GST will be a game-changing reform for the Indian economy which promises a common Indian market and reduction of cascading effect of tax on the cost of goods and services. GST will have a far-reaching impact on almost all aspects of business operations in the country; for instance, impact on pricing of products and services, supply-chain optimisation, IT systems, policies and processes, accounting and tax compliance systems, etc. More specifically, in the context of indirect taxes, GST will impact tax structure, incidence, computation, payment, compliance, credit utilisation and reporting leading to a complete overhaul of the current indirect tax system of any organisation operating in India.
The Model GST Law released on June 14 has attempted to address indirect tax disputes currently prevailing in the technology sector.
Foremost, it has attempted to address the historical dispute of levy of dual indirect taxes (VAT vis-a-vis service tax) on right to use intangibles such as IT software, trademarks, etc. ‘Service’ has been defined to include intangible property and the definition of ‘goods’ excludes intangibles. Additionally, the transfer of right to use any goods has been defined as a deemed service. This clear articulation should put to rest the historic dual treatment of software and other intangibles as both ‘goods’ and ‘services’. While doing so, ambiguity still persists where intangibles are supplied on a tangible medium which could be a point of representation by the industry.
Further, the place of supply for B2B transactions being linked to the location of service recipient with no exceptions being carved for IT/ITeS services, online information and database access services, intermediary services and performance-based services (like IT maintenance and testing services) is another welcome move from service exporters’ perspective.
‘Zero-rating’ has been rightly preserved for export of goods and services. However, it appears that no scheme for upfront GST exemption/zero-rating is in the offing for supply of goods and services to exporters of services (i.e. STP, SEZ, EHTP and EOU units engaged in exports), leading to additional working capital requirement for such units. As things stand, it seems that these units would be given the same treatment as a DTA exporter and will be required to claim refund of the unutilised input GST credits. Hence, it is worthwhile for the industry to represent on such discontinuance of benefits.
As regards the IT hardware sector, discontinuation of concessional duty benefits currently available to manufacturers of mobile phones, tablets, etc, could have a tax-cost impact. The good news is that, with various taxes which were currently not available as credit (like CST) being subsumed into GST, this would help unlock the cascading impact in the value-chain and, thereby, reduce the impact of incremental tax rates on such final product, if any.
Moreover, the apprehension of a decentralised registration and compliances in each state of operation appears to be confirmed by the Model GST Law. Consequently, service providers may need to value and discharge GST in each state of operation in respect of services delivered under a single contract (like multi-state contracts) from multiple offices across the country. Also, splitting the contract or contract value state-wise can entail practical challenges in monetising the value of services delivered from each location. GST could also entail for careful planning of the supply chain to ensure that GST credits are not accumulated or lost.
The Model GST law has attempted to address various issues plaguing the technology sector. However, it does not seem to inspire required level of confidence to the exporting community, particularly export-oriented units set up basis a promise of tax and duty exemptions. Given that the ‘Revenue-Neutral Rate’ report suggests a lower rate for merit/essential goods, it remains to be seen whether the expectations of the IT industry for a merit rate are met.
Since the rolling out of GST seems to be closer to reality with a target date of April 1, 2017, companies have already commenced working towards the transition to GST, and for the ones that have not yet started, would need to have a plan to address the challenges of crash-landing into the GST regime. Given the far-reaching impact of GST across the business organisation and its value-chain across businesses, as part of the process towards effective GST transition, companies may need to adopt a comprehensive business transformation approach. This would involve a business impact analysis, reviewing business delivery and supply-chain models, engaging with the government on issues of representation, preparing IT systems to be GST-compliant, reviewing and aligning the policies, processes and controls across the business organisation to GST requirements, and plan an effective change management programme. This would ensure zero business disruption and 100% GST compliance.
Tax Partner, Technology, EY India