In this article, Anisha pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, elaborates on Impact of GST on Information Technology Sector.
“GST is one indirect tax for the whole nation, which brought India under one unified common market. GST is a single tax on the supply of goods and services, right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage. The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.”
The GST gives a lot of benefits to the manufacturers, sellers and to the end users i.e. the consumers. Some of the main advantages of GST, in general, are that it follows a uniform tax structure and there cannot be any discrimination between place, etc. It is easy compliance because the taxpayer services such as registration, payment, returns, etc. could be made through the online portal. In addition, GST aims for removal of cascading effect of taxes, improved efficacy thereby improving the competition and also gain to the manufactures and the exporters.
From the view of the Central and State Government, GST is beneficial because it is simple and easy to administer, there is better control on leakage since tax is paid at each steps and also higher revenue efficiency thus promoting the overall development and growth of the country.
In view of the consumers, there is a single and transparent tax that is proportionate to the value of goods and services and relief in overall tax burden.
The much-awaited GST Bill was passed on July 1st, 2017. The IT sector will include services like the software development, mobile app development, website design, etc will have a huge impact because of the GST.
Impact of GST
The main ways in which the GST implementation will impact the IT sector are discussed below.
The Tax Rate Administration
The GST is dual structured and is governed by the Central Board of Excise and Customs (CBEC) and State Tax Administration and they will be responsible for collecting CGST and SGST. Hence for this dual tax structure to be in place, there requires a robust mechanism and system in place to track down the flow of goods and services across the country. The implementation and execution part has to be strong, only then non-compliance will be less and the punishment also should have a deterrent effect in as much as any other law.
As per the CRISIL analysis will reduce the cost of logistics for non-bulk goods by 20% thus excluding the bulk commodities that are transported by the railways like coal, iron ore, cement, steel, food grains, fertilizers and the like. Under the GST luxury goods are charged at a higher level, at about 28% which includes luxury cars and high end products whereas essential commodities such as education, healthcare and the like are charged less. The rates of the cess will be 5%, 12%, 18%, 28%. The tax rate for IT sectors before GST was 15%. Under GST, even though the recommended rate was 15-15.5%, it is around 17-18%. Hence this will raise the cost of IT services thereby rendering it difficult for the end use consumers who do not claim the tax input credit.
Under the previous tax structure, for the sale of packaged software, there was VAT (Value added tax) approximately 5% which will go the State Government and the Service Tax approximately 15% will be directed to the Central government and all of which would amount to 25%-35%. But under the GST scheme it is expected to be only around 18-25% because of taxing only by the last dealer and not at every stage.
For example, under the old scheme, if a software comes on a CD, DVD, Hard disk then there might be three types of taxes applied on it like Excise duty for manufacturing of product, VAT for sale and Service Tax for providing service. But under GST, all these complications will not be present.
Cascading Effect of Taxes
Cascade tax means that the amount of tax levied on each stage of production up to the final stage of production till it reaches the final consumer. This GST scheme purports to remove the idea of cascading of taxes to a greater extent. There is benefit of credit of services for the traders under the GST such as in the Annual Maintenance Scheme (AMC) contracts. Under the previous structure IT service providers cannot guarantee credits of quality including the assessment or arrangement charge spent on setting the IT infrastructure and also services given to the client is a cost to that was incurred by the IT service providers. But under the present scheme, the IT service providers and the clients can claim full credit of GST. This will remove the cascading effect of the taxes.
IT companies might need a business restructuring because of the fact that under this scheme, the IT service providers will have to bifurcate their services and bill their customers based on their location of consumption and hence GST can also be termed as Destination-based tax system for this reason. So the IT service providers should get registered in all states where they have customers. As per the interview given by the NASSCOM (National Association of Software and Services Companies) Chief, Mr. Chandrashekar he points out certain difficulties that the Information and Technology sector could face because of operation of GST. The Central Goods and Services Tax Act, 2017 was passed by way of hundred and first Constitutional Amendment. Mr Chandrashekhar also stated that the current GST scheme might give rise to potential litigation risks because of certain provisions. This is so, because of the complex billing and invoicing requirements due to the ‘supply and valuation’ provisions making it difficult to the service sector especially the information technology sector.
In GST scheme there are three points of taxing, the center, inter-state and state GST whereas in the previous tax structure there was only one point of taxation i.e. central service tax. This would mean that an IT company has to register under 37 jurisdictions which comprises of 29 States and 7 Union Territories if the company is on a PAN-India basis and also the IT company has to register and file compliance reports at 111 points (37 jurisdictions multiplied by 3 tax points). Hence in the previous tax structure, the process was simple as the service industry was under the central service tax regime. But this system hampers the ease of doing business for IT companies at this one juncture. Moreover, the ‘place of supply’ will be requiring multiple invoices. Although GST brings in a uniform tax structure, the valuation of services can potentially invite many legal claims. Also, most of the items used in the IT industry like printers, photocopier and fax machines are highly taxed at a rate of 28 percent.
For the e-commerce traders, the GST is expected to increase its administration costs.
Also with respect to e-commerce, there are taxes imposed on businesses that depend on online transactions. This is because of the provision which says ‘Tax Collection at Source’ thus rendering e-commerce platforms unrealizable. This also makes compliance difficult for the e-commerce companies since they have a lot of sellers on their platform. Moreover, this might lead to cash flow issues and small scale sellers might ask for refund on the tax paid on inputs.
New Software’s required
Accounting systems and ERP (Enterprise Resource Planning) are done in batches. So ERP are the resource persons who train the company employees and understand the needs and requirements of the company and design the software accordingly. In the previous tax structure, ERP’s were taxed over the years and service tax was charged accordingly keeping in account the amount paid. Under the current GST system, the ERP’s will be taxed periodically and continuously as and when their service is provided. Now all companies will thrive to build GST oriented software systems and hence will open a market for software developing companies. India is one of the biggest exporters of IT services. Exports are zero rated and input taxes will be allowed as a refund. The default rule for ‘place of supply’, in this case if it is export of services, is the location of the service recipient if his address is available. Freelancers who are offering software services such as designing, app development, website designing etc., earlier paid a service tax of 15%. But now under the GST, it has been raised to 18%. Even though the service rates had been increased to 18%, the IT sector will benefit due to the increase in the sale of the software. Now since the availability of the Information and Technology service providers has increased, it will bring down the operating costs and thereby increase the consumer base and bring in more profit.
Hence the current GST scheme should encompass all the positive aspects of the previously existing system so that there could be more ease of doing business as India ranks low when it comes to Ease Of Doing Business.