How GST will affect the IT industry

by Gopal Gidwani on April 20, 2017 · 0 comments

in Financial Planning

Most of corporate India has reacted positively to the introduction of GST, expected to come into effect from July 1. For all the complexities in moving to the new framework, the application of a single tax regime is seen as a boon for economic productivity and fiscal transparency.

The IT sector anticipates a simplified and rationalised indirect tax structure that does away with the practice of cascading (“tax on tax”). Instead of the numerous indirect taxes at central and state levels, there will be just two – central GST and state GST. An integrated GST will also apply to cross-border or interstate sales and purchases and will be collected by the Centre.

However, the industry has sounded a note of caution about some changes that could lead to a procedural nightmare.

How are IT firms currently taxed?
IT services pay 15% tax (a combination of service tax, Swachh Bharat Cess and Krishi Kalyan Cess). In the most recent GST news, Revenue Secretary Hasmukh Adhia has hinted that the standard rate for services may rise from the current 15% to 18%.

Software sales are currently subject to value-added-tax (VAT) – around 5% in most states – as well as the 15% service tax. The VAT will be eliminated, but other taxes may apply depending on the format of the software, reigniting the age-old debate – and subsequent tax implications – of whether software is a service or a good.

So, why is the IT industry uneasy about GST?
While GST will apply a long-awaited uniformity to India’s tax structure, companies offering services in multiple states (like most IT majors) will still have to register in each invididual jurisdiction.

At the moment, service providers have one central filing system for paying service tax. But after July 1, IT firms operating on a pan-India basis will have to register separately in each state in which they do business, so states can collect their share of service tax under the new structure. These companies will have to raise multiple invoices for accounting purposes, causing an administrative burden.

Under GST, IT and software companies will have to file three service tax returns (state GST, central GST and integrated GST) for each state. This number will balloon – possibly into the thousands – on account of the multiple registrations in different states and union territories.

NASSCOM, an IT and software lobby group, has urged the GST Council to consider a single registration system. It cautioned that multiple invoicing for services provided under one contract from different locations may threaten the sector’s global competitiveness.

Okay. What about my shares in IT companies?
Most IT services companies have underperformed on the Sensex of late, and a quick recovery is doubtful: Goldman Sachs recently projected a CAGR of 8% for the revenues of the five main IT companies, compared to 11% from 2011 to 2016.

Although IT companies have lost an average of almost 15% of their market capitalisation in the last year, they can look forward to a silver lining in the implementation of GST: companies of all sizes will have to adopt or upgrade their IT systems and software as part of the digital transition to the common market.

For more legal news in India, visit BloombergQuint.

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