By S Sivakumar, LL.B., FCA, FCS, ACSI, MBA, Advocate
THE following are the GST related issues that would affect the IT/ITS/ITeS sector, as per my understanding of the model GST law.
1. By and large, this sector is subject only to the levy of service tax, which is currently at 15%, inclusive of all cesses. Also, a significant portion of the companies in this sector are engaged in export of services and consequently pay, no or negligible service tax. Except for software product companies which are engaged in domestic sales through the licensing mode, no VAT is paid by these companies as no VAT is payable on services.
2. The biggest challenge for these companies who are primarily into exports is to obtain refund of the unutilized CENVAT credit of the service tax paid on input services. Currently, these companies file service tax refunds based on the place where their principal office is located, in terms of the centralized registration. However, under the GST regime, these companies would be required to take separate registrations under the Central GST law, in respect of each of the States where they are operating, necessitating filing of separate refund claims in each of these States. This could pose enormous problems for IT exporters.
3. Next… with the GST rate likely to be fixed at around 18%, as per the latest indications, the overall quantum of the refund to be obtained could go up significantly. With the service tax refunds not flowing to the IT exporters currently, it remains to be seen as to how this critical aspect would get handled. Under the model GST law read with the draft refund rules, there is a provision for automatic refund of 80% of the service tax refund claimed on a provisional basis and there is also a time limit of three months for refund to be granted and if refund is not granted within the said period of three months from the date of filing of the refund claim, there is also a provision for payment of interest. It is for the first time that a time frame for processing of refund claims is being brought in as a statutory provision. It remains to be seen as to how these provisions are handled at the ground level.
4. It is not very clear as to whether, only the Central Government would administratively manage both the central and the state GST laws, for companies with annual business turnover of over Rs.1.5crores. Though the Central Government is pushing to exclude the States from exercising dual administrative control, the States are not agreeing. If both the Central Government and the States are allowed to administratively handle the respective laws, viz. CGST law and SGST law, in which case, IT exporters would be required to file refund claims in respect of CGST and SGST laws, with the Central and the State Governments, respectively. This could be a major dampener for IT exporters.
5. One major positive aspect of the GST regime would be the availability of CENVAT credit on inputs. Currently, IT exporters being service providers, are not allowed to avail of input tax credit of the VAT paid on inputs, as IT players who are rendering services are not treated as ‘dealers’ within the meaning of the VAT law. Under the GST regime, this would change, and IT players, as suppliers of services, would be entitled to input tax credit on all eligible goods and services. Given the huge investment that is made by IT players in computers, software packages, furniture, etc., the benefit of input tax credit in respect of central excise duties and VAT paid on these inputs could be significant.
6. Yet another benefit that would accrue to the IT sector is the abolition of levy of multiple taxes. Currently, software product companies pay both the service tax (15%) and VAT (5.5% in Karnataka) on license fees. This would vanish under the GST regime. Moreover, for software maintenance activities, IT companies treat these as works contracts and charge service tax on 70% of the receipts and VAT on 70% of the receipts, resulting in taxation on more than 100% of the transaction value. This situation would cease to exist under the GST regime, to the overall benefit of the Industry.
7. Under the GST regime, the input tax credit scheme would be broad based, as compared to the current CENVAT credit scheme and this would augur well for the IT sector. Credit would be available on most inputs and input services that are used for business purposes, except for a small list of negative services which are found also in the current service tax regime.
8. Currently, refund of the unutilized CENVAT credit is granted to IT exporters, even for the period prior to registration. However, under the GST regime, registration is a mandatory pre-requisite for availment of and claiming of refund of unutilized input credit.
9. As per the latest indications, the small-scale exemption under the GST regime is likely to be fixed at Rs. 20 lakhs, as against the current exemption limit of Rs. 10 lakhs under the service tax law. Small IT companies would benefit from this provision.
10. Under the GST regime, the time limit for filing of refund claims is proposed to be fixed at 2 years from the relevant date, as against the time limit of one year under the existing service tax law in terms of Section 11B of the Central Excise Act. This would augur well for IT exporters. Input tax credit, under the GST regime, has to be availed within 12 months from the date of the invoice of vendors/service providers.
11. At the procedural level, IT and services companies would be required to file all the requisite returns under the three Acts, viz Central GST Act, State GST Act and Integrated Goods and Services Act. From a procedural perspective, these companies would be required to file details of all claims towards input tax credit, etc. entailing some amount of effort and would need to follow the requirements related to availing of input tax credit.
12. The Central Board of Excise and Customs (‘CBEC’) has exhorted the Service Tax Department to expedite the processing of the refund claims. It remains to be seen as to whether this directive would have any practical impact. Unutilized CENVAT credit of service tax paid on input services can be carried forwarded under the GST regime and IT exporters whose refund claims are pending to be adjudicated or whose claims have been rejected, wholly or partially, would need to take expert help to take the benefit of the transitional provisions.
13. The concept of Input Service Distributor would continue to exist under the GST regime and IT companies can take advantage of this provision to distribute credit amongst their development centers, to derive optimal advantage.
14. Under the GST regime, exemptions related to the SEZ scheme are proposed to be converted into refund schemes. Consequently, IT companies that are currently operating as SEZ units would be required to pay service tax to their lessors/SEZ Developers/landlords, as against the exemption from service tax that is currently available in terms of service tax Notification No. 12/2013-ST. Consequently, these SEZ companies would be required to file refund claims in respect of input services such as rent, maintenance services, etc.
15. The quarterly refund scheme is likely to be continued under the GST regime. It, of course, remains to be seen if IT and services exporters would be required to file separate refund claims with the Central and State Governments.
16. As per latest indications, the GST council has decided to have four GST slab rates, viz. 6%, 12%, 18% and 26% and above. Services rendered by IT companies are very likely to come under the 18% slab. Given this, as aforesaid, the overall quantum of refunds under the GST regime is likely to go up significantly, for this sector.
17. From a systems perspective, IT and other companies, like any other company, would need to tweak their internal software systems to ensure that they trace input tax credit separately under the three Acts/streams, viz. central GST, state GST and IGST. Most input invoices would have multiple taxes under the GST regime and tracking these invoices and availing input tax credit would require ample adjustment of the internal systems.
As is well known, the IT and allied sectors are the largest exporters of services from India and being export centric would be concerned about the manner the refunds are administered under the GST regime. While it is good to see some provisions in the draft GST refund rules relating to provisional refund of 80% of the claim, time limit of 3 months for disposal of the refund claim, etc., it would remain to be seen as to how these provisions are ultimately administered by the Department.
IT and services exporters would be well advised to meticulously plan their procurements, etc. over the next few months and,if need be, delay major purchases of goods to take advantage of the input tax credit that would be available under the GST regime.