All of us have been inundated with news articles about GST and its implementation in India. It is important that we understand this massive economic change that our country has witnessed with the introduction of Goods & Services Tax (GST). Considered as one of the most crucial economic reforms, it is set to impact each one of us. This opinion piece seeks to decode GST and explain its implications on the IT sector.
What does GST mean?
GST stands for Goods, services, and tax. It is an indirect tax that will replace the different state and centre taxes. This will take the form of a single and uniform tax. There are many sectors that had to go through more than 2-3 taxes, but after the implementation of GST, there is only one tax. The main purpose of GST is to rationalize the current indirect tax regime, which will provide a stable economic environment favourable for growth and development.
Brief Introduction of impact of GST on IT sector
The earlier VAT/service tax regime in India was complicated due to multiple taxes, innumerable compliance obligations, and tax cascading. Under the GST regime, it is a simpler tax system, especially for the IT sector.
Pre – GST – Tax Rates under Excise/VAT/Service Tax
Under the old tax regime, the sale of packaged software attracted both VAT and service tax. VAT rate was around 5% in most states and service tax rate was at 15%. Excise duty was also applicable in the case of manufacturing of IT products.
Example: If a software came on a CD, DVD or hard disk, then 3 taxes were applicable:
· Excise duty for manufacturing of product
· VAT for sale and
· Service tax for providing service, as software can be downloadable for multiple times.
All such complications and double taxation have been removed with GST.
Impact of GST on IT sector
GST in IT sector will attract 18% on software services provided by software companies. For purely software services, the cost of such services will increase under GST.
Getting the accounting systems and ERPs in sync with GST will mean an increase in infrastructure costs, overhead costs and change in business systems. Availing input tax credit (ITC) is an option under GST. This means that traders who sold goods (paying output VAT) earlier and could not claim tax paid on AMCs for their computers and software can now do so. Companies must ensure there is seamless coordination between their tax experts and technology teams to accommodate the complexities of calculating GST.
Every Fintech company has been vying with the other to develop a GST software. GST has impacted these companies positively, by opening up newer markets, pan India. On the export front, India is the biggest exporter of IT services. Introduction of GST means that exports are zero rated and input taxes paid will be allowed as refund.
The typical IT/ ITES services which come under the default rule will be software development, BPO operations, software consultancy, etc. Apart from these, this rule will also apply to other services like software support/ maintenance and intermediary services as there are no exceptions under GST. Freelancers offering software services such as designing, app development, website designing etc., earlier paid a service tax of 15%. This has now increased to 18% under GST. However, there is some confusion about bloggers being taxable under GST and requiring to register. Earlier they were not taxable under the service tax.
Impact of GST on SMEs & MSMEs operating in the space:
Small and Medium Enterprises (SMEs) have been considered as the primary growth drivers of the Indian economy. Today, approximately 3 Million SMEs in India are contributing 42% of India’s total export. GST will now impact every business in India, however, it is expected to have a tremendous positive impact on the SME / MSME industry for the following reasons:
· Earlier, smaller firms spent a huge amount of time and energy to manage the various taxes. Adhering to different regulations at the different states made the process very complex. GST has now simplified the process by integrating all taxes, making the process of paying tax simpler.
· A business, having operations across different states needs VAT registration. Different tax rules in different states only add to the complications and incur a high procedural fee. GST now enables a centralized registration that will make starting a business easier and the consequent expansion, an added advantage for SMEs. The single point taxation system is also expected to address corruption issues.
· Before GST, businesses with a turnover of more than Rs. 5 lakhs, needed to pay a VAT registration fee. GST has increased this limit to Rs. 10 lakhs. Further, businesses with a turnover between Rs. 10 and 50 lakhs, will now be taxed at a lower rate. This will bring respite from colossal tax burdens, to the newly established businesses.
In spite of the fact that the GST rate for services has been increased to 18%, IT industry will definitely benefit from GST, thanks to the enormous boost in the sale of the software. Other factors like availability of Input Tax Credit (ITC) will bring down the operating costs and thus, it will increase the overall profitability of the IT sector. I believe, it is a harbinger of good times ahead.