Over the past few weeks, there has been significant progress on the GST front. On 8 September 2016, India saw its biggest indirect taxes reform taking a giant leap, as the Constitution (One Hundred and First Amendment) Bill for GST received the Presidential assent. This has enabled the Government to introduce the GST legislation in the Parliament during the upcoming winter session in November 2016. In line with achieving the target date of 1 April 2017, the Government officially released the Model GST Law on 14 June 2016. The industry now needs to analyze the draft provisions in detail and examine the impact of these provisions on their business.
Overall, the provisions of the Model Law are aligned to the current service tax regulations; therefore, they should not be negative or disruptive for the IT/ITeS sector. However, there are several key challenges that should be addressed so that the regulation eventually implemented meets the tenets of being simple, clear and easy to comply with.
In this backdrop, the key impact points/open issues proposed under the GST regime relevant for the IT/ITeS sector are encapsulated below.
- Taxation of software: Software transactions are proposed to be treated as supply of services, which should put to rest the controversy on treatment of such transactions. Software is being potentially treated as supply of goods under current VAT regulations, as well as supply of services under service tax. However, once treated as a service, the effective rate of tax (if both taxes are charged today) is around 19%, which will be very close to the GST rate. Therefore, there may not be any benefit on the rate of tax; the upside is on the ability of clients to take credit for the taxes charged. However, there is still lack of clarity on whether software sold on media would qualify as goods or service.
- Imports from branches/head office (HO): The definition of import of services now excludes transactions within the same legal entity. This may eliminate the need to pay reverse charges on services received from overseas branches/HO.
- Outright exemption on purchases by STP/SEZ units: The report of the Joint Committee on business processes for refund provides that supplies treated as deemed exports may qualify for ab initio exemption. The Model Law also provides for the concept of deemed export. The list of such qualifying supplies is yet to be notified, and it remains to be seen whether supplies to STPs and SEZs will qualify as deemed exports. If the SEZ benefits are protected, there is a risk that the current tax exemption available to STP units on the purchase of goods may be withdrawn.
- Multi-state registrations: The requirement of shifting to a multi-state registration from a centralized setup will be a massive change and will lead to multi-fold compliances.
- Intra-company cross charges from one state to another: Cross charges/cost allocation made between two tax registrations of the same entity shall be treated as supply and liable to tax. While this provision is purported to be in line with the consumption-based taxation policy, what can be a cause for concern is the fact that such transactions are to be valued at an arm’s length (including a mark-up). This would necessitate an assessee to maintain a separate set of memorandum books of accounts specifically for reporting transactions under GST returns. Also, the concept of valuation will trigger tax disputes. As such, the concept may be unwarranted, specifically for B2B supplies.
- Higher working capital requirement: With the median rate for GST expected to be around 18%—20%, entities claiming refund would see greater cash being blocked as compared to today, where services are taxed at 15%. The working capital requirement may also increase if the current proposition of taxing intra-company transactions and phasing out upfront exemptions for STPI/ SEZ goes through in the final legislation. It will be important to see how the 80% immediate refund provisions are implemented to address this situation.
- Onerous conditions for availing input tax credit (ITC):
- One of the condition prescribes that ITC shall not be available unless the service has been received by the assessee. This condition has multiple challenges. First, as service is an intangible activity, it would be difficult for assessees to prove how and when they have received certain input services. Second, this would be challenging in cases of software licensing and annual maintenance contracts, where the service is received continuously over a period of time but the payment of tax to the vendor is made upon issuance of an invoice.
- Another condition mentions that the tax with respect to which ITC is availed should be paid to the Government Treasury. Given the manner in which compliance dates are planned, it is likely to be difficult to practically validate this when the first opportunity to avail credit triggers.
- Powers to adjust refunds need to be clarified: The Model Law authorizes a refund adjudicating officer to withhold refunds when returns are not filed on time or a proceeding under the act is pending. This provision may be interpreted to empower officer to withhold refund in case of any show cause notice that is pending adjudication. Such provisions would merely make the already cumbersome refund process more complex and prone to litigation.
Considering the key positive notes and the host of open issues, the IT/ITeS industry should use the current window of opportunity and engage with the Government to iron out the issues and anomalies well before the GST law is finalized.
(Views expressed here are personal)