Table of Contents
Introduction: Unlocking the GST Framework for Freelancers in India
Freelancing is an incredibly versatile and dynamic career choice. With the rise of global freelancing platforms like Upwork, Fiverr, Freelancer, Guru, PeoplePerHour, and others, professionals in fields ranging from website development, app development, graphic design, and content writing to consulting, marketing, and financial services can offer their expertise to clients worldwide.
However, with this freedom comes the responsibility of understanding the complexities of Indian Goods and Services Tax (GST), which impacts freelancers just as much as it does traditional businesses. Freelancers, whether they are solo consultants or work via freelancing platforms, must adhere to the GST framework if their turnover exceeds the prescribed limits.
This comprehensive guide aims to walk you through the entire GST landscape for freelancers, explaining everything from GST registration requirements and tax rates to invoicing and input tax credit (ITC). TaxGroww ensures that you have all the information necessary to comply with the tax laws and avoid common pitfalls.
Freelancers need to understand that GST is not just a regulatory burden but an opportunity to streamline business processes and claim back taxes on business expenses, optimizing your tax liabilities.
GST Registration for Freelancers: When Do You Need It?
Understanding when GST registration is mandatory is crucial for freelancers. GST registration is tied directly to annual turnover and whether services are provided domestically or internationally. Here is a breakdown:
A. Turnover Below Rs. 20 Lakhs:
If you are a freelancer with a turnover of Rs. 20 lakhs or less in a financial year (Rs. 10 lakhs in north-eastern states), GST registration is not mandatory. This means you do not have to collect GST on your services, and you will not be required to file GST returns.
Important Note: This threshold applies only to services, not to goods. For goods suppliers, the limit is Rs. 40 lakhs. This limit of Rs. 20 lakhs is further reduced to Rs. 10 lakhs in some north-eastern states like Assam, Jammu & Kashmir, and Manipur.
B. Turnover Exceeds Rs. 20 Lakhs:
If your turnover exceeds Rs. 20 lakhs, you must register for GST. This is irrespective of whether you provide services within India or to clients outside the country. Even 100% export services (services provided to foreign clients) require GST registration.
Key Action Step: Once registered, you will be required to submit a Letter of Undertaking (LUT) to ensure no GST is applied to export services. This registration also means that you are required to file GST returns regularly.
C. GST Registration for North-Eastern States:
For freelancers in north-eastern states, the GST registration threshold is reduced to Rs. 10 lakhs. The registration requirement applies once your turnover exceeds this limit.
Voluntary GST Registration: Why and When Should You Choose It?
Even if your turnover does not exceed the prescribed thresholds (Rs. 20 lakhs or Rs. 10 lakhs), you can still opt for voluntary GST registration. This may be beneficial under certain circumstances.
A. Why Choose Voluntary Registration?
- Claim Input Tax Credit (ITC): As a GST-registered freelancer, you can claim ITC on the GST paid on business-related expenses, such as software, office supplies, marketing services, and business travel. This means that you can offset the GST you pay on inputs against the GST you collect from clients.
- Refunds for Export Services: If you offer export services (services provided to clients outside India), you can claim a refund of the GST paid on inputs, which can reduce your overall tax liability.
- Credibility with Clients: Many large businesses and international clients prefer working with GST-registered professionals. It shows that you are compliant with Indian tax laws and can issue proper invoices with GST.
- Ease of Doing Business: Voluntary registration ensures that your business is compliant from the start, avoiding potential complications later. It also helps in creating a professional image when working with other businesses.
B. Obligations of Voluntary Registration
- File GST Returns: You will need to file GST returns regularly, even if your turnover is low.
- Charge GST on Services: As a registered taxpayer, you must charge GST on all taxable services provided to clients, including export clients (unless LUT is filed).
- Compliance with GST Laws: Being voluntarily registered means adhering to all the provisions of GST, such as tax collection, filing returns, and payment of GST.
Types of GST Registration: Regular Scheme vs. Composition Scheme
Freelancers must decide between the Regular Scheme and the Composition Scheme based on their turnover and business model.
A. Regular GST Scheme
- GST Rate: Under the Regular Scheme, freelancers must charge 18% GST on services.
- Input Tax Credit (ITC): Freelancers registered under this scheme are eligible to claim ITC on purchases related to their business, including office supplies, software, and services (like internet and marketing).
- No Restrictions on Turnover: There is no upper limit on turnover under the Regular Scheme. You can provide services within India or to clients abroad without restrictions.
B. Composition Scheme
- GST Rate: The GST rate is 6% under the Composition Scheme for service providers.
- No ITC: Under the Composition Scheme, you cannot claim ITC on purchases. This means you must pay GST from your pocket rather than charging it to your clients.
- Restrictions on Services: If you wish to provide services across states or to foreign clients, you cannot register under the Composition Scheme. The scheme is limited to local
- Simplified Returns: The Composition Scheme involves simplified returns, reducing the compliance burden for small service providers.
GST Rate on Freelancing Services: How to Determine Your Tax Liability
- Accounting and Bookkeeping
- Software and App Development
- Technical Services
- Consulting (Management, HR, Legal)
- Marketing Services (SEO, Digital Marketing)
- Graphic and Web Designing
- Translation and Voice Over Services
- Data Entry and Virtual Assistance
- Domain Registration and Hosting Services
Input Tax Credit (ITC): Claiming GST on Business Expenses
Freelancers can claim Input Tax Credit (ITC) on the GST paid for business-related purchases, reducing their effective tax liability. This includes GST paid on purchases such as:
A. Eligible ITC for Freelancers:
- Office Equipment: GST paid on items like computers, laptops, printers, office furniture.
- Software and Tools: GST paid on tools and software subscriptions (e.g., Adobe, Microsoft Office, accounting software).
- Services: Internet, telephone, and other services required for your freelance business.
- Business Travel: If you incur expenses on travel related to your freelance work (e.g., airfares, hotel stays), you may be eligible to claim ITC..
B. Non-Eligible ITC:
ITC cannot be claimed on the following:
- Motor Vehicles (unless used exclusively for business purposes).
- Food and Beverages.
- Construction Materials.
C. Export Services and ITC:
- Use ITC to offset the GST payable on other services, or
- Apply for a refund of the ITC paid on inputs used for export services through Form GST RFD-01.
Invoicing for Freelancers: Issuing GST-Compliant Invoices
As a freelancer, it’s essential to issue GST-compliant invoices for all services provided to your clients, whether in India or abroad. A compliant invoice ensures that you and your client are following the GST Act correctly.
Key Elements of a GST Invoice:
- Service Provider’s Details: Your name, address, GSTIN, and contact details.
- Client’s Details: Client’s name, address, GSTIN (if applicable).
- Description of Services: Clearly describe the services provided, along with SAC (Service Accounting Code).
- Invoice Number and Date: A unique sequential invoice number and the date of issue.
- Invoice Value: The total service fee, broken down by GST (18% for most services).
Invoicing for Export Services:
- “Export of Services without payment of GST under LUT filed on [Date], ARN [ARN Number]”.
Proforma Invoices:
Before finalizing a contract, you may issue a proforma invoice to provide a quote or estimate of the services. Once both parties agree to the contract, the final invoice must be issued with the official GST details.
Foreign Currency Invoice for Freelancing Services: A Comprehensive Guide
Raising and Converting Foreign Currency Invoices:
- Step 1: Raise the Invoice in Foreign Currency When you provide services to a client outside India, you are required to raise the invoice in the foreign currency agreed upon by both parties. This is the standard procedure to ensure that the invoice reflects the actual value of services rendered.
- Step 2: Conversion to Indian Rupees (INR) for GST Reporting Once the invoice is raised in foreign currency, it must be converted into Indian Rupees (INR) for the purposes of GST return filings and accounting. The conversion rate must be the RBI-approved exchange rate applicable on the invoice date. You can access the official exchange rates provided by the Reserve Bank of India at RBI Foreign Exchange Rates.
- Step 3: Reporting in GST Returns After conversion, the INR amount is used to report the revenue in your GST return. This ensures that the GST is calculated based on the accurate value of services in Indian Rupees.
- Step 4: Exchange Gain/Loss Accounting When the actual payment is received, there might be a difference in exchange rates, resulting in exchange gain or loss. This difference should be recorded in your books of accounts under the Exchange Gain/Loss account.
Note: No GST is payable on the exchange gain or loss. Additionally, TDS is deducted at 1% under Section 194-O by the e-commerce platform (like Upwork, Fiverr, Freelancer, etc.) on the gross amount received for the services rendered.
Export of Services and GST: What You Need to Know
In India, export services are treated as zero-rated transactions under GST. This means that no GST is levied on services provided to foreign clients. However, in order to benefit from this exemption, certain conditions must be met, and proper documentation is required.
Prerequisites for Export of Services:
- The Service Provider Must Be Located in India: The freelancer offering services should be based in India.
- The Client Must Be Located Outside India: The recipient of the services should be based outside India.
- Payment in Convertible Foreign Currency: Payment for the services should be received in convertible foreign currency. This does not necessarily mean that the payment must be made in foreign currency directly to your bank account, as banks generally convert the foreign currency into INR at the time of credit. However, you must obtain a Foreign Inward Remittance Certificate (FIRC) from your bank for the transaction.
Providing Services through Freelance Platforms (Upwork, Fiverr, Freelancer, Guru, etc.)
Services Provided to Clients Outside India (Export Services):
- You are not required to charge GST on services provided to clients abroad.
- Ensure you have the Foreign Inward Remittance Certificate (FIRC) to prove the remittance received in foreign currency.
Services Provided to Clients Within India (Domestic Services):
If you are providing services to a client located in India through these platforms, GST is applicable. In this case, the liability to collect and remit GST rests solely with the freelancer. The platforms like Upwork or Fiverr are not responsible for GST collection.
Example: If a freelancer registered under GST provides services to a client in India via Upwork, the freelancer must charge 18% GST on the total service fee.
Reverse Charge Mechanism (RCM) for Freelancers Using Online Platforms
How Does RCM Apply to Freelancers?
- Freelancers providing services through platforms like Upwork or Freelancer are required to pay GST under RCM on the service fees charged by these platforms. This is because the services provided by these platforms are considered imported services under the IGST Act, and are outside the scope of intermediary services.
- Key Point: These platforms do not charge GST on the service fees they charge freelancers. Therefore, freelancers must self-assess and discharge the GST liability under RCM.
Foreign Inward Remittance Certificate (FIRC): Essential Document for Export Services
Where and How to Obtain FIRC:
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- From Your Bank: When payment is received via wire transfer, your bank will issue the FIRC. The bank usually emails this certificate once the payment is credited to your account.
- Via Payment Providers: Payment gateways like Payoneer, PayPal, and Stripe also provide FIRC. These platforms have started offering FIRC to freelancers, making it easier to comply with the export documentation requirements.
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Electronic Bank Realisation Certificate (eBRC): Simplifying the Export Process
How to Generate eBRC:
- Self-Certification: As of November 2023, exporters can generate their own eBRCs and self-certify them using the Trade Notice 33/2023.
- Difference Between eBRC and FIRC: While FIRC is provided by banks and payment platforms to verify that payments were received in foreign currency, the eBRC focuses on the export-related inward remittance for the services rendered.
Using eBRC for GST Refunds:
GST Returns for Freelancers: Filing and Penalties
Filing Frequency:
- Turnover Up to Rs. 5 Crore: Freelancers can file quarterly GST returns.
- Turnover Above Rs. 5 Crore: Freelancers with higher turnover must file monthly GST returns.
Annual Return:
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- Freelancers must file the GSTR-9 annual return if their turnover exceeds Rs. 2 Crore.
- Reconciliation Statement (GSTR-9C) is required for freelancers with turnover above Rs. 5 Crore.
GST Refund for Freelancers: Claiming Refunds on Export Services
- GST Paid on Input Services or Goods: If you paid GST on inputs used to provide export services, you can claim a refund.
- GST Paid at the Time of Export: If you mistakenly paid GST on export services, you can claim a refund by filing GST Refund Forms.
Key Conditions for Refund:
- FIRC is required to prove that services were provided to foreign clients and that payment was received in foreign currency.
- Refund Application must be filed within 24 months from the end of the month in which the services were exported.
Conclusion: Navigating GST Compliance for Freelancers
As a freelancer in India, staying compliant with GST regulations is essential for ensuring smooth business operations and avoiding legal complications. This guide has comprehensively covered GST registration, invoicing, export of services, reverse charge mechanism (RCM), and the necessary documentation such as FIRC and eBRC, all of which are crucial for international freelancing.
While GST compliance may seem overwhelming at first, it offers a significant opportunity to optimize your tax liabilities through mechanisms like Input Tax Credit (ITC) and export refunds. By understanding the requirements and leveraging the benefits of GST, you can streamline your freelancing business and focus on what you do best—providing exceptional services to your clients.
As freelancers, it is vital to keep up with the latest GST updates, especially those related to cross-border services. Filing timely GST returns, maintaining proper documentation, and staying aware of any changes in the law will ensure that your business remains compliant and efficient.
TaxGroww is here to keep you informed with the latest GST updates, tailored insights, and expert advice to help you succeed in your freelancing journey. Stay ahead of the curve and ensure your business remains compliant—take charge of your tax obligations today.
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Disclaimer:
This article is based on the author’s expertise in GST law, regulations, and rules as applicable to freelancers in India. The information provided is intended for educational purposes only and should not be construed as legal or financial advice. Freelancers are advised to make decisions in consultation with a qualified tax professional to ensure compliance with the applicable laws and regulations.