Understanding GST on Commission from Foreign Entities in Foreign Currency

Goods and Services Tax (GST) has been a game-changer in the Indian taxation system since its implementation in 2017. It has brought transparency and a simplified tax structure to businesses across the country. However, the complexities of GST can be challenging for small and medium business owners to understand, especially when it comes to GST on commission from foreign entities in foreign currency.

Before we delve into the details of GST on commission from foreign entities in foreign currency, let us first understand what constitutes a commission.

What is Commission?

Commission refers to a payment made to an individual or a company for services rendered. In the context of foreign exchange transactions, a commission is a payment made to a foreign exchange dealer for facilitating the transaction.

Now, let us understand how GST applies to commission payments made in foreign currency.

GST on Commission from Foreign Entities in Foreign Currency

When a commission is paid in foreign currency to an Indian entity, it is considered as an export of service. The Indian entity is liable to pay GST on the commission received. On the other hand, when a commission is paid in foreign currency to a foreign entity, it is considered as an import of service. The recipient of the commission is liable to pay GST under reverse charge mechanism.

The reverse charge mechanism is a mechanism where the recipient of the service is liable to pay GST instead of the supplier. In the case of commission payments made in foreign currency, the GST liability falls on the recipient.

Calculating GST on Commission from Foreign Entities in Foreign Currency

The GST on commission from foreign entities in foreign currency is calculated as follows:

GST = (Commission Received x GST Rate) / (Conversion Rate)

Here, the commission received refers to the amount of commission received in foreign currency, the GST rate refers to the rate of GST applicable (currently 18%), and the conversion rate refers to the rate of exchange between the foreign currency and the Indian rupee.

Conclusion

GST on commission from foreign entities in foreign currency can be a complex matter for small and medium business owners to understand. However, it is essential to understand the implications of GST on commission payments made in foreign currency to comply with the GST laws in India.

If you are an SME or a startup and have any questions related to GST on commission from foreign entities in foreign currency, you can consult a tax expert or a GST consultant for guidance.