Will IT Industry Sink or Swim Post GST? An Analysis of the Sector’s Major GST Talking Points
While tax
incidence is set to decline, ease of doing business may suffer slightly.
TechSci experts analyse the outcome and impact of GST on the Indian IT industry
As July 1
2017 slowly approaches, there is almost a palpable sense of unease from certain
sectors in the Indian economy while other sectors openly rejoice at having got
a great deal from the get go; the IT industry is one that belongs somewhere in
the middle of the two. While there are certain pressing issues that GST will
create vis a vis IT, discontinuance of certain regulations may dampen the negative
impacts of the former. Experts at TechSci Research weigh the various pros and
cons:
One of the
biggest benefits to the GST is that the tussle between state governments and the
central government on the basis of software classification will cease to exist.
Basically, states consider software as goods, and demand VAT (Value Added Tax)
from IT industries; the central government on the other hand, considers
software a service and thus demand Service Tax. This obfuscating variance,
where many IT companies suffered double taxation, is set to cease post GST. The
prevailing Service Tax rate on IT services is around 14.5%. The recommended
revenue neutral rate under GST is about 15%–15.5%, which, though slightly
higher, avoids the cascading effect of VAT and Service Tax on IT service
providers. TechSci experts therefore, predict that the tax incidence will quite
possibly reduce post GST. In theory, TechSci Research estimates that, given
that the rollout is done in a structured and synchronized manner, the current
average tax rate of around 25%-35% will go down to 20%-25% after July 1.
While the
incidence of taxation is expected to go down, there are some other flaws to the
GST which have been pointed out by interested observers and researchers. For
one, a number of items such as printers, photocopiers, and fax machines
utilized extensively by the IT industry have attracted the highest tax rate of
28%. On top of this is the fact that GST is primarily a destination based tax; companies
under the GST regime pay a tax to the state where their goods or services end
up, not where the goods or services originate. This can be highly problematic
for IT companies, that provide services and solutions across the length and
breadth of India, more so than a company that manufactures tangible good and
who are at the mercy of time and distance. As per Nasscom president R.
Chandrashekhar, the model GST law would see as many as 111 points of taxation
as companies supplying pan-India services will have to seek registration in as
many as 37 jurisdictions—29 states, seven union territories, and the Centre.
There is no
doubt that there will be both positive and negative pressure exerted under the
new GST regime. While the tax incidence will go down, the nature of a
destination tax will imply that ease of doing business will fall somewhat. The
tangible impact of both, whether the negatives outweigh the positives or vice
versa, remains to be seen. TechSci Research experts have reserved judgement on
the overall effect of GST; it would be wise to wait for a quarter or even till
the end of FY17 before a strong conclusion can be derived from the quantum of
information present to us as of yet.
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