The GST tax regime is to be implemented soon and will affect almost every industry in India.
Although the IT sector is quite different that other retail and manufacturing businesses, it will also be impacted by the GST bill.
The following are some of the ways how GST will have an impact on the IT sector:
Compliance will become a major issue under the GST system, as the IT companies will have to file compliance reports at as many as 111 points. This is because you will need to get registration in as many as 37 jurisdictions- 29 states, 7 union territories, and the Centre itself.
Now, since there are three different tax points under the GST regime- central GST, state GST, and inter-state GST, so multiplying 37 by 3 becomes 111. That’s 111 total points you might need to file compliance reports at.
At present, the service tax rate applicable on IT services is 15%. However, after GST implementation the neutral rate is expected to rise to 17% to 18%. Thus, IT services are likely to become more expensive, especially for the end-customers who won’t be claiming input tax credit like other businesses.
Another major impact of GST will be on VAT and service tax. Under the current taxation system, both VAT and service tax are levied on the sale of software at circa 5% and 15% respectively. The former is directed to the state government, while the latter to the central government. However, sometimes excise duty is also levied, which is why the cumulative tax can be quite high.
GST will combine multiple taxes, and as a consequence, the total average tax rate will drop to 18% to 25% from the existing 25% to 35%.
Since GST is a destination-based tax, which is collected at the final point where the goods are consumed by the end consumer, it will change how an IT business operates today.
Today, most IT companies are registered only with the Central State Tax authorities, and all the billing and accounting work is centralized. However, to be GST compliant these companies will need to get themselves registered with all the states they are operating in. They will also need to charge their customers based on their location of usage. So, a separate bill will be created for a user of your IT service who is based in Mumbai, and another bill for another user of the same service who is based in Surat.
Under the current taxation system, selling software may attract VAT, Customs Duty, Service Tax, Excise Duty, etc. depending on nature of the transaction. It is also difficult to determine which taxes are applicable due to the complex nature of “software” as it could be treated as “goods” or “services” or both.
GST will eliminate the need for bifurcation as only two types of taxes will be levied on every sale of software- one by the state government and one by the central government.
The GST law holds a lot of promise for the consumers and businesses alike. Given the fact that the government is working hard towards creating a digital India, the IT industry can certainly expect a slew of welcoming reforms.