India is accounted as the world’s mammoth sourcing destination for the information technology (IT) industry, accounting for approximately 66 per cent of the US $123-129 billion market. The trade employs about 11 million workforces.
Predominantly, the IT industry has usher the economic transformation of the country and recast the perception of India in the global economy.
India’s cost competitiveness in administering IT services, which is approximately 3 times cheaper than the US. India’s technology and BPM sector (including hardware) is credible to generate revenues of US $150 billion during FY16 compared to US $136.5 billion in FY15, entailing a growth rate of 8.2 per cent.
Related Read: The Final Wakeup Call For Indian IT Industry !
Through this article we would like to introduce some of the major impacts of GST on Indian IT industry.
What is GST
GST is simply a consumption based tax that is imposed on sale, manufacture and consumption on goods & services at a national level. This tax will be a standby for all indirect tax levied by state and central government. Taxes like exports, income tax, corporate tax and capital gain tax will not be affected by GST.GST will incorporate of:
- Central GST (CGST) which will be levied by Centre.
- State GST (SGST) Which will be levied by State.
- Integrated GST (IGST) – which will be levied by Central Government on inter-State supply of goods and services.
Previous Tax Regime in Information and Technology Sector
Subject to our previous tax regime the sale of packaged software is authorized to both VAT and service tax. VAT rate is basically 5% in most of the states and Service tax rate is 15%(including Swachh Bharat Cess and Krishi Kalyan Cess), Excise duty is also foisted in case of manufacturing of IT products.
For instance, if software comes in a CD or DVD or Hard disk, then there are 3 taxes that are included namely: –
- Excise Duty for manufacturing of product.
- Sales tax i.e. VAT for sale.
- Service Tax for providing Service as software can be downloadable for numerous times.
Impact of GST on the Indian IT Sector
After coming into GST from April 1st July, all the traders require to register in each state for their business. At present, all the Service Provider is registered under Central Service Tax department and all billing matters, utilization of credit are assessed from a single location.
In the wake of GST, big IT Service Provider like MNC have to face practical difficulties as the GST Registration and other statutory matters to be taken care for each location separately.
- Impact of GST on Tax Rate of IT Industry
It is noteworthy to look that Tax rate may come as 18% to 20 % as per expert are concerned, which mayusher increase in tax portion under GST. Consequently, the cost of IT Services will advance, particularly for ultimate customers who do not usually claim the input tax credit.
As per current tax regime overall rate of indirect taxes is come under 20 to 25 %( excise duty, vat, service Tax), and GST rate may come under 18 to 20 % due to this price of IT productsmay cost you cheaperbut for IT services, you have to pay exorbitant rates.
- Splendid benefits to manufacturers and exporters:
The incorporating of major Central and State taxes in GST with intact and unabridged set-off of input goods and services and phasing out of Central Sales Tax (CST) would diminish the cost of locally manufactured goods and services.
This will expand the competitiveness of Indian goods and services in the international market and foster Indian exports. This conformity in tax rates and procedures across the country will also go a long way in reducing the compliance cost.
- Outpouring effects of taxes
Subject to GST both the IT service providers and their clients will be eligible to claim full credit of GST; this is expected to accentuate the outpouring effects of the present tax structure as in the case of AMC (Annual Maintenance Service) contracts.
- Revamp competitiveness:
Curtailment in transaction costs of doing business would eventually leads to an improved competitiveness for the trade and industry.
- Taxation Points
The issues staring at the industry’s face has largely to do with taxation.
For IT services, it has been simple. A single point of taxation which is Central Service Tax, one point of registration, one place for refunds and one invoice.
Under GST, it could go up as high as 111 points of contact because of Central GST, Inter-State GST and State GST. This is becoming troublesome for many traders.
- Export Competitiveness
GST also raises concerns over export competitiveness in the IT sector.
The IT sector could strike down by complex billing and invoicing requirements due to place of supply and valuation, reverse charge of GST on import of services used as inputs for export, and removal of exemptions for SEZs.
There are many challenges such as increased documentation, and multiple registrations for companies having pan India operations which needs to be addressed before it becomes too complicated.
- Key Highlights of Impact of GST On IT Industry
- After GST cost of IT products may accentuate to a greater extent.
- Big MNC Company incurred more cost for infrastructure
- Delineate cascading effects.
- Compliance cost increase.
- Input of various local taxes available under GST regime
- Reduce hassle and expense.
- Surveys shows that numerous items used in the IT industry like printers, photocopier and fax machines has attracted highest tax rate of 28 percent.
- As far as eCommerce traders are concerned, the GST is anticipated to expand the administrative costs. As we know that e-commerce traders have hundreds of sellers on their platforms, it can remarkablyincrease compliance burden also.
Overall, the Model GST law has attempted to address various issues plaguing this industry, it does not seem to inspire required level of confidence to the exporting community, particularly, export oriented units set up basis a promise of tax and duty exemptions.
The way toward following inter-state transactions will be extremely complex and will require a reliable IT system.Despite these anomalies, GST law brings certainty in taxation of Information Technology services. It shall be a great assistance to development of IT service sector.
(Disclaimer: This is a guest post submitted on Techstory by the mentioned authors. All the contents and images in the article have been provided to Techstory by the authors of the article. Techstory is not responsible or liable for any content in this article.)
About the Author
Ankush Sachdeva is COO & Co Founder at MyOnlineCA which deals in Online Business and Tax Registrations across India.