The recent release of the draft model GST law is possibly the most ambitious and far-reaching reform of the Indian indirect tax structure for goods and services in decades.
This is a move as eagerly awaited as it is overdue, given the issues that have plagued the tax system for a long time, including dual taxation by Centre and states, cascading impacts of these to the end consumer making goods and services more expensive, lack of transparency and tax evasion.
A reading of the draft suggests several positive moves towards simplification and reform, including elimination of Central and state taxes being levied on the same transaction — for instance service tax (Central) and VAT (state); a single interface for pan-Indian tax payments, making it convenient and a significant move towards transparency through the GST network, where all transaction and invoice data will now be stored.
On the whole, the IT ITES industry will certainly benefit from these, along with the rest of the Indian industry. However, the draft GST law as it is today also throws up some concerns for this industry.
1. Upfront tax exemptions have not been notified under the draft law for Special Economic Zones (SEZ) units and Software Technology Parks (STP). If upfront exemption from customs duty excise duty, service tax and VAT do not continue this will cause major cash flow and P&L impact for the industry as GST will be payable on imports or procurements.
a. Working capital requirements for IT ITES companies will come under a great deal of strain due to this unanticipated change.
b. Refund process and its complexities will bring additional burdens in terms of compliance.
c. This is likely to slow investments into SEZs.
2. The IT ITES business model typically serves a single customer contract with services delivered across multiple locations in India. This is both sound risk management and has been instrumental in generating employment in several states and regions where a conventional industry has been declining. The draft law, however, will affect this model in the following ways:
a. For a single customer contract delivered from say four locations, a company will have to either send the customer four different invoices, one from each location, or a single invoice but then have three different locations send internal invoices to the billing location and have this unit then ‘pay’ these internal invoices.
b. Each of these locations will now also have to register with the appropriate state for tax purposes, file separate returns, pay and claim credit locally.
The burden that this will place in terms of compliance and administration will be a significant cost on this sector and is a significant step backward in terms of streamlining and making the tax system more efficient.
Hence, while the overall direction of the draft model GST law is overwhelmingly positive, the aspects outlined above can cause substantial negative impacts in terms of increased stress on working capital, increased compliance costs and lower efficiency for the IT industry. The IT industry is one of the shining success stories of the Indian economy, with $ 145 billion in revenues and $ 108 billion in exports, employing 3.7 million people and creating shareholder wealth for many more. With trade and tariff policies being thrown into uncertainty by political developments, the IT ITES industry and the Indian economy as a whole cannot ill-afford a stutter in the growth of this industry.
Here are few recommendations:
1. Continuation of the current upfront exemptions for SEZ and STP schemes.
2. Centralised registration and administration for all tax payments, credits, returns & audits.
3. Place of supply rules should permit billing from location and billing to location to be based on the contractual party location.
The industry looks forward to further consultation on these aspects.
Source: Economic Times
