GST Compliance for Foreign Subsidiaries

The Goods and Services Tax (GST) is India's comprehensive indirect tax, replacing over a dozen central and state levies since its introduction in July 2017. For foreign-owned subsidiaries operating in India, GST compliance is one of the most operationally intensive obligations. This guide covers everything from registration to return filing and input tax credit optimization.

GST Registration: When Is It Mandatory?

GST registration is mandatory for any business whose aggregate turnover exceeds INR 20 lakh (approximately USD 2,400) in a financial year, or INR 10 lakh for businesses in special category states. However, for foreign subsidiaries, registration is typically mandatory from day one regardless of turnover if:

• The entity makes inter-state supplies of goods or services
• The entity is liable to pay tax under reverse charge mechanism (RCM)
• The entity supplies through an e-commerce operator
• The entity is required to deduct TDS under GST

In practice, most foreign subsidiaries register for GST immediately upon incorporation, either via the SPICe+ integrated filing or separately through the GST portal (gst.gov.in). The registration is state-specific — if you operate in multiple states, you need separate registrations in each state.

Understanding GST Rates and Classification

GST has four main rate slabs: 5%, 12%, 18%, and 28%. Most services provided by IT, consulting, and professional services companies fall under the 18% slab. Certain goods attract different rates. The correct HSN (Harmonized System of Nomenclature) code for goods or SAC (Service Accounting Code) for services must be declared on every invoice and return.

GST Return Filing Schedule

The filing frequency depends on your turnover and registration type:

Companies with turnover up to INR 5 crore can opt for the QRMP (Quarterly Return Monthly Payment) scheme, filing GSTR-1 and GSTR-3B quarterly instead of monthly. However, most foreign subsidiaries operating at scale find monthly filing preferable for better cash flow management and ITC tracking.

Input Tax Credit (ITC): Maximizing Recoveries

Input Tax Credit allows you to offset GST paid on purchases against GST collected on sales. For foreign subsidiaries, ITC management is crucial because:

• Vendor compliance matters — you can only claim ITC if your vendor has actually filed their return and reported your invoice. The GSTR-2B auto-populated statement is the basis for ITC claims.
• Time limits apply — ITC must be claimed by the earlier of the due date for September return of the following year or the date of filing the annual return.
• Blocked credits — GST on certain items cannot be claimed as ITC, including food and beverages, health insurance (unless mandated), club memberships, and passenger vehicles (with exceptions).
• Export refunds — companies exporting services can claim accumulated ITC refunds through the GST portal.

Reverse Charge Mechanism (RCM)

Under RCM, the recipient pays GST instead of the supplier. This is especially relevant for foreign subsidiaries that import services from their parent company or other overseas affiliates. When an Indian company receives services from outside India (such as software licenses, management fees, or technical consultancy from the parent), the Indian entity must self-assess and pay GST under reverse charge. This GST is eligible for ITC, making it cash-flow neutral but compliance-heavy. RCM also applies to certain domestic supplies, such as services from unregistered persons (above INR 5,000 per day), legal services, and sponsorship services.

E-Invoicing and E-Way Bills

E-invoicing is mandatory for businesses with aggregate turnover exceeding INR 5 crore. All B2B invoices must be reported to the Invoice Registration Portal (IRP) to obtain an Invoice Reference Number (IRN). Key points:

• E-invoices must be generated within 30 days of the invoice date
• The IRP auto-populates GSTR-1, reducing manual filing effort
• E-way bills are required for movement of goods exceeding INR 50,000 in value
• Services-only companies are generally exempt from e-way bill requirements

Common Compliance Pitfalls

• Late filing penalties — INR 50 per day for GSTR-3B (INR 20 for nil returns), capped at INR 10,000 per return. Interest at 18% p.a. on tax paid late.
• Mismatch in ITC claims — claiming ITC not reflected in GSTR-2B triggers notices from the department.
• Incorrect place of supply — misclassifying inter-state as intra-state (or vice versa) leads to wrong tax type (IGST vs CGST+SGST) and subsequent reconciliation issues.
• Missing RCM payments — forgetting to pay GST under reverse charge on imported services is a common oversight for foreign subsidiaries.
• HSN/SAC code errors — incorrect classification can lead to rate disputes during audits.

GST Audits and Assessments

The GST department can initiate audits for any registered person. For foreign subsidiaries, the most common triggers are significant ITC claims, export refund applications, and turnover discrepancies between GST returns and income tax returns. Maintaining clean documentation, reconciled books, and timely filings is the best defense against adverse audit outcomes.