GST on SaaS and Digital Services: Where Indian Startups Trip Up

GST on SaaS feels deceptively simple. You sell software, you charge 18%, you file returns. In practice, every SaaS founder running an Indian operation that sells beyond India runs into the same set of questions within the first two years — and the answers determine whether they collect a refund or pay 18% out of pocket on revenue they thought was tax-free.

The framework lives in the IGST Act, principally Section 13 (place of supply for cross-border services) and Section 2(17) (the definition of OIDAR). Get these two right, and the rest of the GST treatment for a digital-service business follows mechanically.

The starting position — 18% standard rate

SaaS, IT services, software licensing, and most digital services fall under HSN/SAC 9983 or 998314, attracting GST at 18%. There is no concessional rate for software (the 5% rate for some specific categories — like printed software media in physical form — no longer applies to most modern SaaS).

For domestic B2B sales, 18% is collected from the customer; the customer takes ITC; net economic cost to the customer is zero (other than the working capital float). For domestic B2C sales (rare for most SaaS), 18% sits as a cost to the consumer. The complications start when the supplier or the customer is outside India.

Place of supply — Section 13 framework

For services where either the supplier or the recipient is outside India, place of supply is determined under Section 13 of the IGST Act. The default rule (Section 13(2)): place of supply is the location of the recipient of services.

If the recipient is a registered business, the place of supply is their registered address. If unregistered, the place of supply is the location available on records of the supplier (usually the billing address). For B2B SaaS sold to a US enterprise customer at their Texas office address, the place of supply is the US — outside India — and the supply is potentially zero-rated as an export.

The specific overrides under Sections 13(3) to 13(13) handle special categories — services relating to immovable property, performance- based services, transportation, etc. Most SaaS escapes these and falls under the default rule.

Export of services — the four conditions

A supply is treated as “export of services” — and so eligible for zero-rated GST treatment — only if all fourof the following are satisfied (Section 2(6) IGST Act):

(a) The supplier is in India. (b) The recipient is outside India. (c) The place of supply is outside India. (d) Payment is received in convertible foreign exchange (or in Indian rupees where permitted by RBI). (e) The supplier and the recipient are not merely establishments of the same person — i.e., you cannot “export” to your own foreign branch.

The fourth condition catches founders out. Receiving payment via Stripe to your Indian bank in INR (because Stripe converted USD to INR before remittance) is fine — you have the FIRC. Receiving payment from a US customer who paid in INR (because they hold an NRO account in India and paid you in INR) is NOT a foreign exchange remittance and disqualifies the export treatment.

The LUT — Letter of Undertaking

Export of services can be made in two ways: (a) on payment of IGST, claiming refund of the IGST paid; or (b) without payment of IGST, under a Letter of Undertaking (LUT) filed with the jurisdictional GST officer.

For SaaS businesses, route (b) — the LUT route — is overwhelmingly preferred. Pay no IGST on the export invoice; instead, accumulate input tax credit on Indian expenses (AWS bills, GCP bills, office rent, marketing) and claim refund of the unutilised ITC under Section 54 of the CGST Act.

The LUT is filed once per financial year through Form GST RFD-11. Filing is straightforward but the LUT lapses on 31 March each year — failing to renew triggers the IGST-payment route automatically. The lapse is one of the most common compliance misses; build the 1 April LUT renewal into the year-end checklist.

ITC refund on accumulated credit

Under the LUT route, refund of accumulated ITC is claimed monthly (or quarterly for QRMP filers) in Form GST RFD-01. The formula is (turnover of zero-rated supply ÷ adjusted total turnover) × net ITC. The refund is processed within 60 days; in practice, 90-120 days is more common.

The qualifying ITC includes the GST on AWS, Google Cloud, Microsoft Azure (all of which charge GST at 18% via their Indian GST registrations under OIDAR), office rent (after GST RCM if landlord unregistered), salary-component reimbursements (no GST), legal and consulting fees, marketing platforms. ITC on construction services, motor vehicles and certain other blocked categories under Section 17(5) does NOT qualify.

Practical rule: every rupee of GST charged by an Indian or GST-registered foreign vendor on a SaaS company’s P&L is a refundable rupee, provided the company exports services under LUT and files RFD-01 cleanly. Treating ITC as an operational cash-flow asset, not as a paperwork annoyance, materially improves working capital.

OIDAR — the special category for digital services to consumers

OIDAR — Online Information and Database Access or Retrieval services — is a special category defined under Section 2(17) IGST Act. It covers services delivered over the internet with minimal human intervention: cloud services, digital downloads, streaming, subscription content, online advertising, online software.

For OIDAR services supplied by a non-resident to a non-business (B2C) customer in India, the non-resident supplier is required to register in India (via the simplified OIDAR registration) and collect IGST. This is why AWS, Google, Microsoft, Netflix, Spotify all have Indian GST registrations — they are obligated under OIDAR rules.

For Indian SaaS startups selling to consumers (B2C) abroad — the treatment is symmetric. An Indian SaaS company selling subscription content to consumers in the EU may be required to register for VAT in each EU country (under the EU OIDAR / OSS rules), in addition to its Indian GST obligations. Cross-border B2C is the highest-compliance segment.

The three traps Indian SaaS founders fall into

Trap one — invoicing in INR for foreign customers.Invoicing in INR and receiving INR remittance from a foreign customer (even via SWIFT) disqualifies the export treatment. Always invoice in foreign currency (USD, EUR, GBP) and ensure the FIRC reflects foreign-currency receipt.

Trap two — wrong place-of-supply on the invoice.Some invoicing platforms default to the customer’s billing address but apply Indian state GST (CGST + SGST) because the GST registration of the customer’s parent is in India. Manual override is needed for accounts where the contracting entity is foreign but billing flows through an Indian subsidiary.

Trap three — not claiming ITC refund. Many smaller SaaS founders never file RFD-01 because the accountant treats GST as a compliance burden rather than an asset. Accumulated ITC sits on the balance sheet for years, eventually expiring. Build the monthly RFD-01 into the close cadence from month one of GST registration.

Domestic SaaS — when 18% sticks

For Indian B2B customers, you charge 18%, the customer takes ITC, economic cost is zero. For Indian B2C customers (consumer apps, freemium SaaS, mobile games), 18% is real cost — neither party can refund or credit. Pricing in India for B2C needs to factor this in; pricing for B2B can be quoted exclusive of GST without friction.

The annual return — GSTR-9 and GSTR-9C

Every registered taxpayer files GSTR-9 (annual return) by 31 December of the following financial year. Taxpayers above ₹5 Cr turnover also file GSTR-9C (reconciliation statement certified by CA). For SaaS businesses claiming ITC refunds, the GSTR-9C is the year-end opportunity to reconcile any ITC mismatches and surface missed credits.

Bottom line

GST on Indian SaaS is straightforward when you understand the place of supply rules and operationalise the LUT route. Most cross-border revenue is zero-rated; most input GST is refundable; the entire system can be net-positive cash for an export-focused SaaS business. The discipline is in the invoicing (foreign currency, right place of supply), the LUT renewal (1 April annually) and the monthly RFD-01 (treat ITC as an asset). Done sloppily, GST becomes 18% friction on every export rupee. Done well, it’s a predictable refund pipeline that funds working capital.