Impact of GST on service providers

GST Impact on Service Providers

The Goods and Services Tax is all set to be rolled out on July 1. Needless to say, both manufacturers and service providers are anxiously waiting for the same.

On one side, there are concerns about increased compliance burden, and on the other side, there are expectations of simplicity and excellent features such as input tax credits.  But how exactly will GST impact the service providers? Let’s find out.

The Good:

The following are some of the positive changes that GST will bring for the service providers:

Credits of CENVAT, Repairs, and Maintenance

In the current regime, VAT and CST paid on the inputs are added to the costs of the service provider and thus increase the cost of services for the end customers. However, under the GST regime, a service provider will be able to claim input tax credits as IGST and SGST/CGST. This will allow them to offer lower service rates to their customers.

Similarly, under the current regime, services providers can claim credits for only the input services. However, under GST they will be able to claim credits for the repair and maintenance costs of machinery and equipment as well.

Elimination of Double Taxation in Works Contract

A works contract is already complex in the current taxation system. In this, there is a transfer of goods as a part of the service contract, which means the invoice contains both the value of the services provided and the value of goods/materials used.

As a works contract involve both goods and services, it attracts VAT and Service Tax both which are levied on 70% of each (total becomes 140%). However, GST will consider both as just a supply of service, and thus a single tax will be levied.

Composition Scheme

Service providers that have a small annual turnover (less than 50 lakhs) will be able to enjoy small tax rates in the form of composition levy. This is to promote the growth of small businesses and services providers in the country.

The Bad:

Although GST is designed to provide as many benefits as possible to the service providers, there are potential drawbacks of the same as well:

High Rate of Taxes

The service tax in the current regime is 15%. However, in GST there will be four tax slabs- 5%, 12%, 18%, and 28% which is applicable to high-end restaurants, hotels, race club service providers etc. Thus, these service providers will have to pay a high rate of tax.

Returns Burden

Service providers will need to file as many as 37 returns every year from each of their service locations. This is a far cry from the current regime under which most providers have to file only 2 returns per year.

No Centralized Registration

There is no concept of centralized registration for business locations in different states. Thus, a service provider will need to get his business registered for every state they have a business facility in.

Anti-Profiteering Risks

GST comes with an “anti-profiteering” clause which empowers the tax inspectors to take measures against businesses who don’t pass on the benefit of input tax credits to their customers. However, it’s possible that the officers misuse the same and create a hindrance for the businesses instead.

Conclusion

GST is expected to make some things simpler, and some things complicated. However, it will certainly improve the system by eliminating the cascading effect, and several types of taxes (luxury tax, service tax, VAT) that create complications. If you are a service provider yourself, then you can certainly make the transition smoother by doing your homework in advance and start the preparations.

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