Impact of GST on IT Sector in India

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Impact Of GST On IT Sector In India

In India, the indirect tax system has come a long way from service tax to Value Added Tax (VAT); VAT to Good and Service Tax (GST), the current tax system that absorbed all oblique taxes of the states and centre. It mainly eliminates the cascading effect of taxes (tax upon tax) on the product sold in the market. 
 
GST is a unified indirect tax system across the country-wide market, and as the term refers, it applies to all goods and services sold in the country. India being an IT hub of the world, it is imperative to understand how the new GST regime, One Nation One Taxation, impacts India's information technology (IT) sector. 
 
Before we set out to study the impact of GST on India's IT sector, let's understand the Pre-GST Tax rates in the IT sector.
 
Pre-GST Tax Rates in the IT Sector During Excise. VAT and Service Tax:

During the old tax regime, the sale of both software attracted both VAT and service tax in the IT industry. The VAT rate is around 5 % in most states, and the service tax is at 15%. Excise duty is also applicable in the case of all manufactured IT products. 
 
So, collectively there were three different taxes applicable to the IT product. 
Excise duty upon manufactured IT products
VAT for the Sale of IT products
Service Tax for providing IT software as a service. 
 
All these taxes layered one upon another, finally reflecting the high-priced IT service to the end-consumer.
 
Let's now understand the impact of GST.
 
Impact of GST on the IT Sector:

Many are confused about whether the software is good or a service under the GST regime. Here is the answer of it:
Under GST, development, design, programming, implementation of information technology software and others shall apply as the supply of service, with an 18% GST rate. 
 
Business Process Change:

Under GST(the destination-based tax), the tax is collected with the aid of the destination state (where the consumer resides). In the earlier regime, most IT groups registered with the Central Service Tax (CST) -in case of inter-state transfer of goods and services. The company does billing and accounting obligations from head office. 
 
Under the current GST regime, provider companies are required to register for all of the states they're catering to, i.e. all states that have customers. It has to be carried out because the SGST part of IGST for inter-state supply is rendered for the respective states.
 
 
Change in Business Accounting:

Irrespective of the size of the business, every business has to now get its business account management system and ERP in sync with GST. It will lead to the rising infrastructure development to match the requirement, and several changes in the business system must be implemented. 
It involves changing business software to facilitate complex GST calculations. The key issue is bringing together tax experts and technology teams. GST taxation for your business gets burdensome without a grip on the software that supports business. If you are looking for expert help handling your GST fillings, our eAuditor Office professional tax team is there for you.
 
Availing Input Tax Credit (ITC):

The tax credit had been a serious issue for businesses in the earlier tax regime (VAT/Service Tax). Most importantly, if you were running a business selling goods and services, you would pay VAT on the goods supplied. 
But, the business owners could not claim the tax credit on service tax paid on AMC (Annual Maintenance Cost) for their computer hardware and software. 
 
But with GST, this issue has been eliminated. Under GST, the traders can claim the Input Tax Credit (ITC) on the service tax paid on AMC. 

Example: 

  

Particulars of the Bill

Pre-GST (VAT/ Service Tax)

After  GST

Total Sale of Fruit pulp or fresh juice based drinks (INR)

100,000

100,000

VAT@14.5%

14,500

 

GST 12%

 

12,000

AMC Contract

10,000

10,000

Service Tax on AMC@15%

1500

 

GST@18%

 

1800

  

Total Tax (INR)

  

14,500 + 1,500

10,200(12,000-1,800)

 

 
 
End of Dispute on Classification of software programs:

In the previous tax regime, there was no clear classification of software programs - whether it was a good or service. 
State governments maintained that software programs were good, so they charged VAT. 
The central government maintained that the software program is a carrier, so it charged Service Tax. 
Due to a lack of clarity, IT industries suffered double taxation in most cases. With the GST system in place and the old tax regime out of the way, software programs are classified as service, and currently, GST is taxed at 18%. 
 Export of Sofware Service:
India's IT industry is one of the reasons for the significant influx of forex into India. To encourage more exports from India in all industries, the government has made exports as zero-rated taxes and input taxes paid will be refunded in full. 
 
One of the key points for an exporter of software service is it is necessary to provide the address of the service recipient to the concerned government agency upon request. It applies to all IT/ITes service providers; there are no exceptions under GST. 
 
Freelancers:

Any freelance digital service providers like software development, web development, designing, etc., the GST is taxed at 18%. In the earlier tax regime, VAT was at 15%. 
 
Seamless and Confusion-free Business Opportunity:
Unlike the VAT system, businesses can do GST registration and payment online. From document submission to claiming tax credits, all in one place. 
 
Conclusion:

Just like every well-intended policy and governance measure, there are both pros and cons in it. The GST system is created to eliminate the cascading effect of indirect taxation and is doing that slowly. Even though it doesn't go away just like that, it should be the long time goal of the GST. With regard to the IT sector and the export of IT Services, GST is a boon for the industry. Most importantly, the availability of Input Tax Credits for IT services will increase the business's operating cost and the company's profitability. 
 
GST return filing can be burdensome for businesses, and errors if GST filing is proven costly for a business. At eAuditor Office, our team of GST experts will assist in the GST registration and filing. With our team by your side, you can remain stress-free and focus on your business growth. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 

 


Author : Dharani

Date     : 15-Oct-2022


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