As India’s middle class grows and the population’s spending power increases, the demand for imported goods increases. This is exciting news if you run an importing business. Before you start placing orders, it’s important to understand the applicability of GST on imports of goods and services.
The goods and services tax (GST) divides all sales into two types of transactions — interstate and intrastate. Imports are treated as interstate sales, which means that they’re subject to integrated tax, or IGST. That means that when you import products, you pay one IGST rate to the central government. The money is then split between the central and your state government, which is considered the place of supply. That way, you don’t need to worry about paying separate state and central taxes.
Taxes for Imported Goods
When you import goods into India, several different taxes apply. The Customs Tariff Act requires you to pay the basic customs duty. IGST is then calculated using the assessed value of your imports plus the BCD. If you’re bringing in products that GST considers luxury or demerit goods such as aerated drinks, you may also need to pay a compensation cess. This tax is charged on the value of the imported goods plus the BCD, not including the IGST. The compensation cess is only active for the first five years of the GST regime and is expected to end in July 2022.
Taxes for Imported Services
Under GST, imported services are also treated as interstate transactions, which means that you must pay IGST. Usually, this is done by a reverse charge — which means that you pay the taxes directly to the government instead of the seller. However, it’s important to figure out which imported services are taxable and which are not.
The GST law specifically states that some services, including Facebook and free Google products, are not subject to IGST. In most cases, when you pay for a service, you need to pay IGST. This could include a wide range of transactions, such as:
- Buying storage space on servers based in the United States for your company in India
- Paying a lawyer based in Australia to help you with a business or personal problem in India
- Paying a Singapore-based designer to create clothing designs for your company in India
Sometimes, you need to pay IGST on services, even when you don’t pay for the services themselves. This occurs when you’re importing services for business use from a person that’s directly related to your company. If you have a branch office in Pakistan, for example, and an employee there performs a free service for your India-based company, you still need to pay IGST.
Can You Claim an Input Tax Credit on IGST?
When you pay IGST on taxable imports, you can claim them as an input tax credit and deduct the IGST amount from the total that you owe to the government when you file your return. As a result, you don’t have to pay tax on tax, and your monthly liability is lower. However, you cannot deduct the BCD as a credit.
Under the GST regime, many of the old taxes on imports have been subsumed by the convenient IGST. By making use of the online GST portal and claiming your ITC credits quickly, you can reduce your liability and take advantage of the regime’s business benefits.