A development studio billing an Indian client has a straightforward GST position. The moment a foreign client appears, it stops being straightforward — and the conditions for treating that invoice as an export are stricter than most people assume.
Domestic work: the easy part
Custom development for an Indian client is a supply of services, taxed at the applicable rate, with place of supply generally following the recipient's location where they are registered. Intra-state attracts CGST and SGST; inter-state attracts IGST. The client claims credit if their own output is taxable.
The main practical issue is milestone billing. Tax liability attaches on the earliest of invoice, payment or completion depending on circumstances, so a project invoiced on milestones needs those milestones defined in the contract rather than decided retrospectively.
Export of services: five conditions, all of them
Exports are zero-rated, which is the attractive position. But "export of services" is a defined term with conditions that must all hold — broadly: the supplier in India, the recipient outside India, place of supply outside India, payment received in convertible foreign exchange (or permitted rupee terms), and the two parties not being mere establishments of the same person.
That last condition is the one that catches people. An Indian development arm billing its own overseas parent or a branch of the same legal entity may not qualify as an export, even though the money genuinely arrives from abroad. The structure matters more than the payment route.
LUT or refund — pick before you invoice
Zero-rated does not mean ignore it. There are two routes:
- Furnish a Letter of Undertaking and export without paying IGST. Simpler cash flow, but the LUT must be in place for the relevant period — it is not retrospective.
- Pay IGST and claim a refund. More paperwork and your money sits with the department while the refund processes.
Most studios want the LUT. The failure mode is forgetting to renew it and discovering mid-year that invoices were raised without a valid LUT in force. Put the renewal in a calendar.
Documentation is the whole game on a refund claim
Unutilised input credit refunds on zero-rated supplies get scrutinised. What matters is whether your paperwork is internally consistent:
- Foreign inward remittance certificates matching invoices, in amount and in timing
- A written contract or statement of work supporting each invoice
- Invoices carrying the required export narration and the LUT reference
- Input credit traceable to the export supply
The common failure is not fraud, it is untidiness — remittances netted across invoices, or a client paying a round figure that matches nothing exactly. Reconcile as you go.
Where it stays genuinely grey
Software does not always sit neatly on one side of the goods-services line. Custom development is clearly a service. A packaged product delivered electronically, a perpetual licence, an on-premise deployment with ongoing support — these have attracted different views over time. If a substantial part of revenue sits in that middle, get a written opinion rather than deciding by analogy. The cost of an opinion is small against the cost of restating a position later.
Practical setup for a studio
- Separate domestic and export revenue in the ledger from day one, not at year-end.
- Keep the LUT current and note its validity against each export invoice.
- Reconcile remittances to invoices individually.
- Retain contracts and SOWs where finance can find them, not only where the delivery team can.
- If you also resell hosting or third-party licences, track those separately — the treatment may differ from your own services.
GST rates, turnover thresholds and reporting windows change. Verify the current position on the GST portal or with your tax advisor before making a decision based on this.
About the author. Kislay Chandan has worked with schools since 2014. Rather than gathering requirements from the outside, he worked inside a school to see what actually goes wrong day to day, and built what he found into the software. He still works with Shemrock Glitters in Patna — most changes to the product start with something that came up there.
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