The new Goods and Services Tax (GST) is a unified tax structure that was implemented by the Government of India on 1 July 2017. The new regime has ushered a significant change in taxation levels and rules associated with it. On an average, we see the tax slab increasing from 15% to 18% for most of the services. While this may translate to higher cost of services to the end consumer, GST also presents a whole lot of opportunities, pushing ease of business.
Services Sector in India: An Overview
India is a strong services-led economy with the sector generating a significant chunk of employment opportunities and contributing to the GDP. It contributed around 66.1% of India’s Gross Value Added (GVA) growth in 2015-16, is the biggest magnet for Foreign Direct Investment (FDI), and an important net foreign exchange earner. Some of the core areas of service are IT and ITES, banking and financial services, outsourcing, research and development, transportation, telecommunications, real estate and professional services.
Some of the positive impacts of GST on service providers are:
Clear distinction between goods and services: The old regime does not clearly distinguish between goods and services, leading to many instances of double taxation. For example, software is often treated as a good and as a service. The new regime clearly distinguishes goods from services, and also defines principal supply, composite supply, and mixed supply separately. For example, when an individual books a Rajdhani train ticket which includes meals, it involves a composite supply wherein the ticket and the meals cannot be sold separately. Since the transportation of the passenger is the principal supply, the rate of tax will only be charged on the ticket. Alternatively, for items that can be sold separately, but are sold together, like a hamper of snacks and aerated drinks, the rate of tax applicable on the higher product will be levied on the composite supply. There are also separate definitions for supply of software, works contracts, and leasing transactions to bring in more clarity and transparency on their taxation rules.
Streamlining of taxation for intra-state service providers: Due to the state level taxes being subsumed, it will become easier for service providers that operate within the state to know their tax obligations better. Such companies can move away from multiple tax calculations. For example, a CD with software incurs Excise, Service Tax, and VAT under the old regime; this is simplified to one unified rate under GST, making tax calculations and administration easier for intra-state service providers.
Input credit facility: VAT payment under the old regime was not eligible for setting off against output liabilities. The input credit facility is now made available to service providers as well, wherein tax paid on any inputs can be claimed and adjusted against tax paid on output. This will result in direct cost savings for service providers and may even offset the expected rise in end pricing. For example, an AC fitter who paid tax on the raw material for AC fittings (pipe, tape, solder etc.) will be able to claim that tax, and end up spending less on the cost of fitting the AC. This cost advantage can spill over to the customer as well.
Regularised return filing: The old service tax system required two half-yearly returns for services businesses. Under GST, this has been replaced by a number of returns provisions, depending on the type of taxpayer and the type of business:
|Return||Type of tax payer||Timeline of filing return|
|GSTR 1||For outward supplies of sale (for registered taxable person)||By 10th of the next month|
|GSTR 2||For inward supplies received by a taxpayer (for registered taxable person)||By 15th of the next month|
|GSTR 3||Monthly return for registered taxable person (except for Compounding Taxpayer)||By 20th of the next month|
|GSTR 4||Quarterly return for Compounding Taxpayer/Composition Supplier||By 18th of the next month|
|GSTR 5||Periodic return by Non-Resident Foreign Taxpayer||By 20th of the next month|
|GSTR 6||Return for Input Service Distributor (ISD)||By 13th of the month succeeding the quarter|
|GSTR 7||Return for Tax Deducted at Source (TDS)||By 10th of the next month|
|GSTR 8||Annual Return for e-commerce operator||By 10th of the next month|
While a shorter timeline for filing returns might seem overwhelming, regularisation in return filing will result in better streamlining of taxes. Since all these returns are required to be submitted online through a common portal provided by GSTN, the process is simplified and will help the government weed out regular defaulters. This in turn will result in a major boost in the contribution of the Service sector to the GDP.
Service providers, however, are concerned about the following aspects:
- State-wise registration will be required: In the old regime, a service provider could operate with a single place of registration, since services were taxed only by the Central government. For example, if an IT services provider was present across states, they could carry out tax and delivery transactions from the main location. However, now a service provider that is offering services across states must register each place of business separately in each state. This is because the new GST regime entails taxation of services at “location of service recipient”, which will differ for different states. This means service providers will need to register afresh in new states and then carry out tax transactions separately in each state. For example, an IT company like TCS that has a widespread presence across states will need to decentralise service delivery.
- Decentralised reporting will add to costs: Under GST, the “location of service recipient” is the key criterion for how a service will be taxed. Tax considerations will be related to the place the service is being delivered, and even a pan-India service provider with several “locations of service” will need to maintain state-wise records of input credit, audits, service consumption, etc. For example, earlier a service provider like TCS would enter into a single contract with the client, based on its main location, and then would discharge service tax based on the single-service tax registration model. GST will decentralise service delivery models, ensuring various TCS units adopt their own tax reporting and tax management. While this need for decentralised tax tracking and processing is an immediate cost to service providers, it presents a very real opportunity to streamline reporting and compliance measures for the future.
GST offers clear benefits to the services sector, and while some of these measures entail additional cost and effort in the short term, businesses can look forward to simpler operations with the new taxation laws.
All in all, services industries must gear up for better ways to manage business. Now is the time for them to equip themselves with the right people, processes and technologies, and emerge as service providers of the future.