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Goods and Services Tax: Impact on IT & Telecom Sector

GST officially known as The Constitution (One Hundred and twenty second Amendment) Bill,2014 is an abbreviated form for Goods and Services tax, which aims at the formation of a seamless and uniform mode for performing the numerous trade of the goods and services across nations. It is an indirect tax which is intended towards bringing the taxes levied on the manufacture, sale and consumption of the innumerable goods and services under a single domain, thereby affecting the tax system on the whole.  France was the first country to introduce the GST bill in the year 1954. Since, then GST has been accepted worldwide and about 150 countries till date are following the GST structure.

Pertaining to India, more than a decade has passed since the GST bill was first discussed in Kelkar Task Force Report on indirect taxes and finally, GST bill bearing the ideology of One Nation, One Tax was given a green signal in the Rajaya Sabha (the upper house of the Parliament) on the 3rd of August,2016. In accordance, with India’s federal structure the bill would be two-tired: Central GST (CGST) and State GST (SGST).  For Intra State transaction both SGST & CGST are applicable, and if the transaction takes between two states (inter-state) then CGST is charged. Integrated GST (IGST) which is an amalgamation of SGST and CGST is applicable for the inter-state which is collected by the Centre.

The different constituents of the GST are taxes like central excise duty, various state level taxes which include sales tax, entertainment tax, octroi, luxury tax, etc. i.e. bringing down a multitude of indirect taxes in a single entity.  Thus, the GST bill would mark the termination of the taxes such as Cenvat, excise duty, sales tax (both state and central) and octroi.  Moreover, the bill is expected to impact different business operations and segments such as pricing of the products, supply chain management, automobiles, consumer durables, financial services, IT, Pharmaceuticals, etc.

The GST bill is expected to eliminate all the compliance issues and further, enhance the efficiency and ease of carrying out the business activities. The bill would also aid in the acceleration of the GDP of India and help increase the export activities.

With respect to the IT sector, considering the technological paradigm shifts, there would be a deeper penetration of the different digital services. The IT service providers are present at multiple locations and the bill would help them in availing services for discharging the tax liability and issuing invoices. However, talking of its flip side, there would be a rise in the duty charged on the manufactured goods, which in turn would lead to a rise in the cost of different electronics spanning from mobile phones to laptops. Thus if the GST is pegged to be somewhere around 18% then definitely it would cause a rise in the prices of the smart devices in India. This will also have an impact IT-BPM and IT Services sector as under GST regime, concept of single taxation point has been further extended to multiple taxation point which can go up to 111 points (as we have 36 states and union territories) as now IGST, CGST and SGST are now in picture. Nasscom said that these multiple taxation points will be a challenge for IT Industry and needed more focus under GST regime. 

In context to the Telecommunication sector, there would be a rise in effective rate from 15% to somewhere around 18%-20% leading to marginal increase in the products and services for the consumers. Communication which is an indispensable part of our lives tales the shape of “Necessity Services” which can attract a lower rate as per the GST bill. There has been a conflict among the telecom companies and the tax authorities regarding the CENVAT credit given to the materials used in the making of the towers and shelters. According to PwC “a restriction has been imposed on the input tax credit for the goods and services related in the construction of immovable properties.” The bill would cause a rise in the services of the tower firms which would further lead to an increase in the operational cost of the telecom service providers and thus it is expected that there would be a hike in the call charges and data rates.  The telecom sector has a number of services including mobile wallets and upon the implementation of the GST bill, it would be a matter of great concern to verify each and every transaction taking place. With respect to the current scenario the distributors and agents of the SIM cards are free from the service tax charges, but upon the implementation of the bill every aspect of the sale of the SIMs and Recharge Coupon Vouchers(RCV) would be subjected to GST, hence the distributors and all the retailers in the chain would be taxed.  

The positive impact would be that the handset prices are expected to come down as the handset makers won’t be burdened with setting up state specific entities, thereby reduce the costs of transportation and logistics.

Thus, the proposed bill would also support the Make in India initiative in a way that it would augment the main idea of the scheme which is directed towards making India, a manufacturing hub. However, the current indirect tax regime has proved to be a hindrance to some extent for the manufacturing sector plus the flow of the foreign investment which can be overcome with the help of the GST bill. Thus, the bill would help in the positive uplift of the current scenario, in context to the initiative and accelerate the growth of the overall economy.

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