GST got implemented on 1st July 2017, and ever since, there has been confusion about the tax policies and its specifications. The major objective of GST is to follow one tax throughout India. However, the implementation of GST didn't quite cover all the taxes. Taxes like Income Tax come under the purview of direct tax, and GST mainly covers indirect taxes like Custom Tax, Excise Duties, Service Tax, VAT, etc. The implementation of GST had an impact on various development sectors.
One of the major economic boosters of India is the IT sector, and the impact of GST on its functional and operational criteria is varied. Assuming the primary concerns, the following discussion leads to a basic understanding of GST intricacies in the IT sector.
Impact of GST on IT industry
1. Simplification of tax:
In the old tax system, VAT was 5%, service tax was 15%, followed by uneven custom charges and excise duties. GST simplifies this tax system by providing a list of goods and services under various categories of taxes. With GST tax hardware like printers, graphic cards will have a tax of 28%, and software packaged goods and services will have a tax of 18%. However, the retailer can claim Input Tax Credit(ITC) on the tax paid by the buyers. For example – if a retailer is getting a product for Rs 110 (including GST) then he may sell that product for Rs 160. If the customer has paid a tax of Rs 15, then the retailer can keep Rs 10 as his credit and pay Rs 5 as his tax. This, in a way, will cut down IT expenses in the long run and eventually make operation smooth.
2. Cascading effect:
Under the GST regime, the traders can effectively avail credit. In the previous tax system, the IT vendor would sell products with 3 different taxes, ultimately leading to over possession of tax. With GST, both vendor and the customer can be eligible for credit.
Under the previous tax system- (VAT, service tax, and excise duty) - A person can pay up to 25-30% tax for a product.
Under GST – The tax got reduced to 18-25%.
Here the service provider has the chance to reduce the input credit (tax paid during purchase) at the time of sale.
Therefore by lessening the impact of charges and exchange costs, the impact of GST on IT industry can help expand this sector aggressively.
3. Redefining and restructuring business:
The previous tax system supported varied taxes at different locations, due to which ease of doing business and business flexibility lay in those areas where service tax was less. Most IT-based companies and manufacturers are centrally registered but if something is manufactured and sold in the state, both central GST and state GST will be applied in the GST regime. Previously, random service taxes were applied in different states, but now the same tax is applied in inter-state trading. IGST will equally divide the taxes among the centre and destination states. Keeping these factors in mind, the IT industries can most possibly bifurcate their services and products to a business target.
The impact of GST on IT industry has led to the restructured accounting system and Enterprise Resource Planning (ERP). Companies have had to change their accounting software and ERPs to match with new GST rules.A real challenge would be to change the IT structures, which need teamwork among CAs who worked with old tax laws.
In the sphere of e-commerce, the administration and management expenses are more likely to exceed. The reason being that with the simplification of tax, smaller e-commerce sites may claim the ITC. The provisional e-commerce guidelines might not support every action, eventually creating inconvenience and extreme workload for e-commerce websites. If we take a consumer point of view, there is no formal difference in tax payment. Online services have always been tax importing points.
A generic example of Amazon and Flipkart:
In the initial period, these e-sellers had a losing game since the providers across the country were not enrolled under the GST rules. Their base was far off the destination since they knew service tax would be unequal throughout the country. But with GST rules, they have had to create their base in every state to reduce their expenses. Now, there is an equivalent manufacturing charge and service charge.
5. Compliance and multi-factor taxation:
Previously, IT services were controlled under a single administration with a single point of taxation (central service tax). The GST model has 111 points of taxation. This is because the IT service centres are present all over the country, and they require registration in each of the 37 jurisdictions (29 states, 7 union territories, one central region). Along with this, the manufacturers and consumers have to pay 3 indirect taxes. This means IT industries need to register compliance reports at 111 points, making things difficult for IT locals who primarily show their relevance as IT supplier exporters and web-based business players.
This impact of GST on the IT industry will make it challenging for the sector to move from a single tax point to multiple taxation points, and complying with state and centre will certainly increase the compliance cost.
6. Complex Taxation and Export of Services:
Before GST, the taxation of IT industries was carried out by one centralised location where the organisation’s head offices operate. But due to the 'Place of Supply' provision of GST, the billing and invoicing is divided according to the end customer address of residence. So, the service of the IT industry needs to obtain registration from respective states individually to whom their customer belongs. This whole procedure will only confirm the state GST component of GST. The multiple invoicing only complicates the taxation procedures.
India is one of the biggest exporters of IT services making this a prime source of foreign exchange. The exports are zero-rated, and the ITC can be used as reimbursement of overhead expenses. Most IT companies and corporations used to get the best of refunds from relevant taxes like Custom Duty, Excise Duty, etc. VAT was not applicable for a refund, but with the GST rule, they might get a complete refund of taxes. (Section 54(6) of the GST act specifies that any right officer may within any case of a claim for refund on account of zero-rated supply of services and goods made through registered people.)
Every government policy has its differences. Similarly, GST has its pros and cons. The specification mentioned in GST rules is mostly unbiased, which strategizes a long-term positive impact. The government needs to keep a regular check over the issues faced by the IT industries so that there will be flexibility in doing business. Moreover, GST will act as destiny proof for Indian businesses if it becomes workable over the years and may lead an example by contributing to India's GDP and economic growth.
1) Impact of GST on used vehicles
2) Impact of GST on Indian Hospitality Industry
3) Impact of GST on Food items
4) GST rates on Medicines
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Q. What is GST?
Ans. GST is a single tax that covers all the indirect taxes, which will make India a unified market. It is a single tax on the supply of goods and services, right from the manufacturer to the customer/consumer.
Q. How will GST be administered in India?
Ans. Due to the federal structure of our country, GST is divided into two parts:
CGST- Central GST is a generalised tax collected from each state.
SGST- State GST is the taxes levied by the state.
So, the net tax given by a state's individual is the sum of CGST and SGST.
Q. How will IT be used for the implementation of GST?
Ans. Goods and Service Tax Network (GSTN) is used by both centres and states to get proper IT infrastructure. The basic objective is to provide a standard uniform interface and shared infrastructure to state and central governments.