The earlier VAT/service tax regime in India was complicated due to multiple taxes, innumerable compliance obligations, and tax cascading. Under the GST regime, it will result in a simpler tax regime, especially for the IT sector.
Tax Rates Under Excise/VAT/Service Tax
Under the old tax regime, the sale of packaged software attracts both VAT and service tax. VAT rate is around 5% in most states and service tax rate is 15%. Excise duty is also applicable in the case of manufacturing of IT products.
Example: If a software comes on a CD, DVD or hard disk, then there are 3 taxes that apply to it.
- Excise duty for manufacturing of product
- VAT for sale and
- Service tax for providing service as software can be downloadable for multiple times.
All such complications and double taxation will be removed under GST.
Impact of GST on IT
GST on IT sector will attract 18% on software services provided by software companies. For purely software services, the cost of such services will increase under GST.
All businesses, large or small are rushing to get their accounting systems and ERPs in sync with GST. This will mean an increase in infrastructure costs and changes in business systems. Most large companies have set up teams consisting of their own technical experts, finance experts, and an expert from their GST software vendor.
While there is a significant increase in infrastructure and overhead costs for businesses, there is good news too in the form of ITC.
Traders selling goods (paying output VAT) earlier could not claim service tax paid on AMCs for their computers and software. Under GST, this ITC is available.
For example, Ajay sells fruit based drinks worth Rs. 1,00,000. He also has to pay an AMC of Rs. 10,000 per month on the computers used in his offices.
Redesigning business software IT service providers can also adjust all their input taxes against the service provided. For example, now they can adjust VAT paid on office supplies against the service provided by them.
Also IT companies maintaining servers incur huge capital expenditure on buying the hardware and also revenue expenditure on repair and maintenance. Now the tax paid on hardware can be adjusted against the tax paid on services and small parts of repairs.
Redesigning Business Software
The biggest hurdle is in changing the IT systems which require coordination between tax experts and technology teams. In many cases, some of the ERP software that were provided by the IT majors have to be redesigned and updated with the new GST rules.
Companies are mainly upgrading their enterprise resource planning (ERP) and accounting software to accommodate the complexities of calculating GST. Either they need to upgrade their existing software to the new version or use specific GST software like the ClearTax GST.
Taxability of Installing New ERP
Businesses install their accounting systems and ERP in batches. For example, ERP implementation is done in batches. It is a long term contract which spreads over years. ERP professionals understand the requirements of the business, design the software accordingly, train the company employees and regularly maintain and update the software. Payment for this contract will be spread over the years and service tax was also charged accordingly.
Under GST, this will be a continuous/periodic supply and will be taxed accordingly. Please read our article on continuous supply under GST.
Software Developers And Sellers
There is a race for all fintech companies to develop a GST software. GST will impact these companies positively by opening a huge market pan India. Demand for GST software by all the companies will mean a huge boost to these software developers.
ClearTax is the first company in India with a live ready-to-use GST software.
Export of Services
Export of information technology is an important source of foreign exchange, with India being the biggest exporter of IT services.
Exports are zero-rated and input taxes paid will be allowed as a refund.
The default rule for place of supply (export of service) is the location of the service recipient if the address of the recipient is available.
So, exporters must ensure that the address of service recipient can be presented before the authorities on request. The typical IT/ ITES services which come under the default rule will be software development, BPO operations, software consultancy, etc. Apart from these, this rule will also apply to other services like software support/ maintenance and intermediary services as there are no exceptions under GST.
Freelancers offering software services such as designing, app development, website designing etc., earlier paid a service tax of 15%. This has now increased to 18% under GST.
However, there is some confusion about bloggers being taxable under GST and requiring to register. Earlier they were not taxable under the service tax. We hope the GST council will clarify this situation in the due course. For an entire analysis of applicability of GST on bloggers, please refer to our article.
Although the GST rate for services has increased to 18%, IT industry will definitely benefit from GST, thanks to the immense boost in the sale of the software. Other factors like availability of ITC will bring down the operating costs and thus, it will increase the overall profitability of the IT sector.