GST for IT and ITeS sector

Goods and Services Tax (GST) is a destination based consumption tax. It has been designed in a manner so that the tax is collected at every stage and the credit of tax paid at the previous stage is available to set off the tax to be paid at the next stage of transaction, thereby eliminating cascading of taxes. This eradicates “tax on tax” and allows cross utilization of input tax credits, which benefit the industry by making the entire supply chain tax neutral.The purpose of this write-up is to provide overview of GST for Information Technology (IT) and IT enabled Services (ITeS) sector/industries.

  ·  GST ends historical issue of software classification: Under previous tax structure, the sale of packaged software was entitled to both VAT (approximately 5%) and service tax (15%). The VAT on sales is directed to the state government whereas the service tax on service follows the central government. Also, there were cases where along with the VAT and service tax, excise duty was also applied due to lack of clarity towards software taxation and modes of it's delivery. However, under GST regime,‘Service’ has been defined to include intangible property e.g. software and the definition of ‘goods’ has been clarified to exclude intangibles. Clause 5(d) Schedule II of the CGST Act provides that development, design, programming, customization, adaptation, upgradation, enhancement, implementation of Information Technology software shall be treated as service.

This explanation removes the uncertainty towards intangible good i.e. software whether it is a good or service. This is one of the main features of GST for software taxation. As Information Technology software has been declared as service, place of supply of IT software can easily be determined. Place of supply of software shall always be the location of the recipient.

   ·   Definition of IT Software: Goods and Services Tax (GST) defines "Information Technology Software” means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment.

   · Single GST Rate for IT Software: GST rate for all kinds of IT Software supply: services, products, supply on media, electronic download and temporary transfer of Intellectual Property (IP) is 18%.

   · Input Tax Credit (ITC) for services used to produce IT Software: GST greatly enhances the ability to take input credits on taxes paid on inputs that are used in the ‘furtherance of businesses’. This means that IT software service providers will be able to take input tax credit for GST paid on goods and services which are used to provide output IT software service.

This is especially relevant in the case of IT software companies who invest significantly in tangible technology infrastructure which were covered under Value Added Tax (VAT) or Central Sales Tax (CST). The levy of VAT / CST used to result in increased cost and impacted businesses. GST has done away with this anomaly by absorbing VAT / CST & service tax under one levy with facility of ITC. This change will benefit and provide ease of doing business for IT software companies.

   · IT Software HSN and SAC codes: IT Services have been defined by Service Accounting Code (SAC) for GST under Section 8 : Business and Production Services  and Heading no. 9983 Other professional, technical and business services and Group 99831 Management consulting and management services; information technology services.

Section 8 : Business and Production Services
Heading no. 9983		Other professional, technical and business services
Group 99831		Management consulting and management services; information technology services.
	998311	Management consulting and management services including financial, strategic, human resources, marketing, operations and supply chain management.
	998312	Business consulting services including pubic relations services
	998313	Information technology (IT) consulting and support services
	998314	Information technology (IT) design and development services
	998315	Hosting and information technology (IT) infrastructure provisioning services
	998316	IT infrastructure and network management services
	998319	Other information technology services n.e.c

   · Place of Supply Rules: GST registration is needed to be done in all States from where ‘supply’ is being made. If any IT software company is present in only State and doing providing all services online or within the State, then there is not need to take GST registration in other States.

   · GST Rate for IT Hardware: Most of IT Hardware is at GST rate of 18%. GST rate for Desktop and Notebook (or Laptop) Computers, Printers [other than multifunction printers, HS 8443], Computer monitors not exceeding 17 inches [8528], CCTV Camera [8525], Electrical Transformer [8504], Winding Wires [8544], Coaxial cables [8544], Optical Fiber [854470], etc. is 18%.

      ·  Import and Export

On the imports side there would be no impact on levy of Basic Customs duty, Education Cess, Anti-dumping duty, Safeguard duty and the like. However, the Additional duties of Customs, which are in common parlance referred to as Countervailing Duty (CVD) and Special Additional duty of Customs (SAD), would be replaced with the levy of Integrated Goods and Services Tax (IGST), barring a few exceptions. On the exports side, export would be treated as zero-rated supply. Exports are currently ‘zero-rated’. The term ‘zero-rated’ means that the service provider does not have to charge and pay and tax on the value of the export (i.e. the exports are taxed, but at 0%). Though, the service provider can claim refund of all taxes that are paid on services consumed as inputs (i.e. taxes on eligible expenses of the business). The government has given this benefit to encourage exports.  Under zero-rated supply IGST paid on export goods or the input tax credit proportionate to the goods and services consumed in goods exported under bond /Letter of Undertaking (LUT) would be refunded.

Imports

·         STPs/EHTPs/EOUs

Export Oriented Units (EOUs)/Software Technology Park Units (STPs)/ Electronics Hardware Technology Park Units (EHTPs) will be allowed to import goods without payment of basic customs duty (BCD) as well additional duties leviable under Section 3 (1) and 3(5) of the Customs Tariff Act. However, IGST would be leviable on the import of input goods or services or both used in the manufacture by EOUs which can be taken as input tax credit (ITC). This ITC can be utilized for payment of GST taxes payable on the goods cleared in the Domestic Tariff Area (DTA) or refund of unutilized ITC can be claimed under Section 54(3) of CGST Act. In the GST regime, clearance of goods in DTA will attract GST besides payment of amount equal to BCD exemption availed on inputs used in such finished goods. DTA clearances of goods, which are not under GST,would attract Central Excise duties as before.

·         SEZs

Imports / Procurement by Special Economic Zones (SEZs) for authorized operations shall be upfront exempted from payment of IGST. Hence, there is no change in operation of the SEZ scheme.

IGST Calculation example

Suppose Assessable Value (A.V.) including landing charges =Rs. 100/-

(1) BCD- 10%

(2) CVD- 12%

(3) IGST-28 %

(4) Education cess – 2%

(5) Higher education cess -1%

(6) Compensation cess-10% 

In view of the above parameters, the calculation of duty would be as below:

(a) BCD = Rs. 10 [10% of A.V.]

(b) CVD = Rs 13.2 [ 12% of (A.V.+ BCD)

(c) Education cess- Rs. 0.464 [2% of (BCD+CVD)]

(d) Higher education cess- Rs. 0.232 [1% of (BCD+CVD)]

(e) IGST- Rs. 34.69 [A.V.+(a)+(b)+(c)+(d)]x 28%

(f) Compensation cess – Rs. 12.389 [A.V.+(a)+(b)+(c)+(d)]x 10%

Note: In cases where imported goods are liable to Anti-Dumping Duty or Safeguard Duty, calculation of Anti-Dumping Duty or Safeguard duty would be as per the respective notification issued for levy of such duty. It is also clarified that value for calculation of IGST as well as Compensation Cess shall also include Anti-Dumping Duty amount and Safeguard duty amount.

• Easy refunds - Grant of Provisional Refund in Case of Zero Rated Supplies: GST follows the principle of exporting only the cost of goods or services and not taxes would be followed. In GST regime, the refund claim, if in order, has to be sanctioned within a period of 60 days from the date of receipt of the claim. GST law also provides for grant of provisional refund of 90% of the total refund claim, in case the claim relates for refund arising on account of zero rated supplies (e.g. IT software or any other export). The provisional refund would be paid within 7 days after giving the acknowledgement. The acknowledgement of refund application is normally issued within a period of 14 days but in case of refund of integrated tax paid on zero rated supplies, the acknowledgement would be issued within a period of three days. The provisional refund would not be granted to such supplier who was, during any period of five years immediately preceding the refund period, was prosecuted. In sum, the law envisages a simplified, time bound and technology driven refund procedure with minimal human interface between the taxpayer and tax authorities.

(Rajeshwar Singh Jenwar)
Twitter: @RSJenwar

Note: Initial draft, comments and suggestion for improvements are welcome.