The long-awaited GST bill that is expected to unify and simplify the Indian tax structure, will be implemented from 1st April, 2017 and most industries are likely to fall under the blanket of its impact. However, the IT sector with services such as software development, mobile app development, website design and more, is one of the major sectors that is likely to be impacted. With the intention of safeguarding the financial independence of the States and the Centre, the government has proposed a dual GST structure, under which State GST as well as Central GST will be applicable for every supply of good. Though at an elementary level this might appear to be basic, the IT sector may have some formidable changes that need to be tuned in to.
We have compiled a list of the five ways GST implementation will impact the IT sector:
The prevailing service tax rate on IT services is 15%. However, the recommended revenue neutral rate is at 15–15.5% and the standard rate is expected to be around 17–18%. Therefore, the cost of IT services will elevate, especially for end customers who do not usually claim the tax input credit.
Under our current tax structure, the sale of packaged software is entitled to both VAT (approximately 5%) and service tax (15%). The VAT on sales is directed to the state government whereas the service tax on service follows the central government. There are also cases where along with the VAT and service tax, excise duty is also applied due to lack of clarity from the government. However, it is expected that once the GST is implemented, the current average tax rate of around 25–35% shall come down to around 18–25%.
Cascading Effect of Taxes
The cascading effect of taxes will be effectively addressed under the GST regime. Traders, under GST, will be eligible to avail the credit of services such as in the case of AMC (Annual Maintenance Service) contracts. Currently, IT service providers can’t claim credits of quality including the assessment or deal charge spent on setting the IT infrastructure. Also, services charged by an IT service provider to a client who is a broker is an expense incurred for the IT service provider. Under GST, both the IT service providers and their clients will be eligible to claim full credit of GST. This is expected to eliminate the cascading effects of the present tax structure.
Business Process Change
Under GST, which is a destination-based tax, tax is collected by the state where the goods or services will be consumed. Most IT companies are registered only with the Central Service Tax authorities and usually all billing and accounting tasks are carried out from a central location. Under the GST regime, service providers are required to obtain registration for all the states that they are catering to, i.e. all states that they have customers in. This is to be done so that the SGST (State Goods and Service Tax) component of IGST (Integrated Goods and Services Tax) is rendered for respective states. IT service providers will therefore have to bifurcate their services and bill their customers based on location of consumption.
For eCommerce traders, the GST is expected to increase administrative costs. Also, since e-tailers have hundreds of sellers on their platforms, it significantly increases compliance burden. Small sellers will face cash-flow issues and will claim for refunds on the tax paid on inputs, which the eCommerce platform may not support. The tax collection at source (TCS) guideline under GST will increase the administration and documentation workload for eCommerce firms.
The model GST law recognizes at least 111 points of taxation which means IT companies providing services all over India will have to seek registration in as many as 37 jurisdictions that will include 29 states, seven union territories and the Centre. This means that IT companies will have to register and file compliance reports at as many as 111 points.
The Way Ahead…..
Even though new provisions under the GST structure such as time-bound processes and clarity on electronic download classifications will ease the process of conducting business for IT companies, there still remain several concerns, especially tax exemptions, which need addressing. The government should ensure the GST legislation addresses the aforementioned challenges so that the reform turns into a success for the IT sector. Deskera ERP, being India’s first GST ready software, takes into account all applicable taxes that fall under the blanket of the Indian GST and can be readily plugged in to accommodate any upcoming tax requirements.