, pays IGST in GSTR-3B, and can claim this as ITC in the same return. For IT exporters operating under LUT, this RCM ITC adds to the refundable ITC pool. Failure to account for RCM results in interest liability and potential penalties during assessment.

6. What is the difference between STPI and SEZ registration for GST purposes?

STPI registration primarily provides procedural benefits such as bonded warehouse facilities and SOFTEX certification, while SEZ registration offers substantive GST exemptions including zero-rated domestic procurement, IGST-free imports, and expedited refunds. From a GST perspective, SEZ units enjoy significantly greater benefits. However, STPI units still play a critical role in validating export declarations through SOFTEX forms, which are essential for FEMA compliance and GST refund documentation.

7. Can IT companies claim GST refund on office rent and employee expenses?

IT companies exporting under LUT can claim refund of ITC accumulated on office rent (18% GST), technology infrastructure, professional services, and other business inputs. However, certain employee-related expenses are blocked under Section 17(5) — including food and beverages provided as perks, health club memberships, and travel for personal purposes. Cab services for employees are eligible for ITC only if the IT company is obligated to provide them. We help IT companies maximise their refundable ITC by identifying all eligible input categories.