GST: 'Achhe Din' for the IT sector and the Economy

Rushabh Shah

INDIA: The passing of the Goods and Services Tax (GST) Constitution 122nd Amendment Bill in the Rajya Sabha on 03August 2016 came as a much-awaited game-changer for the indirect tax regime in India.

Going forward, the landmark tax legislation is expected to bring about significant changes in the way business is conducted in this country. It will create a single national common market and reduce the cascading effect of tax on the cost of goods and services, while positively impacting the tax structure, tax incidence, tax payment, compliance and credit utilisation. The provisions of the GST Bill will have an impact on almost all aspects of business such as pricing of products and services, optimization of supply chains, systems of accounting and tax compliance, and deployment of Information Technology (IT) solutions.

Rushabh Shah

India is one of the latest countries to adopt the GST regime. Most Southeast Asian countries had adopted VAT (Value Added Tax)/GST way back in the 1980s and 1990s. Malaysia was the most recent ASEAN economy to join the GST bandwagon in 2015.

Benefits of GST for the Economy, IT Sector

Tax policies of a country have a vital role to play in the economy with notable impact on efficiency and equity. India, one of the fastest growing economies in the world, has been criticised on account of its archaic tax laws. Thus, there was a sense of urgency for a simpler, transparent tax structure to do away with the old, complicated laws and rules that created borders within borders – the legacy indirect taxation system was unable to provide tax credits for inter-state transactions leading to inefficiency in the allocation and utilisation of resources. With the implementation of GST, the country would be able to integrate the economy and create a single, unified common market. Both the Centre and the states will simultaneously levy GST across the value chain, on every incidence of supply of goods and services within their respective jurisdictions.

The introduction of GST will provide ‘ease of doing business’ in the country as a whole, as it will eradicate multiple taxes which are currently levied on manufactured goods and service transactions. By eliminating multiple layers of taxation GST would help the technology, services, FMCG, and e-commerce industries penetrate deeper into the hinterland. With decreased cost of production in the domestic market, the competitiveness of Indian goods and services in international markets will rise. This would benefit exporters who currently compete with global vendors on unfavourable terms.

If we examine the pros and cons of GST for the IT sector, IT services are governed by a single point of taxation that is the Central Service Tax and one single point of registration. So, most IT services companies have their tax registration only with the Central Service Tax authorities and all accounting and billing operations are managed from a centralised location. On the other hand, the IT software sector pays Central Excise, VAT, and Service Tax.

Over the past few decades the IT, Telecommunications and BPO-ITeS sector has been a major contributor to India’s economy with a global footprint. Currently, the total tax on software is 15 per cent Service Tax and 5.5 per cent VAT, totaling about 21.24 per cent on base price. Software is taxed twice by means of a Service Tax and VAT, but with implementation of GST this will be reduced to a single tax.With GST, this is expected to come down to 18 per cent.It will simplify compliance and free up resources to concentrate on business growth and expansion.

GST will reduce the cascading effect of multiple taxes, as IT service providers will be able to set-off input GST on purchase of goods, required to set up IT infrastructure, against their output liabilities. This will benefit end users as IT service providers will be able to lower costs.

GST Implementation: New Reporting Requirements

Under the GST regime, IT distributors, reseller partners, system integrators and service providers will be required to obtain tax registration in all the states where they maintain a ‘place of business’. Accordingly, SGST (State GST) will be levied as per customer location and would have to be collected and accounted for in the respective state. Similarly, IT product vendors, IT service providers and BPO-ITeS organisations would all need to rethink and re-plan their compliance systems and processes, and bill customers in the state in which the products/goods/services/solutions are consumed.

The Way Forward

GST will play a key role in bringing transparency into India’s indirect tax regime. It will bring uniformity and ease taxation woes of industry as a whole and the IT-ITeS sector. It would be important to conduct an impact analysis on costing and pricing of goods and services vis-à-vis the enlargement of credit allowance, applicable rate of GST, branch transfer and sourcing of raw materials/semi-finished goods, stock cut-off dates and so on. With modifications expected to credit policy on both purchase and sales of raw materials, semi-finished goods, services etc., owner-managers would need to estimate for adequate working capital. There would also be a need to implement robust IT systems and impart staff training at all levels.

(Rushabh Shah is President, TAIT - Trade Association of Information Technology. Views expressed here are of the author and CyberMedia does not necessarily endorse them.)