In an increasingly globalised economy, India has emerged as a preferred destination for foreign companies looking to establish a foothold in Asia. Whether it's to tap into the vast consumer base, leverage skilled human resources, or optimise operational costs, foreign entities are setting up subsidiaries across the country. However, entering a new jurisdiction comes with its share of regulatory and tax-related complexities—chief among them is understanding the Goods and Services Tax (GST) regime in India.

In this article, we’ll unpack the nuances of GST as it applies to foreign subsidiaries, demystify registration and compliance obligations, and share practical insights that every foreign-owned business must know. Whether you're a multinational expanding into India or a Chartered Accountant assisting one, read on for a comprehensive breakdown.

What is GST?

The Goods and Services Tax (GST), introduced in India on July 1, 2017, is a unified indirect tax that replaced a complex web of central and state levies like VAT, Service Tax, Excise Duty, etc. It is levied on the supply of goods and services and is based on a destination-based consumption model.

• CGST (Central GST) – Collected by the Central Government on intra-state sales.

• SGST (State GST) – Collected by the State Government on intra-state sales.

• IGST (Integrated GST) – Collected by the Central Government on inter-state and international (import/export) transactions.
  

Foreign Subsidiaries: Who Are They?

A foreign subsidiary is a company incorporated in India, but owned (partially or wholly) by a foreign entity. Despite foreign ownership, the subsidiary is treated as a resident Indian company for tax purposes. This distinction is crucial when it comes to GST applicability, as it implies the subsidiary is expected to comply with Indian tax laws just like any other domestic company.

GST Registration Requirements for Foreign Subsidiaries

Mandatory GST Registration

A foreign subsidiary is mandatorily required to register for GST in the following cases:

1. Turnover Threshold Exceeded: If the annual aggregate turnover exceeds ₹40 lakhs (₹20 lakhs for services in most states), the entity must register under GST. In special category states, the threshold may be lower.

2. Inter-State Supply: Even if the turnover is below the threshold, a foreign subsidiary supplying goods or services across states or internationally must obtain GST registration.

3. Reverse Charge Mechanism (RCM): If the foreign subsidiary receives services from a foreign parent or any overseas vendor (e.g., software, consulting, cloud services), GST may be applicable under RCM.

4. Import/Export of Goods or Services: Any entity involved in cross-border trade must register under GST, regardless of turnover.

5. E-Commerce or Online Services: If the subsidiary offers services through an e-commerce platform or digital means, registration is obligatory under certain provisions (like OIDAR services).

GST Compliance Obligations

Once registered, a foreign subsidiary must adhere to the same compliance framework as an Indian company. Key responsibilities include:

1. Issuance of GST Invoices

Invoices must be GST-compliant, including details such as GSTIN, HSN/SAC codes, tax breakup (CGST, SGST, IGST), and place of supply.

2. Monthly/Quarterly Returns

• GSTR-1: Details of outward supplies (monthly/quarterly).

• GSTR-3B: Summary of outward and inward supplies (monthly).

• GSTR-9: Annual return.

Missed filings can attract late fees and interest, making regular compliance crucial.

3. Payment of Tax

GST must be deposited via challans generated on the GST portal, typically by the 20th of the following month. The liability is calculated after claiming Input Tax Credit (ITC).

4. Input Tax Credit (ITC)

Foreign subsidiaries can claim credit for the GST paid on inputs (goods/services used in business). However, ITC is subject to various conditions:

• Vendor must have filed GSTR-1

• Tax must be paid to the government

• Invoice must be available with the company

Proper reconciliation is necessary to avoid blocked credits.

Special Considerations for Foreign Subsidiaries

1. Reverse Charge on Import of Services

When a foreign subsidiary receives services from its parent company or foreign vendors (e.g., software, legal, management consultancy), it is liable to pay GST under the reverse charge mechanism (RCM). This tax must be paid in cash, and ITC can typically be claimed in the same month.

2. Place of Supply Rules

Understanding the “place of supply” is vital to determine whether IGST or CGST+SGST applies. For services, the place of supply is often the location of the recipient—i.e., the Indian subsidiary.

3. Export of Services

Exports are considered zero-rated supplies, meaning:

• No GST is charged on the invoice.

• ITC on input services can be claimed as a refund.

To qualify, the following conditions must be met:

• Supplier is located in India

• Recipient is outside India

• Payment is received in convertible foreign exchange

• The two parties are not merely establishments of the same person

This is especially relevant when Indian subsidiaries bill their foreign parent or other group entities for services like tech support or back-office functions.

4. Cross-Charging vs. Secondment

Foreign subsidiaries must carefully distinguish between:

• Cross-charging: Where costs (like shared resources) are formally billed between group entities.

• Secondment: Where employees are deputed from the parent company. This can have dual implications under GST and Income Tax, and incorrect structuring may lead to tax disputes.

Common GST Challenges Faced by Foreign Subsidiaries

• Language and Portal Usability: Navigating the GST portal, understanding technical jargon, and submitting documents can be daunting for foreign stakeholders.

• Vendor Compliance Issues: If vendors don’t upload their GSTR-1 data correctly, ITC gets blocked.

• Multiple Registrations: Operating in multiple states? Separate GST registrations may be required.

• Documentation for Refunds: Export-related ITC refunds are often delayed due to errors or incomplete documentation.

Best Practices for Smooth GST Compliance

1. Hire a Reputed CA Firm: Engaging professionals like TAXAJ ensures accurate filings, timely returns, and compliance with nuanced GST provisions.

2. Use ERP and Accounting Software: Automation reduces manual errors and improves audit readiness.

3. Regular Reconciliation: Match GSTR-2B with purchase registers monthly to avoid ITC mismatches.

4. Staff Training: Educate your finance and procurement teams about invoicing and GST laws.

Conclusion

GST compliance for foreign subsidiaries is not just a legal obligation—it’s a critical part of ensuring operational efficiency and long-term sustainability in India. While the law applies uniformly to all entities, the cross-border nature of foreign subsidiaries introduces additional layers of complexity.

At TAXAJ, we specialise in helping foreign-owned businesses navigate India’s tax ecosystem with ease. From GST registration and monthly filings to ITC reconciliation and advisory on cross-border transactions, our team is equipped to be your trusted partner.

Need help with GST for your Indian subsidiary? Reach out to us at TAXAJ and let our experts handle the complexity while you focus on growth.

Created & Posted by Sony Garg

Accounts & Finance Executive at TAXAJ

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