Export Services: ₹20 Lakh GST Threshold & Direct Tax Code 2025 Compliance

Key Takeaways

• Clarification on GST Threshold for Exports: The ₹20 lakh (or ₹10 lakh) threshold under the Goods and Services Tax (GST) regime primarily applies to taxable domestic supplies of services. Exports of services are categorised as zero-rated supplies under Section 16 of the IGST Act, typically not mandating GST registration solely for export purposes, though opting for registration allows Input Tax Credit (ITC) claims.
• Anticipated Direct Tax Code 2025 Impact: While the proposed Direct Tax Code (DTC) 2025 will replace the Income Tax Act, 1961, governing direct taxes, its provisions are expected to align with global tax principles, potentially influencing the overall compliance framework for digital nomads and SaaS businesses, including aspects like Permanent Establishment (PE) and beneficial ownership.
• FEMA and Export Compliance Criticality: Regardless of GST or DTC amendments, stringent adherence to Foreign Exchange Management Act (FEMA) regulations for export proceeds, including timely realisation and statutory reporting via Export Data Processing and Monitoring System (EDPMS) and Electronic Bank Realisation Certificate (eBRC), remains paramount for all service exporters.
• Proactive Business Structuring: Digital nomads and SaaS founders should review their current business structures (e.g., proprietorship, partnership, private limited company) in anticipation of the DTC 2025, considering implications for tax residency, income attribution, and the interplay between direct tax liabilities and GST compliance.

PART 1: EXECUTIVE SUMMARY

The transition from the Income Tax Act, 1961 (ITA 1961) to the proposed Direct Tax Code, 2025 (DTC 2025) marks a pivotal shift in India’s direct tax landscape. Concurrently, the Goods and Services Tax (GST) framework, though distinct, presents crucial compliance considerations, particularly concerning the ₹20 lakh turnover threshold for service exports. This guide addresses the implications for digital nomads and SaaS businesses, clarifying existing GST mandates and anticipating future compliance requirements.

The Old Law (Income Tax Act, 1961 & Current GST Framework): The ITA 1961 governs direct taxes on income, with established provisions for residents and non-residents, and specific treatments for foreign source income. For GST, the existing law categorises exports of services as zero-rated supplies. The standard ₹20 lakh (or ₹10 lakh for specified states) turnover threshold applies to taxable domestic supplies of services for mandatory registration. Businesses exclusively exporting services can choose to register to claim Input Tax Credit (ITC) by filing a Letter of Undertaking (LUT) or paying IGST and claiming a refund. There is currently no mandatory GST registration solely based on the ₹20 lakh threshold for entities exclusively making zero-rated exports.

The New Law (Direct Tax Code, 2025 & Future GST Context): The DTC 2025, while replacing the ITA 1961, is expected to streamline direct tax laws, simplify provisions, and align with international taxation norms. While the DTC itself will not directly amend the GST Act, its underlying principles concerning tax residency, income attribution, and digital economy taxation may indirectly influence the overall compliance burden for digital nomads. The question of "mandatory GST in 2026" for export of services at the ₹20 lakh threshold highlights a potential area of future policy discussion, though currently, no such mandate exists for exclusive zero-rated exporters. Any such change would require explicit amendments to the CGST/IGST Acts.

Who is Impacted: This transition and the GST compliance nuances primarily impact Indian digital nomads, SaaS founders, freelance professionals, and technology startups engaged in providing services to overseas clients. It affects their direct tax liabilities, GST registration decisions, ITC claims, and adherence to foreign exchange regulations, necessitating a proactive review of their operational and financial structures.

PART 2: DETAILED TAX ANALYSIS

1. Tax Landscape for SaaS & Digital Nomads

The operational model of Digital Nomads and SaaS businesses often involves cross-border service provision, triggering a complex interplay of direct tax, indirect tax, and foreign exchange regulations. Understanding the current regime and anticipating changes under the Direct Tax Code (DTC) 2025 is crucial for ensuring uninterrupted compliance and optimising tax efficiency.

1.1 Current GST Framework for Export of Services:

The core of the discussion for service exports revolves around the Goods and Services Tax (GST) regime.

• Definition of Export of Services: As per Section 2(6) of the Integrated Goods and Services Tax (IGST) Act, 2017, "export of services" means the supply of any service when:
  • The supplier of service is located in India.
  • The recipient of service is located outside India.
  • The place of supply of service is outside India.
  • The payment for such service has been received by the supplier in convertible foreign exchange or in Indian rupees wherever permitted by the Reserve Bank of India (RBI).
  • The supplier of service and the recipient of service are not merely establishments of a distinct person.
• Zero-Rated Supplies: Exports of services are classified as "zero-rated supplies" under Section 16 of the IGST Act. This means that such supplies are subject to GST at a zero rate, allowing the exporter to claim a refund of Input Tax Credit (ITC) paid on inputs and input services used for making these exports.
• GST Registration Threshold for Services: The general threshold for mandatory GST registration for suppliers of services is ₹20 lakh in a financial year (₹10 lakh for specified special category states). It is critical to understand that this threshold applies to taxable supplies.
  • Implication for Exporters: If a digital nomad or a SaaS entity exclusively provides services that qualify as "export of services" (i.e., zero-rated supplies) and has no taxable domestic supplies, they are generally not mandated to register for GST. This is a crucial distinction.
  • Voluntary Registration for ITC: However, even if not mandated, most exporters choose to register for GST. This allows them to:
    • Make exports without payment of IGST under a Letter of Undertaking (LUT) or Bond, and claim a refund of accumulated ITC.
    • Make exports with payment of IGST and claim a refund of the IGST paid.
  • The ₹20 Lakh Threshold for Exports: The notion of a "₹20 lakh threshold for export of services" triggering mandatory GST registration is a common misconception. As per current law, the value of zero-rated supplies (exports) is typically excluded when determining the threshold for mandatory registration if there are no taxable domestic supplies.
• Scenario for 2026 and Beyond: If a policy change were to mandate GST registration for all service exporters exceeding ₹20 lakh turnover, irrespective of zero-rated status, it would signify a significant shift. Our team would expect such a change to be introduced through explicit amendments to the CGST/IGST Acts, rather than being an automatic outcome of the Direct Tax Code 2025, as GST operates under its distinct legislative framework. Currently, there is no legislative proposal indicating such a change for 2026.

1.2 Anticipated DTC 2025 Impact on Direct Taxes:

While the Direct Tax Code 2025 (DTC 2025) will directly replace the Income Tax Act, 1961, its specific provisions are yet to be finalised and enacted. However, based on past proposals and global tax reform trends, we can anticipate certain principles:

• Simplification and Rationalisation: The DTC aims to simplify complex provisions, reduce litigation, and rationalise tax rates and structures.
• Global Alignment: Increased alignment with international tax standards, including principles of Permanent Establishment (PE) for non-residents, General Anti-Avoidance Rule (GAAR), and possibly specific provisions addressing the digital economy (e.g., Equalisation Levy, Digital Services Tax) within the direct tax framework.
• Tax Residency: Clarified or modified rules for determining tax residency, which is critical for digital nomads who may spend time across multiple jurisdictions.
• Income Attribution: Potential changes in rules for attributing income to a PE or to specific types of digital businesses.

These changes, while not directly impacting GST rates or thresholds, will significantly influence the overall direct tax burden and compliance requirements for digital nomads and SaaS companies operating cross-border.

2. Direct Tax vs GST Interplay

The interaction between direct taxes (governed by the ITA 1961, and eventually DTC 2025) and indirect taxes (GST) is crucial for comprehensive tax planning for digital nomads and SaaS entities. While distinct, they are not entirely independent in terms of business compliance and financial health.

2.1 Nexus of Compliance:

• Business Income Declaration: The income reported under the Direct Tax regime (Income Tax Returns) must reconcile with the turnover declared under the GST regime (GST Returns). Any significant discrepancies can trigger scrutiny from tax authorities.
• Financial Records: The same underlying financial records (invoices, bank statements, ledgers) are used for both direct and indirect tax compliance. Accurate bookkeeping is paramount for seamless reporting across both regimes.
• Audit Requirements: Statutory audits, if applicable, encompass a review of compliance with both direct and indirect tax laws, highlighting the integrated nature of overall financial governance.

2.2 Impact of DTC 2025 Principles on GST Compliance:

• Tax Residency and Place of Supply: A digital nomad's tax residency under the DTC 2025 could influence their interpretation of the "place of supply" rules under GST. For instance, if a nomad's residency status impacts whether they are considered "located in India" for export of service rules, it could have GST implications. The DTC's emphasis on global tax principles could align definitions, reducing ambiguity.
• Permanent Establishment (PE) Considerations: If a SaaS business creates a PE in another country under the DTC's revised rules (e.g., through significant economic presence), it could potentially lead to tax implications in that foreign country under direct tax laws. While not directly affecting Indian GST on exports from India, understanding PE is crucial for global tax strategy and could affect foreign tax credits claimed under the DTC.
• Digital Economy Taxation: The DTC 2025 may contain specific provisions for taxing digital services. While the Equalisation Levy already exists as an indirect tax on certain digital ad services, the DTC could bring broader aspects of the digital economy under the direct tax net. This broader direct tax approach may lead to discussions on whether corresponding changes are needed in GST for specific digital service categories, especially those involving cross-border supplies.
• Simplified Compliance: If the DTC successfully simplifies direct tax compliance, it could free up resources for businesses to focus more effectively on indirect tax compliance, potentially enhancing overall adherence.

2.3 Importance of GST Registration for Exporters (Even if Not Mandated): Even with no current mandate for GST registration solely for zero-rated exports, our team strongly recommends registration for entities with substantial export turnover.

• Input Tax Credit (ITC): Exporters incur GST on various inputs (e.g., internet, software subscriptions, office rent, consulting services) and input services within India. Without GST registration, they cannot claim ITC, increasing their cost of doing business. The zero-rated nature of exports allows for a refund of this ITC.
• Compliance & Transparency: Being GST registered enhances a business's credibility and simplifies compliance when interacting with banks for Foreign Inward Remittances and with customs authorities for any potential physical export/import activities.
• Future Policy Changes: Proactively registering and maintaining GST compliance ensures readiness for any potential future legislative changes regarding export thresholds or compliance requirements.

3. FEMA & Export Compliance

Compliance with the Foreign Exchange Management Act (FEMA), 1999, and its associated regulations is critically important for digital nomads and SaaS businesses exporting services from India. This framework ensures proper handling and repatriation of foreign exchange earnings.

3.1 Key FEMA Requirements:

• Realisation of Export Proceeds: Exporters of services are mandated to realise and repatriate export proceeds to India within a specified period (currently nine months from the date of export). Any delays require specific approvals from the RBI or Authorised Dealer (AD) Banks.
• Reporting of Exports:
  • Export Data Processing and Monitoring System (EDPMS): AD Banks report all service exports (Foreign Inward Remittances – FIRCs) to the RBI through EDPMS. Exporters are responsible for ensuring that their bank correctly reports these transactions and that the related Export Declaration Forms (EDF) for goods or Softax Export Forms (SOFTEX) for software/ITES services are properly linked.
  • SOFTEX Form: For exports of software or IT-enabled services (ITES), including SaaS, filing a SOFTEX form with the Software Technology Parks of India (STPI) or other designated authorities within 30 days of the export is mandatory for reporting the value of software/service exports. This ensures that the exports are properly accounted for under FEMA guidelines.
• AD Code Registration: Every exporter must register their Authorised Dealer (AD) Code with the customs authorities (for goods) or with their respective bank (for services) to facilitate smooth clearance of export proceeds. This is crucial for linking remittances to specific export transactions.
• Electronic Bank Realisation Certificate (eBRC): Once export proceeds are realised, the AD Bank issues an eBRC, which serves as proof of repatriation of foreign exchange into India. This is essential for various benefits and compliance requirements under both FEMA and potentially the Foreign Trade Policy.

3.2 Interplay with Direct Tax Code 2025 & GST:

• Proof of Income & Export: The eBRC and SOFTEX forms provide robust evidence of foreign income earned, which is critical for accurate reporting in Income Tax Returns under the DTC 2025. It also supports the classification of supplies as "export of services" for GST purposes, justifying zero-rating and ITC claims.
• Cross-Verification: Tax authorities (both direct and indirect) often cross-verify reported export turnover with FEMA records (e.g., EDPMS data). Discrepancies can lead to inquiries and potential penalties.
• Compliance Synergy: A streamlined and simplified direct tax regime under the DTC 2025, coupled with clearer GST regulations, can create an environment where FEMA compliance is more easily integrated into the overall financial reporting workflow for digital nomads and SaaS companies. Maintaining clean and reconciled records across all these regimes is a hallmark of robust compliance.

4. Business Structuring Impact

The choice of business structure (e.g., proprietorship, partnership, Limited Liability Partnership, Private Limited Company) has significant implications for direct tax liabilities, GST compliance, and overall regulatory burden, especially when considering the transition to the DTC 2025.

4.1 Proprietorship/Individual Professional:

• Simplicity: Easiest to set up and manage. Income is directly taxed in the individual’s hands.
• Direct Tax Under DTC 2025: The DTC 2025 is expected to rationalise individual tax slabs and deductions. Digital nomads operating as sole proprietors would be directly subject to these individual tax provisions.
• GST: If registered, the proprietorship operates under the individual's Permanent Account Number (PAN). GST compliance for exports (LUT filing, ITC refunds) is managed by the individual.
• Limited Liability: No separate legal entity means unlimited personal liability for business debts. This is a significant risk for SaaS businesses with potential contractual liabilities.

4.2 Partnership/Limited Liability Partnership (LLP):

• Direct Tax Under DTC 2025: DTC is expected to refine partnership taxation, possibly addressing issues of profit sharing, capital gains, and partner remuneration. An LLP offers limited liability to its partners, making it more attractive than a traditional partnership for SaaS ventures.
• GST: The partnership/LLP is a separate legal entity for GST purposes. Registration, compliance, and ITC refunds are handled in the name of the entity.
• Compliance Burden: Moderately higher compliance compared to proprietorship, but offers benefits of shared responsibility and limited liability (for LLP).

4.3 Private Limited Company (Pvt Ltd Co):

• Separate Legal Entity: Provides distinct advantages like limited liability for shareholders, ease of raising capital, and perpetual succession.
• Direct Tax Under DTC 2025: The DTC 2025 will govern corporate tax rates, dividend distribution tax, and provisions related to capital gains, mergers, and acquisitions. It is anticipated to focus on stable and competitive corporate tax rates.
• Permanent Establishment (PE) Risk: For SaaS companies with international operations, the definition of PE under the DTC 2025 and Double Taxation Avoidance Agreements (DTAAs) will be critical. Establishing physical presence or having dependent agents in foreign jurisdictions could trigger tax liabilities in those countries.
• Transfer Pricing (TP): SaaS companies with related entities overseas (e.g., a parent company abroad, or foreign subsidiaries) will need to ensure compliance with transfer pricing regulations under the DTC 2025. This ensures that transactions between related parties are at arm's length.
• GST: As a separate legal entity, a Private Limited Company will have its own GST registration and compliance obligations, which are generally more formalised compared to a proprietorship.
• Higher Compliance: Significantly higher compliance burden (ROC filings, audit requirements, stricter governance norms) but offers robust legal structure and credibility, particularly for growth-oriented SaaS businesses.

4.4 Strategic Considerations for Digital Nomads and SaaS Founders:

• Growth Trajectory: Early-stage digital nomads might start with a proprietorship for simplicity. However, as turnover grows, a shift to an LLP or Private Limited Company becomes advisable due to limited liability and better scalability.
• Investment Readiness: For SaaS businesses seeking angel or venture capital funding, a Private Limited Company is almost always the preferred structure due to its legal sanctity and ease of equity transfer.
• Global Footprint: Entities with ambitions for a global footprint must consider the implications of their structure on international tax, PE risks, and transfer pricing under the DTC 2025.
• Exit Strategy: The business structure plays a significant role in the ease and tax implications of an exit (e.g., sale of business, IPO).

Our team advises a thorough review of the business structure in light of these considerations, preferably with expert consultation, before the full implementation of the DTC 2025.

5. Final Checklist for Founders

As the tax landscape evolves, proactive compliance and strategic planning are paramount for digital nomads and SaaS founders. Our team provides this final checklist to navigate the transition and ongoing requirements:

1. Review GST Registration Status:

   • Assess if your current services qualify as "export of services" under IGST Act.
   • If exclusively exporting, confirm whether you are registered voluntarily or if your taxable domestic supplies exceed the ₹20 lakh threshold.
   • If not registered, evaluate the benefits of voluntary registration for ITC claims.
   • Ensure all necessary LUTs are filed and renewed annually to make zero-rated supplies without paying IGST.

2. Verify Export Compliance (FEMA & GST):

   • Confirm timely realisation of export proceeds and repatriation within FEMA stipulated periods.
   • Ensure accurate and timely filing of SOFTEX forms (for software/ITES exports) with STPI or relevant authorities.
   • Cross-verify FIRCs with bank statements and ensure proper reporting in EDPMS by your AD Bank.
   • Maintain robust documentation for all export invoices, eBRCs, and bank remittances.

3. Prepare for Direct Tax Code 2025 (DTC 2025) Transition:

   • Stay updated on legislative developments regarding the DTC 2025.
   • Review your current direct tax filing practices for consistency and accuracy.
   • Evaluate the implications of potential changes in tax residency rules under the DTC if you are a digital nomad with varying physical presence.
   • If operating internationally, assess potential PE risks and transfer pricing implications for your current structure under anticipated DTC provisions.

4. Optimise Business Structure:

   • Re-evaluate your current business structure (proprietorship, LLP, company) against your growth plans, risk appetite, and potential DTC 2025 impacts.
   • Consider transitioning to a structure offering limited liability as your business scales.
   • Consult with tax and legal professionals to align your structure with long-term strategic and compliance goals.

5. Maintain Meticulous Records:

   • Implement robust accounting software and practices to maintain accurate records of income, expenses, invoices, and bank transactions.
   • Ensure all financial records are reconciled regularly across direct tax, GST, and FEMA reporting.
   • Digital nomads should maintain records of their physical presence if tax residency rules are based on days of stay.

6. Continuous Professional Development & Consultation:

   • The tax landscape is dynamic. Our team strongly recommends continuous education on tax changes.
   • Engage with qualified tax professionals (CAs, International Tax Strategists) to review your compliance framework periodically and adapt to new legislative requirements.

💡 SaaS & Nomad Tip: Ensure your zero-rated exports and LUT filings are aligned with the Tax Year 2026 guidelines.