A ₹2,000-a-month AI subscription carries ₹360 of GST. For a GST-registered business using the tool for work, that ₹360 should cost nothing in the end, because it comes back as input tax credit. In practice, a lot of small businesses and startups either never get it back or, worse, have quietly stopped paying GST on the subscription altogether without doing the paperwork that's supposed to replace it.
This post explains why, and what the correct monthly routine looks like. It covers foreign tools billed from outside India. Indian vendors that issue a normal GST tax invoice — Zoho, Refrens and others in our GST-invoice guide — are much simpler, and are covered at the end.
Foreign AI tools are "OIDAR" services taxed at 18%
Under GST, software and online services delivered over the internet from abroad are generally treated as OIDAR — Online Information and Database Access or Retrieval — services, and attract 18% IGST. ChatGPT, Claude, Perplexity, Cursor, Midjourney and most other AI subscriptions paid to a foreign company fall under this.
Who pays that 18% depends on who the customer is. If you're buying as an individual or an unregistered business, the foreign provider is supposed to charge GST and remit it in India. If you're a GST-registered business, the law flips the obligation onto you through the reverse charge mechanism (RCM): you pay the IGST yourself and then claim it back as credit. Since 1 October 2023, when the Finance Act 2023 changes took effect, a registered person can no longer be treated as a "non-taxable online recipient", so there's no route for a registered business to sit outside reverse charge on imported online services.
The two ways businesses get this wrong
Mistake one: never giving the vendor your GSTIN. The tool keeps charging 18% GST on every invoice, as it would for a consumer. That invoice isn't in your GSTIN's name, so the GST on it doesn't show up as credit you can claim. It's simply a cost — ₹360 a month on a ₹2,000 plan, ₹4,320 a year, per seat — and your reverse-charge position isn't cleanly settled either. If you've been doing this, talk to your CA about how to tidy it up.
Mistake two: giving the GSTIN and then doing nothing. Once you add your GSTIN in the tool's billing settings, many foreign vendors stop charging GST, and the invoice total drops by 18%. That looks like a saving, but it isn't — you now owe that 18% under reverse charge. Skipping it builds an unpaid liability, with interest, that surfaces in an audit or a notice.
The correct monthly routine
Add your GSTIN in each foreign tool's billing settings, so invoices are issued to your business without Indian GST charged.
Work out the time of supply. For imported services under reverse charge, it's the earlier of the date you pay and 60 days after the vendor's invoice date. For a card-billed monthly subscription, that is usually the payment date.
Convert to rupees using the exchange rate on that date, applied under generally accepted accounting principles (Rule 34 of the CGST Rules). Use the underlying exchange rate, not your bank's forex markup.
Raise a self-invoice within 30 days (Section 31(3)(f) of the CGST Act and Rule 47A of the CGST Rules). It should show the vendor's name and address, what was supplied, the rupee value and exchange rate, IGST at 18%, your GSTIN and a note that tax is payable on reverse charge. Keep a separate numbering series for self-invoices. A payment voucher is also required at the time of payment (Section 31(3)(g)).
Pay the IGST in cash through your GSTR-3B for that month. Reverse-charge tax can't be paid out of your existing credit balance — it goes through the electronic cash ledger. Report it in Table 3.1(d), inward supplies liable to reverse charge.
Claim the same amount back as input tax credit in Table 4(A)(2), import of services, in the same return, provided the tool is used for your business and the usual Section 16 conditions are met. Do it in the same month so the two entries match. Because it doesn't appear in GSTR-2B, it's easy to pay the liability and forget to take the credit.
A worked example
Say you pay $25 a month for a business AI plan, and the exchange rate on the payment date is ₹88 to the dollar. The taxable value is ₹2,200 and the IGST is ₹396. You raise a self-invoice for ₹2,200 plus ₹396 IGST, pay ₹396 in cash through that month's GSTR-3B, and claim ₹396 of credit in the same return. Your net GST cost is zero. The only real cost is your cash being tied up until the credit is used against your output tax.
Annual plans work the same way, but the whole year's liability falls in the month you pay. A $300 annual plan paid in one go means the full reverse-charge amount lands in that one GSTR-3B — worth planning for.
When you can't claim the credit
If you aren't registered for GST — many freelancers below the ₹20 lakh turnover threshold for services — you pay whatever GST the foreign vendor charges, and there is no credit to claim. The 18% is a real cost, which is one reason we track INR pricing and GST invoicing on every tool page.
Even for registered businesses, credit isn't available on subscriptions used personally, and the blocked-credit list in Section 17(5) still applies. If a tool is used partly for personal work, the credit has to be apportioned.
Indian vendors: much simpler
When an Indian vendor bills you in rupees with a proper GST tax invoice in your GSTIN's name, you are not under reverse charge at all. The vendor charges CGST and SGST, or IGST, and files its returns; the invoice appears in your GSTR-2B; you claim the credit normally. That's the whole case for the GST-invoice check in our India-readiness score — it removes a monthly compliance task, not just a line item. Our guides to AI tools with a GST invoice and AI tools with INR pricing list the options in the catalogue.
The fine print
This post is general information, not tax advice. How it applies to you depends on your registration, your use of the tool and how each vendor invoices you, and vendor behaviour changes — some foreign AI companies register in India and bill in rupees, others don't. Check your own invoices each month, and have your CA confirm the treatment for your business.