TL;DR: If your Indian contractor exports services to you, their invoice should carry 0% GST. The mechanism is a Letter of Undertaking (LUT), an annual filing that lets them invoice without paying integrated GST up front, and you will usually see its reference number printed on the invoice. You, the US client, do not pay Indian GST. If an invoice adds 18%, ask about the LUT before paying it. What you owe does not change: collect a W-8BEN, pay the invoice, pay it on time, and keep the records.
Your Indian contractor sends an invoice and it has a line you have never seen on a US invoice: "Export of service under LUT ARN AA1002…, zero rated supply under Section 16 of the IGST Act, 2017". Or it says GST 0%. Or, occasionally, it adds 18% to your total.
None of that is a mistake, and only one version of it should reach your bank. Here is what each line means, in the order it matters to you.
What your contractor is claiming
India taxes services under the Goods and Services Tax. Most professional services carry a standard rate of 18%. But an export of services is treated as a zero-rated supply under Section 16 of the Integrated GST Act, which means the tax rate on your invoice is 0% while your contractor keeps the ability to recover the tax they paid on their own inputs, per guides from PayGlocal and Karbon.
Zero-rated is not the same as exempt, and the distinction is why the paperwork exists. Exempt means no tax and no credit. Zero-rated means no tax and full credit, so the government wants proof that the transaction really was an export.
Five conditions define an export of services, per Karbon's LUT guide and RegisterKaro:
- The supplier is in India.
- The recipient (you) is outside India.
- The place of supply is outside India.
- Payment is received in convertible foreign exchange.
- The supplier and the recipient are not two establishments of the same person.
Conditions 4 and 5 are the ones a US startup can accidentally break. Pay in a way that does not arrive as foreign currency into their Indian bank and condition 4 wobbles. Route the payment through your own Indian subsidiary to your own Indian branch and condition 5 fails outright, which is worth checking with your accountant if you have any Indian presence at all.
What the LUT actually is
The Letter of Undertaking is an annual declaration your contractor files on the GST portal, on Form RFD-11, promising to meet the export conditions. With it in place, they invoice you at 0% and nothing is paid up front. Without it, the legal route is to charge and pay integrated GST at 18% and then claim it back as a refund, which ties up their working capital for months, per IncorpX and Karbon.
Two details explain most of what you will see:
- It has to exist before the invoice date. A LUT filed in June does not retroactively zero-rate a May invoice.
- It expires with the financial year. India's financial year runs April to March, so the LUT is refiled every April. A contractor who forgets in April can send you an April or May invoice with a problem attached.
The reference number on the invoice ("LUT ARN") is the acknowledgement number from that filing. You are not expected to verify it. Its presence is simply the signal that your contractor did the thing that makes 0% correct.
Why an invoice might add 18% anyway
Three situations, with different answers.
They have no LUT. Then charging integrated GST is the technically correct route for them, and refunding it is their process, not yours. But that 18% is being added to your cost for a tax the export was never supposed to bear. The reasonable ask is: file the LUT (it takes minutes on the portal and is free) and reissue at 0%. Almost every contractor will, because the refund route is worse for them than for you.
They are not GST-registered at all. Registration is mandatory once aggregate turnover crosses ₹20 lakh in a financial year, or ₹10 lakh in the special category states, per RegisterKaro and SmartGST. A smaller contractor may be under the line and simply not registered, in which case their invoice will carry no GSTIN, no LUT, and no tax. That is normal and correct. It also means they cannot file a LUT or claim input refunds, which is why many exporters register voluntarily.
They misread the rule. Some contractors, or their billing software, treat a foreign client like a domestic one. A polite question usually resolves it. What you should not do is quietly pay the 18% and treat it as the price of doing business in India, because you are then funding a refund claim you cannot make.
To be clear about your own position: Indian GST is a tax on the Indian supplier, not a withholding obligation on you. A US company paying an Indian contractor does not register for GST, does not remit it, and cannot reclaim it. Confirm the specifics with your accountant, especially if you have an Indian entity.
The one-year rule that makes your payment timing their problem
This is the part almost no US client knows, and it is the one that can actually hurt your contractor.
Under Rule 96A of the CGST Rules, export proceeds for services must be realised in convertible foreign exchange within one year of the invoice date. Miss it and the exporter has to pay the tax with interest within 15 days of that one-year mark, and the LUT facility is treated as withdrawn until they do, per CAclubindia and TaxGuru. Interest is commonly cited at 18%. The facility is restored once the tax is paid.
One year sounds like a lot of runway until you have seen how invoice disputes and 60-day payment terms compound. The practical translation for you is simple: pay on the agreed date, in dollars, into their Indian bank through a normal commercial channel. Slow payment is not just a cash-flow inconvenience for an Indian contractor, it is a tax event with a deadline.
What your contractor needs from your payment
Two things, and both are about proof rather than tax.
Foreign currency, arriving as foreign currency. Condition 4 of the export test. Paying in USD into a channel that credits their account as a domestic transfer defeats the point.
Evidence of the inward remittance. Banks stopped issuing classic Foreign Inward Remittance Certificates for ordinary export receipts years ago; service exporters now typically get a Foreign Inward Remittance Advice, often as an e-FIRA from their bank or payment provider, per Skydo and Grey. It is the document that ties your payment to their zero-rated invoice at audit or refund time, and Razorpay's guide covers how it differs from a Bank Realisation Certificate, which applies to goods exports.
You do not have to produce either document. You just have to not get in their way: consistent payer name, invoice reference on the payment, and a rail that generates the advice automatically.
Send this to your contractor. If they are invoicing you without a LUT, the fix is a Form RFD-11 filing on the GST portal, valid for the current financial year, renewed every April, and quoted by ARN on each export invoice. If they are under the ₹20 lakh threshold and unregistered, no GST line belongs on the invoice at all. Their CA can confirm which of the two they are in ten minutes.
How this looks on Shor
Contractors in India invoice in USD, and the money arrives as a foreign inward remittance to their Indian bank, which is what the export test requires. Payouts to India settle on same-day local rails. Contracts, W-8BEN collection, and invoicing are part of the $19 per month per contractor fee, and the flat 2% FX margin applies only when the contractor chooses to convert dollars to rupees, disclosed before the money moves. If they want to hold part of their earnings in dollars and convert on their own timing, our guide to paying international contractors in USD explains why so many ask for exactly that.
The tax side stays theirs. What the platform removes is the ambiguity around your half: a dated invoice, a payment that matches it, and a record both sides can show later. For the wider picture of hiring in India, including when a contractor should really be an employee, see our India country guide.
This page is general information, not tax or legal advice. Indian GST rules and thresholds change; your contractor should confirm their position with their chartered accountant, and you should confirm yours with your accountant.
FAQ
Do I pay Indian GST on my contractor's invoice? No. GST is a tax on the Indian supplier, and an export of services is zero-rated under Section 16 of the IGST Act, so a correctly issued invoice to a US company shows 0%. You do not register for GST, remit it, or reclaim it. If an invoice adds 18%, the usual cause is a missing Letter of Undertaking rather than a rule that applies to you.
What does LUT mean on an invoice? Letter of Undertaking. It is an annual declaration your contractor files on the GST portal (Form RFD-11) that lets them invoice exports without paying integrated GST up front. It must be in place before the invoice date and is refiled each April for the new financial year, which is why the reference number on your January and May invoices may differ.
My contractor is not registered for GST at all. Is that a problem for me? Generally no. GST registration is mandatory above ₹20 lakh of aggregate turnover in a financial year (₹10 lakh in special category states), so a smaller contractor may legitimately have no GSTIN and no GST line on the invoice. Keep the invoice and the payment record as you would for any contractor, and ask your accountant if you need more comfort.
Does paying late create a tax problem for my Indian contractor? Yes. Under Rule 96A, export proceeds have to be realised in foreign currency within one year of the invoice date, or the exporter owes the tax with interest within 15 days of that deadline and loses the use of their Letter of Undertaking until it is paid. Paying on the agreed date, in dollars, through a normal commercial channel avoids the whole issue.