The earlier VAT and service tax regime in India was complex due to multiple taxes, compliance burdens, and cascading effects. With the introduction of GST, the taxation system has become more streamlined, especially for the IT sector.
Previously, software transactions attracted multiple taxes such as VAT, service tax, and excise duty. For example, software sold via physical media (CD/DVD) attracted:
- Excise duty on manufacturing
- VAT on sale
- Service tax on the service component
GST has eliminated this cascading effect and introduced a unified tax structure.
GST on IT Services
GST Registration for IT Service Providers
GST registration is mandatory if:
- Turnover exceeds ₹20 lakh (₹10 lakh for special category states)
- Inter-state services are provided
- OIDAR (Online Information Database Access and Retrieval) services are offered
GST Invoice Requirements
A valid GST invoice must include:
- Supplier details (name, address, GSTIN)
- Unique invoice number
- Date of issue
- Recipient details
- SAC (Service Accounting Code)
- Description of services
- Taxable value and tax amount
- Place of supply
- Reverse charge applicability (if any)
- Signature or digital signature
👉 E-invoicing (Updated Rule):
Applicable if turnover exceeds ₹5 crore
Time Limit for Issuing Invoice
- Invoice must be issued within 30 days from the date of supply of service (Rule 47)
GST Rate on IT Services
- Most IT services are taxed at 18% GST
HSN / SAC Codes for IT Services
HSN Reporting Requirements
- Below ₹1.5 crore → Not mandatory
- ₹1.5 crore to ₹5 crore → 2-digit HSN
- Above ₹5 crore → 4-digit HSN
- Imports/Exports → 8-digit mandatory
Common SAC Codes
- 998313 – IT consulting & support
- 998314 – IT design & development
- 998315 – Hosting services
- 998316 – Network management
- 998319 – Other IT services
Place of Supply Under GST
Determining the place of supply is crucial to decide:
- IGST (inter-state)
- CGST + SGST (intra-state)
Incorrect classification may lead to:
- Additional tax liability
- Interest penalties
Reverse Charge Mechanism (RCM)
Under RCM, the recipient pays GST instead of the supplier.
Example:
If an Indian company imports software services from a foreign company:
- The Indian company pays IGST under RCM
Continuous Supply of IT Services
What is Continuous Supply?
Services provided over a period with periodic payments.
Example:
ERP implementation projects:
- Development
- Customisation
- Maintenance
These are treated as continuous supply of services under GST.
E-Way Bill Applicability
- Not required for pure services
- Required if goods are transported along with services
Maintenance of GST Records
Businesses must maintain:
- Inward and outward supply records
- Input Tax Credit (ITC) details
- Tax payable and paid
- Financial records
👉 Records must be preserved for 6 years
Income Tax on IT Companies
Income tax is levied on net profits earned by IT companies.
Tax Rates for Companies (Latest)
- Domestic company (turnover ≤ ₹400 crore) → 25%
- Other domestic companies → 30%
- Foreign companies → 40%
Sources of Income for IT Companies
- Software development
- IT consulting
- Cloud computing
- Data management
- Technical support
- Digital transformation services
Deduction Rules for IT Companies
Expenses allowed if:
- Incurred during the financial year
- Related to business activities
Allowed Deductions
- Salaries and wages
- Rent and utilities
- Depreciation on assets
- Software and infrastructure costs
Not Allowed
- Personal expenses
- Contingent provisions
- Pre-business expenses
Set-Off and Carry Forward of Losses
- Business losses can be carried forward for 8 years
- Can be set off against business income
Tax Audit (Section 44AB) – Updated
Audit required if:
- Turnover exceeds ₹1 crore
- Limit increases to ₹10 crore if cash transactions ≤ 5%
For professionals:
- Audit required if receipts exceed ₹50 lakh
Penalty for Non-Compliance
- 0.5% of turnover or ₹1,50,000 (whichever is lower)
Capital Gains for IT Companies
Capital gains arise when assets are sold:
- Computers
- Equipment
- Office assets
Tax Rates
- LTCG → 10% or 20%
- STCG → 15% or slab rates
TDS on IT Services
Under Section 194J:
- Professional services → 10%
- Technical services → 2%
👉 Threshold: ₹50,000 (FY 2025–26)
ITR Filing for Companies
- ITR Form: ITR-6
- Due Date: 31 October
Salary and TDS (Section 192)
Employers must:
- Deduct TDS on salary
- Deposit tax
- Issue Form 16
Books of Accounts Requirement
Books must be maintained if:
- Turnover exceeds ₹25 lakh
- Income exceeds ₹2.5 lakh
Required Records
- Cash book
- Ledger
- Journal
- Bills and invoices
Conclusion
The taxation of IT services in India has become significantly more structured with GST replacing the earlier multi-tax system. With a standard GST rate of 18%, clear rules on place of supply, and provisions like RCM, compliance has improved for IT businesses.
On the direct tax side, companies must carefully manage income reporting, deductions, audits, and TDS obligations. With updated provisions such as higher audit limits and revised TDS thresholds, IT companies and professionals must stay informed to ensure compliance and optimize tax efficiency.
Disclaimer: The content on this website is for informational purposes only and does not constitute legal, financial, or professional advice. Please consult qualified experts before acting on any information. Jatin Sethi & Co accepts no liability for errors, omissions, or outcomes from the use of this content. This site is not an advertisement or solicitation.
FAQ’s
1. Are IT services taxable under GST in India?
Yes, IT services such as software development, IT consulting, technical support, and cloud services are generally taxable under the Goods and Services Tax regime.
2. What is the GST rate applicable to IT services?
Most IT and software-related services are taxed at 18% GST, unless they fall under a specific exemption category.
3. Is GST registration mandatory for IT service providers?
Yes. IT service providers must obtain GST registration if their aggregate annual turnover exceeds the prescribed threshold limit under the GST law.
4. Are export of IT services taxable in India?
Export of IT services is treated as zero-rated supply under GST. This means GST is not charged to foreign clients, but the service provider can claim input tax credit or apply for a refund.
5. How is income from IT services taxed under direct taxation?
Income earned from IT services is taxed as business or professional income under the Income Tax Act, 1961.
6. Is TDS applicable on payments for IT services?
Yes. Payments for certain technical or professional services may attract TDS under relevant provisions of the Income Tax Act when the payment exceeds the prescribed limit.
7. Can IT professionals claim deductions on business expenses?
Yes. IT professionals can claim deductions for expenses related to their work such as software tools, internet charges, office rent, hardware purchases, and employee salaries.
8. Are freelancers in IT services required to pay tax?
Yes. Freelancers providing IT services must report their income while filing their Income Tax Return and pay taxes according to the applicable tax slab.
9. What is presumptive taxation for IT professionals?
Eligible professionals can opt for presumptive taxation under Section 44ADA of the Income Tax Act, 1961, where 50% of total receipts are considered taxable income, reducing the compliance burden.
10. What records should IT service providers maintain for tax purposes?
IT service providers should maintain invoices, contracts, bank statements, expense records, GST returns, and financial statements for proper tax compliance and audit requirements.
Written by
Asha Ahuja Sethi (Head Admin at Jatin Sethi & Co., Chartered Accountants)
Shilpa Khata ( Works at Jatin Sethi & Co., Chartered Accountants)
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About the Author
cajatinsethi
Professional Chartered Accountant with expertise in taxation, financial planning, and business advisory services. Committed to helping businesses and individuals achieve their financial goals through personalized solutions and expert guidance.
