Information Technology sector is today plagued by a bewildering array of taxes and provisions. It is sometimes taxed as Goods and sometimes it is taxed as ‘Service’. In some cases it may be taxed as both. Each state has its own definition and taxation rate and rules.
GST will bring uniformity to this whole confusing scenario and ease taxation woes on the sector. With the Revenue Neutral Rate recommended at 15 to 15.5% and the standard rate suggested at 17-18%, IT services will definitely get taxed at a higher rate than the prevailing Service Tax rate of 14.5%. Thus prima-facie it appears that cost of IT services would jump, especially for end customers who do not claim input credit. In case of packaged software sales, in most of the states both VAT (~ 5%) and Service Tax (14.5%) is applied leading to dual taxation with effective rate of tax touching 20% due to dual tax and tax-on-tax effect. Under GST, this is likely to come down.
IT service providers, under GST would be able to set-off input GST on purchase of Goods required for setting up the necessary IT infrastructure with their GST output liabilities. Thus, in the long-run these benefits would ultimately flow to end users as IT service providers would lower their costs. IT software currently attracts Central Excise (for manufacture of CDs containing software), VAT (for sale of those CDs) and Service Tax (for selling software in electronically downloadable format). Under GST this dual taxation and cascading effect would reduce significantly and the benefits could accrue to end user in the form of lower prices.
GST is a destination based consumption tax- the tax revenue would accrue to the state government where the services are consumed. Currently most IT service companies are registered only with the Central Service Tax authorities and all accounting and billing is done from a centralized location. Under GST regime, the service provider will be required to obtain registration for all the states where the customer is located as the SGST component of IGST has to be accounted for the respective states. IT service providers would also be required to bifurcate services and bill the customer state-wise. That is, determination of point of supply using location based proxies or other mechanism becomes crucial. This is more cumbersome for IT service provider whose customers have pan-India presence. This brings additional complexities related to distribution of GST credits (for supplies procured centrally) to state wise branches.
Since GST is a destination and consumption based tax, any export of Goods or Service outside the country will not attract output GST. Thus, IT Service exporters located in STPI will always have Refund claims. Under GST regime these refund claims for services received would have to be bifurcated state wise. With many issues like multiple taxes in places like Maharashtra, the new tax structure might break the rules and give the distributors bill anywhere across India giving tough fight online traders. Also, adding value to that, in terms of a desktop, a channel partner can import multiple accessories and peripherals, put it together and rename it under a new brand while selling. However, on the dark side, the channels which were billing at 12.5% and 15% for various products, might face a huge tax burden of close to 18% which might eat their margins.