GST compliance may tighten for businesses paying for overseas software, cloud and consulting services | Today’s news
Indian companies paying for overseas software, cloud warehousing and consulting services may be more stringent goods and services tax (GST) as the government is considering extending e-invoicing to imported services and purchases from unregistered suppliers covered by the reverse charge mechanism.
The proposal recommended by the 57th GST Council applies to businesses with an annual turnover of Rs ₹5 million and above. If implemented, it could require companies to adjust the way they document, verify and report transactions on which they pay GST under the reverse charge mechanism.
Under the existing framework, Indian businesses purchasing services from foreign suppliers are generally required to charge the relevant GST as part of the reverse charge. Since foreign suppliers do not issue Indian GST invoicesthe Indian consignee issues its own invoice if required by GST rules.
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The proposal recommended by the 57th GST Council would apply to businesses with an annual turnover of ₹5 crore or more. It could apply to imported services and purchases from unregistered reverse charge suppliers.
Indian businesses generally account for applicable GST under the reverse charge mechanism. Since foreign suppliers do not issue Indian GST invoices, the Indian consignee issues his own invoice if required by GST rules.
The proposal could bring transactions involving imported services into a more standardized electronic invoicing framework. Detailed requirements, including how these invoices will be integrated into the invoice management system, have not yet been clarified.
The objective of the proposed mechanism is to reduce the discrepancy between the tax liabilities reported in the returns and the claimed input tax credits. It could strengthen the reconciliation between GSTR-3B and the credit available in GSTR-2B.
The proposed changes could come into force from April 2027. The revised mechanism is due to be published for a time-limited consultation and the final requirements will depend on a detailed framework and approval.
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The proposed extension could incorporate these transactions into a more standardized electronic invoicing framework, although the exact implementation requirements have yet to be clarified.
A mechanism is proposed for the correction of GST refunds
Along with the electronic invoicing proposal, the council recommended a mechanism for correcting tax liabilities and input tax rebates (ITC) reported in GST returns. Changes could take effective from the April 2027 return period.
The revised mechanism will be open to the public for time-limited consultations. Finance Minister Nirmala Sitharaman was authorized to approve the modifications based on feedback from stakeholders.
According to the board, the proposed changes aim to reduce the discrepancies between the tax liabilities claimed by businesses and the ITC they claim. This could help reduce demand notices and system-generated intimations arising from discrepancies in GST returns.
The invoice management system is gaining importance
The proposals come as GST compliance increasingly relies on the Invoice Management System (IMS), which allows buyers to accept, reject or hold supplier invoices pending review.
The proposed changes could strengthen the alignment of credit reported in GSTR-3B with credit available in GSTR-2B. Therefore, businesses may need to improve invoice verification, vendor verification, and more accuracy their accounting data.
Most companies don’t need to replace their existing accounting systems, but experts say modifications may be necessary to meet additional compliance requirements.
Businesses that rely heavily on manual reconciliation could face greater operational challenges as invoice matching and return statements become more integrated.
Credit notes and late adjustments can present problems
The transition could also cause reconciliation issues involving credit memos, late vendor adjustments and ITC reversals. Companies may need closer coordination between purchasing, accounts payable and tax teams to ensure invoices and credit receivables are recorded correctly.
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For imported services, a standardized self-invoicing process could improve the linkage between GST payments, return reporting and ITC claims.
However, it remains to be clarified how invoices related to imported services will be integrated into IMS.
Experts said the GST Council’s recommendations indicate a gradual shift towards an IMS-based compliance framework. The proposed measures are intended to improve reporting accuracy and reduce non-compliance, while businesses may need to strengthen internal controls and review their existing GST compliance processes.
The final operational requirements will depend on a detailed framework issued after stakeholder consultation and approval of proposed changes.
