How to pay and manage Indian contractors: A practical guide

If you're paying independent contractors in India, you need to handle payment, understand GST and FEMA requirements, and ensure proper documentation. The payment part is straightforward once you know the right method. The compliance part—GST classification, FEMA regulations, and income tax requirements—is where most foreign businesses get confused.

This guide walks through what you actually need to do. Then we'll show you where Kontrable helps organize the work.

The main things you need to do

1. Use Wise for payments. It's the cheapest and most reliable way to pay Indian contractors. Wise costs $3-10 per transfer with mid-market exchange rates. PayPal costs 4.4% + $0.30 per transaction—that's 3-4% more expensive. For $100,000 USD/year in payments, Wise saves you $3,000-4,000 USD.

2. Request PAN and understand GST status. Before paying an Indian contractor, request their Permanent Account Number (PAN) and verify their GST registration status. This confirms they're registered with Indian tax authorities.

3. Understand that services to foreign clients are zero-rated GST. When an Indian contractor provides services to you (a foreign client), it's classified as "export of services" and zero-rated (0% GST). You don't pay GST, and the contractor shouldn't charge it.

4. Use a written contract. Document the contractor relationship with a clear agreement covering scope, deliverables, payment terms, IP ownership, and explicit statement that they're an independent contractor (not an employee).

5. Keep records for your own tax purposes. Maintain invoices, payment proof, and contracts for your records. As a foreign company, you don't file anything with Indian tax authorities, but you need documentation for your own country's tax compliance.

That's the foundation. Everything else builds on these five things.

Payment methods: What actually works

For paying Indian contractors:

Use Wise. It's the cheapest, fastest, and most transparent way to pay contractors in India.

Why Wise is best: It charges $3-10 per transfer with mid-market exchange rates—3-4% better than PayPal or banks. For a $1,000 USD payment, Wise costs $10 while PayPal costs $44 (plus worse exchange rates). Over a year, this adds up to thousands in savings.

How to set up: Create a Wise business account (free, takes 5 minutes). Get the contractor's Indian bank details (account number, IFSC code, bank name). Send USD or INR to their account. Wise converts at mid-market rate if sending USD to INR. The contractor receives money in 1-2 business days.

What about PayPal?

PayPal is convenient if the contractor already uses it, but it's expensive. For small one-time payments under $200, the convenience might be worth it. For regular payments, use Wise.

What about Payoneer?

Payoneer is popular with Indian contractors and charges 2-3% per transfer, which is cheaper than PayPal but more expensive than Wise. Use it if the contractor already has an account and prefers it, but Wise is still the best option.

What about bank wires?

Bank wires are expensive ($25-50 per transfer) and slow (3-5 days). Avoid them unless you have a specific reason.

Currency: USD or INR?

Most Indian contractors prefer USD because it protects against INR currency fluctuations. They can convert to INR locally when needed. Agree on a USD rate upfront so both sides know exactly what's being paid.

Understanding GST (Goods and Services Tax)

This is where many foreign businesses get confused. Indian contractors must register for GST if their annual turnover exceeds ₹20 lakhs (₹10 lakhs for special category states). Once registered, they normally charge 18% GST on services.

But here's the critical part: services provided to foreign clients are classified as "export of services" and zero-rated (0% GST).

What this means for you: When an Indian contractor provides services to you (a foreign client), they should NOT charge you GST. The invoice should show "Export of Services" with 0% GST. You don't pay GST, and you don't register for GST in India. The contractor handles all GST compliance on their end.

Example invoice for export of services:

• Services: ₹83,000 INR (or $1,000 USD)
• GST (0% - Export of Services): ₹0
• Total: ₹83,000 INR
• Note: Export of Services under GST Act

Your responsibility: None. You don't file anything with Indian tax authorities. The contractor handles all GST compliance.

FEMA compliance (Foreign Exchange Management Act)

Indian contractors receiving foreign payments must comply with FEMA regulations. This is the contractor's responsibility, not yours.

What contractors must do: They must receive payments through authorized channels (banks, Wise, PayPal, Payoneer—all FEMA-compliant). When they receive foreign payments, they specify a purpose code (e.g., "P0802 - Software consultancy services"). They also file a FIRC (Foreign Inward Remittance Certificate), which is proof of foreign payment received, with their bank.

Your responsibility: Use legitimate payment methods. Don't use cash, cryptocurrency, or informal channels. That's it. The contractor handles the rest.

TDS (Tax Deducted at Source)

If you're a foreign company with no permanent establishment in India, you do NOT withhold TDS (Tax Deducted at Source).

TDS only applies when Indian companies pay Indian contractors. Since you're a foreign company paying from outside India, TDS doesn't apply. The contractor is responsible for their own income tax compliance.

Income tax requirements

Indian contractors are responsible for their own income tax compliance. They must obtain a PAN (Permanent Account Number), file annual income tax returns (ITR), and pay advance tax if income is high enough.

Your responsibility: Request the contractor's PAN before the first payment. Keep invoices and payment records for your own tax purposes. Ensure the contractor is properly classified as independent (not an employee).

Contractor vs employee classification

One mistake businesses make is misclassifying employees as contractors. Indian labor law distinguishes between the two, and getting this wrong can result in penalties and back taxes.

A proper independent contractor relationship looks like this: They work for multiple clients (not just you), they control how and when the work is done, they use their own equipment and tools, the work is project-based with defined deliverables, they invoice you directly, and they bear financial risk on the engagement.

Red flags for misclassification include: Working exclusively for you, you setting specific hours or requiring daily check-ins, you providing equipment or software, integration into your team structure, ongoing indefinite work (not project-based), or you providing training and professional development.

Document the relationship carefully with a written contract that explicitly states they're an independent contractor.

Common mistakes and how to avoid them

Mistake 1: Using PayPal for regular payments. You pay $5,000 USD/month to an Indian contractor via PayPal. PayPal charges 4.4% + $0.30 = $220.30 per payment, plus poor exchange rates cost another $125-150 per payment. That's roughly $4,000+ per year in unnecessary fees.

Solution: Use Wise. For the same $5,000 payment, Wise charges ~$10. You save over $4,000 per year per contractor.

Mistake 2: Not requesting PAN. You hire an Indian contractor without collecting their PAN. If they don't file income taxes or have compliance issues, you face potential liability. It also makes them harder to track and verify.

Solution: Always request contractor's PAN before the first payment. Keep copies for your records. This demonstrates due diligence and confirms they're registered with Indian tax authorities.

Mistake 3: Expecting contractor to charge 18% GST. You budget $1,000 USD for a project. The contractor sends an invoice for $1,180 USD (including 18% GST). You're confused and dispute the charge because you didn't expect GST.

Solution: Services to foreign clients are export of services (0% GST). The contractor should NOT charge you GST. If they do, they either aren't registered for GST or don't understand export of services rules. Clarify before the engagement starts.

Mistake 4: No written contract. You hire an Indian contractor with just verbal agreement or email exchange. Scope creep occurs, payment disputes arise, or IP ownership becomes unclear when there's no written agreement.

Solution: Always use a written independent contractor agreement. Include scope of work, deliverables, payment terms, IP ownership, confidentiality, termination clauses, and an explicit statement that they're not an employee.

Frequently asked questions

Q: Do I need to register a business in India to pay contractors? A: No. You're paying independent contractors for services, not hiring employees. You don't need an Indian business entity, GST registration, or PAN. The contractor handles their own tax compliance.

Q: Can Indian contractors invoice in USD? A: Yes. They can invoice in USD for export of services. They report the income to Indian tax authorities in INR (converted at the exchange rate on the date of receipt) for tax purposes.

Q: What is FIRC and do I need to provide it? A: FIRC (Foreign Inward Remittance Certificate) is proof that a foreign payment was received. The contractor's bank provides it automatically. You don't provide it—the contractor obtains it from their bank for their records.

Q: What are mandatory benefits for Indian contractors? A: None. Independent contractors aren't entitled to PF (Provident Fund), ESI (Employee State Insurance), gratuity, or paid leave. They're responsible for their own benefits. If you provide these, they may be reclassified as employees.

Q: How do I verify an Indian contractor's GST registration? A: Use the GST portal at gst.gov.in. Go to "Search Taxpayer" and enter their GSTIN (GST Identification Number). This confirms the registration is valid and active. Keep verification records for your files.

Q: Should I pay Indian contractors monthly or per project? A: Either works, but per-project or milestone-based payments reinforce the independent contractor relationship. Monthly retainers can look more like employment. Choose based on the nature of work, but ensure contracts specify deliverables, not just time worked.

Q: Do I need tax advice for hiring Indian contractors? A: It depends on your country's tax laws. Consult a tax professional in your country about reporting contractor payments. Your responsibility is to your own tax authorities, not Indian authorities.

Getting started

If you're paying Indian contractors, here's the process:

1. Request contractor's PAN before first payment
2. Verify their GST registration status if applicable (turnover > ₹20 lakhs)
3. Create a written independent contractor agreement
4. Set up Wise for payments (saves 3-4% vs PayPal)
5. Agree on USD or INR payment (most prefer USD)
6. Ensure invoices show "Export of Services" with 0% GST
7. Keep records for your own tax purposes
8. Maintain contractor contact and documentation

Kontrable helps with steps 1, 3, 4, 6, 7, and 8 by organizing contractor information, tracking payments, managing invoices, and storing contracts. You stay in control of your payment method and use Wise directly.

If you're managing a few contractors, a spreadsheet works. If you're managing dozens or coordinating across a team, Kontrable saves time and keeps contractor data organized.

Ready to get organized?

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