ERP Pricing, Cost Drivers and 2026 Rules
GST, TDS and depreciation on ERP software: what applies to your purchase
18% GST and input tax credit on ERP and SaaS, reverse charge on foreign SaaS, TDS under section 393 of the Income-tax Act 2025, and depreciation of software licences.
When an Indian business buys ERP software, three tax questions come up: GST on the invoice (generally 18%, usually claimable as input tax credit), TDS that you may have to deduct from the payment to the vendor or partner (now under section 393 of the Income-tax Act, 2025, which replaced sections 194J and 195 of the 1961 Act from 1 April 2026), and how the cost is treated in your books and tax return: a SaaS subscription is generally a revenue expense, while a purchased licence is generally a depreciable asset. The details depend on how the deal is structured, so this guide explains the principles and the questions to settle with your chartered accountant before the first payment.
This guide is part of the overview of ERP software pricing in India. It is general information, not tax advice.
GST on ERP software and services
| What you buy | Usual GST position | Input tax credit |
|---|---|---|
| SaaS subscription from an Indian supplier | Supply of services, generally 18% GST charged on the invoice (CGST + SGST, or IGST for inter-state) | Usually available to a registered business using it for business |
| Implementation, training, customisation, AMC | Services, generally 18% | Usually available |
| Perpetual software licence from an Indian supplier | Generally treated as a supply attracting 18% | Usually available |
| SaaS or licence billed by a supplier outside India to a registered business | Import of services: the recipient pays IGST at 18% under reverse charge | Available after paying the reverse-charge tax in cash |
| Hardware for on-premise servers | Goods, rate depends on the item | Usually available |
Since the GST rate rationalisation that took effect on 22 September 2025, the main slabs are 5% and 18% with a 40% rate for a small list of goods; IT and software services remained at 18%. Confirm the rate for your specific supply on the CBIC GST site.
Foreign SaaS: reverse charge and OIDAR
When a supplier outside India provides online services such as SaaS:
- to a registered business in India, the business is the importer of services and pays IGST under reverse charge through GSTR-3B, then claims it as input tax credit in the same return if eligible;
- to an individual or unregistered recipient (a "non-taxable online recipient"), the foreign supplier of OIDAR services is supposed to register and charge GST itself.
Worked example: USD SaaS under reverse charge (illustrative)
A registered company pays $12,000 a year for a cloud ERP billed from abroad, at an illustrative ₹86 per dollar: value = ₹10,32,000. IGST under reverse charge = ₹10,32,000 × 18% = ₹1,85,760, paid in cash in GSTR-3B. If the company is eligible, it claims ₹1,85,760 as input tax credit in the same period, so the net GST cost is nil, but the cash leaves the business first. If the company makes exempt supplies, part of that credit may be blocked and the tax becomes a real cost.
TDS on payments for ERP software and services
From 1 April 2026, TDS on payments other than salary is consolidated in section 393 of the Income-tax Act, 2025: sub-section (1) for payments to residents (covering what section 194J did) and sub-section (2) for payments to non-residents (what section 195 did). The table in section 393(1), as published by the Income Tax Department, provides for:
- 10% on fees for professional services and on royalty (other than film royalty), and 2% on fees for technical services that are not professional services;
- a threshold of ₹50,000 a year per category for these payments (the threshold under section 194J was raised from ₹30,000 to ₹50,000 from 1 April 2025);
- a higher rate where the payee has no valid PAN.
How a particular ERP payment is characterised is the hard part:
| Payment | Possible characterisation | Comment |
|---|---|---|
| Implementation and consulting by an Indian partner | Fees for professional or technical services | Usually within section 393(1); rate depends on whether it is technical or professional |
| Perpetual licence or software purchased from an Indian supplier | Royalty, or purchase of goods | Treatment has been litigated; the old Act had a notification relieving some resale situations. Ask your CA whether it carries over |
| SaaS subscription from an Indian supplier | Service fee, royalty or business income | Depends on the contract; get advice |
| Payments to a non-resident vendor | Section 393(2), subject to tax treaties | The Supreme Court held in 2021 (Engineering Analysis Centre of Excellence) that payments for end-user software licences were not royalty under the relevant treaties; facts and contracts matter |
Section numbering and sub-items under the new Act are recent. Check the current text and the Income Tax Department's mapping tables on incometaxindia.gov.in and ask your CA, especially for payments to non-residents, where a certificate or Form-based process may be needed before remitting.
Worked example: TDS on an implementation invoice (illustrative)
An Indian partner bills ₹6,00,000 for implementation plus ₹1,08,000 GST = ₹7,08,000. If the service is treated as professional fees at 10%, TDS is generally calculated on the amount excluding GST where GST is shown separately: ₹6,00,000 × 10% = ₹60,000. You pay the partner ₹7,08,000 − ₹60,000 = ₹6,48,000 and deposit ₹60,000 with the government. If it is treated as technical services at 2%, TDS would be ₹12,000. The characterisation changes the cash flow, so decide it upfront.
Note that a separate GST TDS (under section 51 of the CGST Act) applies only to government departments and certain notified bodies, not to ordinary businesses.
Depreciation and accounting treatment
In your income-tax computation
- Purchased software licences have traditionally been depreciated as part of the computers and software block at 40% on the written-down value, with half the rate in the year of purchase if the asset is put to use for less than 180 days. Commentaries indicate the rates carried over into the Income-tax Act, 2025 (with renumbered sections); check the depreciation schedule for tax year 2026-27 with your CA.
- SaaS subscriptions are generally a revenue expense deductible in the year to which they relate. A three-year prepayment is usually spread over the period in the books.
- Implementation costs follow the asset: capitalised with a purchased licence where they are part of making it ready for use, or expensed for SaaS where no asset is created.
In your financial statements
Under the accounting standards (Ind AS 38 or AS 26 for intangible assets), a purchased licence you control is an intangible asset, amortised over its useful life. For cloud arrangements where you only get access to the vendor's software, configuration and customisation costs are often expensed, unless they create a separate asset you control. The answer depends on facts, so agree it with your auditor before go-live; it affects profit in the year of implementation.
Worked example: licence vs SaaS (illustrative)
| Purchased licence ₹10,00,000 | SaaS ₹3,50,000 a year | |
|---|---|---|
| Year 1 tax deduction | 40% of ₹10,00,000 = ₹4,00,000 if used 180 days or more (₹2,00,000 if less) | ₹3,50,000 |
| Year 2 tax deduction | 40% of ₹6,00,000 = ₹2,40,000 | ₹3,50,000 |
| Year 3 tax deduction | 40% of ₹3,60,000 = ₹1,44,000 | ₹3,50,000 |
These are deductions, not cash savings; the tax saved depends on your rate. Taxes rarely decide between licence and SaaS, but they change the timing.
For cost comparisons over time, see the 3–5-year TCO guide and cloud vs on-premise ERP. For USD pricing, see ERP pricing models.
FAQ
Is equalisation levy payable on foreign SaaS?
The 2% equalisation levy on e-commerce supplies was withdrawn from 1 August 2024 and the 6% levy on online advertising from 1 April 2025, according to the Finance Acts of those years. Confirm with your CA for the period you are dealing with.
Can I claim GST credit on ERP for a business with exempt supplies?
Only partly. Credit on common inputs and services is apportioned between taxable and exempt supplies under the GST rules.
Do I deduct TDS on a card payment to a SaaS vendor?
The TDS obligation does not depend on the payment method. If TDS applies, it applies whether you pay by card, transfer or cheque, which is why monthly card payments to foreign SaaS need advice.
Sources
- CBIC GST — GST rates, reverse charge on import of services, OIDAR
- Income Tax Department — Income-tax Act, 2025, section 393 tables and depreciation
- e-Filing portal — TDS returns and certificates
- Institute of Chartered Accountants of India — accounting standards for intangible assets
- GST Council — 57th meeting recommendations
