Budget 2015: How will GST impact IT sector?

Mahesh Jaising

Goods and Services Tax (GST) is arguably the most talked about fiscal reform in recent times and India appears set to transition into a GST regime in the coming year.

To recap, with a view to preserve the fiscal autonomy of the Central as well as State Governments, Indian lawmakers have proposed a "dual GST" structure in terms of which, every supply of goods and services is expected to attract a Central GST as well as State GST. While at a conceptual level this seems simple, here is a look at some key aspects a service provider in the information technology (IT) services sector should evaluate from a GST transition perspective.

As on date, there is no definitive indication on what the GST rate is likely to be. While a combined GST rate of 27 percent is being discussed in the context of goods, some reports indicate that services could attract a lower rate, atleast, in the initial years of GST. Be that as it may, it should be reasonable to infer that the GST rate for services is likely to be higher than the current rate of 12.36 percent.

In addition to a potential change in tax rate, in pricing services under GST, a service provider may well need to evaluate a reduction in the cost of providing services as well as the ability of the customer to absorb the GST charged on the supply. By way of illustration, today, an IT service provider is unable to claim credits of value added tax/sales tax incurred in creating his IT infrastructure and the service tax charged by the IT service provider to a customer who is a trader is a cost to such trader.

However, under GST, both the service provider as well as his customer in the above example should be in a position to claim full credit of GST. This may provide a window of opportunity for the service provider to leverage on the tax efficiency and recoup additional profits on the supply. On the other hand, supplies to an end consumer or government or other non-taxable sectors would involve the customer being unable to avail GST credit and hence cause potential pricing pressures. Also, relevant is the cash flow impact a service provider may need to budget for in the light of an increase in the tax pay out on procurements.

While appropriate pricing would undoubtedly be critical, what is expected to be even more critical for service providers in general and IT service providers in particular is the impact of potential decentralized compliances under GST.

To recap, under GST, while an intra-state supply of services is expected to attract Central GST plus State GST, an inter-state supply of service is expected to attract an Integrated GST or IGST (which is a combination of Central GST and State GST). What assumes importance in this scheme of things is identifying the relevant State which can stake claim to the State GST on a supply of services. It is expected that the 'place of supply of services' shall be determined by a specific set of rules that are somewhat aligned to the rules presently in force for determining the 'place of provision of services' in the context of cross border supply of services into and from India.

Today, most IT service providers have a multi-locational presence with the preferred mode of service tax compliance being on a centralized basis from a single location. An IT service provider enjoys the benefit of availing input service credits, issuing output invoices, discharging service tax liability as well as applying for refunds all on a centralized basis.

As opposed to paying service tax to a single jurisdictional service tax authority, the service provider may well be required to pay GST (State GST, Central GST, IGST, as the case may be) to GST authorities across multiple States. What is presently not clear is whether the rules will provide for the service provider to pay an IGST on such supplies from his location or in effect require for the service provider to obtain a GST registration in each relevant State (especially in the case of services that are taxed based on the location of their performance). Either way, the service provider would need to map the relevant place of supply for each of his supplies and report compliance basis the same. An important related aspect in this regard is for the service provider to ensure that GST credits pertaining to the supplies are captured and availed in the location from where output GST is paid.

The issue of determining the place of supply can be expected to assume more significance in the context of IT services provided to customers with a pan-India presence. Should the concept of centralized supply and billing undergo a change under GST, an IT service provider engaged in ERP systems implementation across branches of a customer in 20 States may well be required to split GST payment across the 20 States. On the reverse side, the same IT service provider procuring software licences for his branches across 6 States may now require to issue 6 purchase orders to his vendor to ensure that appropriate GST is charged on each of the procurements.

Unless simple proxies are fixed for determining the 'place' or State of supply, several complexities could arise in manner of taxation of IT services. A classic case in point being provision of cloud services by an IT company headquartered in one State, from an infrastructure hosted in another State to customers located across multiple other States. It is hoped that clear and specific proxies are prescribed to determine the place of taxation of such services that involve assets and people across different States coming together to service customers in a third State.

While there is some speculation on retaining centralized compliances for Central GST with state-wise compliances being restricted to State GST, maintenance of State-wise books of accounts as well as undergoing audits, investigations and assessments across States (where the service provider has a presence) could enhance the burden of compliances on service providers.

On a related matter, IT service exporters under the Software Technology Park ('STP') scheme, presently burdened with recurring service tax refund claims could well see an increase in the number as well as quantum of such refund claims under GST. With only basic customs duty exemption expected to continue for these exporters, the possibility of State-wise refund claims for Central GST, State GST and IGST for goods as well as services cannot be ruled out under GST. Should this happen, the very rationale of operating under the STP scheme may need to be re-evaluated.

No discussion on the IT services sector would be complete without a reference to the dual taxation of electronic supplies of software both as goods under the VAT law and as services under the service tax law. While this sector hopes that GST shall put an end to this dual levy regime, the same would be contingent on a clear classification of electronic software supply either as a 'good' or as a 'service'. In the absence thereof, this debate could well continue under GST to the extent the place of supply as well as rate of GST varies for goods and services.

While significant headway is being made towards GST, it is hoped that the proposed methodology of taxation of services is disclosed soon so that service providers are in a position to gear up for the same, and more importantly, where required, engage in a discussion with the lawmaker to ensure a smooth transition into GST.