The Goods and Services Tax (GST) is going to be in the limelight once again in the approaching winter session of the Parliament. It is a foregone conclusion that the implementation of the GST is likely in 2016-17 and most of the industry is already working out the impact of the GST on them. The service sector which comprises of the IT sector and other service providers is likely to be affected on multiple counts by the GST. Let us take a look at some of these aspects.
GST Rate: The service sector is taxed at the rate of 14%. This rate came into effect from 1st of April from a prevalent level of 12.36% in the past. The GST rate is likely to be higher. The recent announcement by the government which has put to rest a number of speculations hopes to cap the GST rate at 20%. This means that there will be an impact on the services which will become costlier by the differential tax amount from the current levels.
GST credit: Under the current scenario the service sector is unable to claim credit of VAT and sales tax incurred in creating the infrastructure. Similarly the traders who buy the services are unable to avail the tax credit and end up paying additional cost equal to the amount of the service tax. This is likely to change in the favour of the service providers and traders.
Multi-locational taxation: The GST is a destination based tax and is proposed to be levied at the point of sale. The service providers especially the IT sector is used to service tax compliance from a centralized location. Under the GST regime the CGST, SGST, IGST and 1% special tax will have to be paid depending on the jurisdiction of the service provided. In other words if the service provider is making the software installation for a company which has 6 offices in 6 different states, it would be required to split the GST payment across six states.
The complexity of the taxation can be well understood from the example on cloud services provision by an IT company having its headquarters in Delhi and the infrastructure in UP. The service is to be provided to customers in a number of states. Here it may be required to work out clear and specific proxies to determine the place of taxation.
Exports and dual taxation: Many of the service providers are involved in export of services. They currently have to do a lot of follow ups to claim their service tax refunds from the authorities. This activity may see an increase under GST in the form of multiple GST refunds from the state governments (SGST), besides refunds of IGST and CGST. However, the exercise will become simpler if the taxes paid on purchase of service and goods are converted to credits in case of exports and used to set off the taxes in subsequent purchases.
GST is also likely to put an end to the double taxation of services like software which are treated as goods and services both.