GST Impact on Indian IT Industry- Some Hits, and then some Misses

Hurray-the Goods and Services Tax (GST) bill, which is aimed at addressing issue of multiple levies and its cascading effect, ushering in destination-based taxation, simplify compliances and provide for effective dispute resolution mechanisms in a time-bound manner- has been passed!

The GST constitutional amendment bill passage would now pave way for the enactment of the GST law at the Center and the states. As details are worked out in the next few months, it will have a positive impact for the country in the long term. The draft GST model law, currently in public domain, requires close collaboration between Industry and Government to ensure that the GST regime lives up to the expectations, including not only maintaining but enhancing the competitiveness of technology products, services and the internet sector.

But is it all a big “hurray”? Maybe not. While several provisions like time bound processes, clarity on electronic download classifications etc. are in line with the larger objective of ensuring ease of business, there are several concerns that need to be addressed.

Positive Impact

  • Subsumes multiple levies
  • Clarifies taxation of electronic downloads
  • Robust technology framework for implementation bringing in transparency and process simplification
  • Provisions for time bound processes
  • Simple, efficient and transparent indirect tax regime is widely expected to accelerate overall growth of GDP in the country with spinoff benefits for all sector including IT-BPM

Key Issues that need to be addressed

  • Companies engaged in the supply of services on a pan-India basis, will have to seek registrations in 37 jurisdictions (29 States + 7 Union territories with legislature + Central Government).
  • Place of supply provisions may require multiple invoicing for services delivered under single contract if services are delivered from various offices/ centers of the same entity
  • Valuation of services can potentially lead to disputes and litigations, leading to transfer pricing like situation for intra company supplies and will necessarily require refunds.
  • Export competitiveness of the IT sector could be impacted due to

o   Complex billing and invoicing requirements due to place of supply and valuation

o   Reverse charge of GST on import of services used as input for services that are exported, can lead to locking in working capital

o   For SEZ units, which were permitted upfront exemptions, there is now no provision for upfront exemptions, and it will necessarily require application for refunds.

  • The provision mandating “tax collection at source” for transactions on third party ecommerce marketplace are discriminatory and can potentially render such ecommerce marketplace unviable. Moreover, this is likely to negate the beneficial impact of e-commerce on lakhs of small businesses in the country by compelling them to seek refunds compounding their working capital problems.

As deliberations on administration and implementation progress, concerns are emerging on the specific language of the model law and its interpretations. However this does not in any way undermine the importance and the urgency of ushering in the GST reform. We are confident that the government will look into the specific issues raised by the industry and find mutually acceptable resolutions to the issues.

Do you see any other impact points for GST on the Indian IT-BPM industry? Feel free to share.

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