We all know that India’s biggest tax regime is divided into two parts.
Direct Tax: The liability of which cannot be shifted to any other person, for example Income Tax, and Wealth Tax.
Indirect Tax: The liability of which can be shifted to other persons. For example, central excise, local sales tax or VAT, central sales tax, service tax, etc.
GST is known to be a comprehensive value added tax that will replace all the indirect taxes that are levied on the production, manufacture, sales, and consumption of goods and services. Since the independence of India, GST will be the biggest tax reform in the country. GST came into effect for solving the complexity of the Indian tax systems. This tax system will not only facilitate a flawless transfer of services and goods all throughout India but also will replace all the cascading effects (tax on tax) on the same goods or services, making compliance transparent and easy. The rates and structure of the indirect taxes are expected to be uniform throughout the nation which will, in turn, ease the process of the enterprises. GST will make the tax neutral irrespective of the business and its place. Rajya Sabha passed the bill on 3rd August 2016 while it was first introduced in the Lok Sabha on 19th December 2016.
Impact of the GST on the IT Sector
Most of the industries will be covered under the mantle of its impact. A lot has been said about the positive impacts of GST. The IT sector will be the biggest beneficiary of GST. The landscape of the IT industry will be experiencing many new developments after the release of the GST structure. But according to the R.Chandrashekhar, the Nasscom chief, there are certain provisions in the GST bill regarding the invoice requirements and complex billing, that will lead to complicating taxation for the different IT companies. Presently, a simple regime governs the IT companies with the central service tax and a single point of registration. But with the GST, it has become mandatory for the IT companies not only to register but also file the compliance reports of 111points. This can be a real challenge in the ease of doing business.
Benefits that the IT Sector would yield from GST
The GST implementation will involve digitization as well as computerization. With the GST becoming operational, the IT companies will have a major fill up along with competitive advantage. GST is predicted to generate huge revenues in both the small and big IT companies and firms throughout the country. GST will also lead to the internal reconfigurations of the IT systems at almost every level. This goes from procurements, audits, and supply chain flow to the vendor management. GST will transform the production based taxation system into a structure that is consumer-oriented. Different organizations will face new challenges like the accounting alignment along with the taxation systems with the newly introduced process, and hence, they will need the help of the IT industry to smoothen the process of the entire workflow.
Impact of the GST on IT Sector
- The Tax Rate: The present service tax rate is 15% on the IT services while the standard rate should be nearly around 18%. Hence, there will be an increase in the cost of the IT services mostly for the end customers who do not claim the credit of tax input. Selling packaged software under the present tax structure involves both 5% VAT and 15% service tax. In many places, the excise duty is also added to the two taxes due to the government’s lack of clarity. With the implementation of GST, it can be expected that the 25%-35% average tax rate shall be coming down to 18-25%.
- The Cascading Effect: With the GST Regime, the cascading effect of the taxes will get addressed effectively. For the AMC contracts, the traders can enjoy the credit services under GST. Presently, the IT service providers are not able to claim the credits of quality which includes the assessment charge that is spent while setting up an IT infrastructure. Simultaneously the services that are charged by the IT service providers to their clients is an operating expense that is incurred for the latter. With GST, both the clients and their IT service providers can claim the overall credit of GST.
- Changes in business processes: GST being a tax that is destination based is collected by the individual states where the services and goods will get consumed. The IT companies are solely registered with the authorities of the Central Service Tax and all the billing and accounting procedures function from a single and central location. With the implementation of GST, all the IT service providers will have to obtain the registration of all the individual states where they are providing service. This will help in rendering the State GST (SGST) and Integrated GST (IGST) for the respective states. Hence, all the IT service providers will have to bifurcate all of their services and the customer billings are to be made on the consumption location.
- Sphere of e-commerce: GST will increase the administrative costs for all the e-commerce traders. The compliance burden is increased significantly with the e-traders having hundreds of sellers on their e-commerce platforms. With the Tax Collection at Source (TCS) guidelines, the documentation and administration workload will get increased for the e-commerce firms.
IT Sector’s Road Ahead With GST
The sooner the companies understand the significance of integrating software solutions and technology into their business; the transitional phase of GST will be smoother. The Finance Minister of India remarked that GST will bring a change in the living and spending patterns of the Indians in the near future. Too much of dependence on the paperwork and constrictions on the tax base acted as a hindrance in doing business activities over the years. It seems that the implementation of GST will have a bright future just like the government’s attempt of demonetization, which facilitated the making of Digital India into a reality.