Passage of the Constitution (122nd Amendment) Bill, 2014, is a historic leap for the country, as it would herald a new regime of indirect taxation of goods and services tax (GST).
With an eye to make GST a reality by 2017, the government had released a draft of the model GST law in June. GST in its present form mandates a dual levy structure, with the Centre being empowered to levy Central GST (CGST) and states empowered to levy State GST (SGST) on intra-state supplies of goods as well services, while GST being levied on supplies in the course of inter-state trade or commerce, which as well covers imports into India.
With the services sector accounting for 60 per cent of the GDP and IT services forming a significant part of the segment, the GST law aspirates a renewed impetus to it by addressing various indirect tax issues currently plaguing the sector.
Foremost, the model GST law attempts to address the historical dispute of multifaceted indirect taxation of IT software.
Clear articulation intangibles as a ‘service’ is welcome and should put to rest the historic dual treatment of software and other intangibles (various types of digital downloads, licences, trade mark etc) as both ‘goods’ and ‘services’.
Similarly, the specification of works contract supplies as well as supplies of goods without a transfer of title as a supply of services is welcome; this should address the current overlap in their taxation under VAT and service tax laws.
The place or state of supply of services is to be determined by specific rules or proxies for specific types of services.
Based on the draft rules, it appears that companies engaged in the supply of services on pan-India basis shall be required to seek registration in every such state from where they provide services with the GST on the supply being paid based on the place of supply determined by the proxies. In such a scenario, the value of supply in each state will have to be identified and valued for the discharge of GST. It is also possible that there may be a requirement to correlate the input tax to the output tax liability at a state-specific level.
Under the current regime of taxation, services are taxed by the Central government with states having no right to tax the same. However, under the GST regime, with both Centre and states having simultaneous powers to tax services, the services sector would now be scrutinised by the state authorities as well, which is significant departure from the current scheme.
While the model GST law has attempted to address various issues plaguing this industry, it does not seem to inspire required level of confidence to the service exporting community, as it appears that service exporters would need to file for state-specific refunds under GST.
It is hoped that some solution around this is emerged with a centralised approach. Also, there persists no clarity on fate of benefits currently afforded to the SEZs.
It is hoped that the proposed lower rate of GST shall apply to IT products as well. It is also expected that the GST law provides a comprehensive HSN based ‘list of goods’ on which such lower rate would apply, which is consistently applied across states, as to in order to avoid disputes and litigation. In this context, it would be worthwhile to note that there has been intense litigation in the past pertaining to classification of goods subject to lower rate, particularly in the IT industry with a number of IT products being differently classified in various states.
With the government having been successful in getting the Bill off the ground in the Upper House, it is expected that the government would cover grounds necessary to ensure the GST law sees light of the day sooner than later and in a manner easily implementation to the services sector.