In the previous tax regime in India, there were “n” number of compliance obligations as there were multiple taxes. However, the GST has simplified the compliance obligation as it has subsumed all the indirect taxes.
Tax Rates Under the Previous Regime
In the previous regime, the IT service provider had to pay both Value Added Tax (VAT) and Service Tax. Where the rate of VAT was 5% and Service tax was around 15%. Moreover, in the case of manufacturing IT product excise duty was also applicable. Let us understand this with an example:
In case of software comes on Pen-drive. Then in such a case, the taxpayer used to pay 3 different taxes:
(i) Excise duty for manufacturing
(ii) VAT for sale; and
(iii) Service tax for rendering software service
However, this tax-structure has been changed after the implementation of GST.
Impact of GST on IT Sector
The GST rate on providing software services by the software companies will attract 18% GST. Moreover, it shall be noted that the cost of purely software services has been increased under GST. However, the compliance procedure has been eased on the other hand.
Availability of Input Tax Credit (ITC)
In the previous tax regime, the taxpayer paying Output VAT was not able to claim credit for the service tax paid on Annual Maintenance Contract (AMC) taken for their hardware and software. However, this has changed under GST, as it has subsumed all other indirect tax structures, now the taxpayer can claim Input Tax Credit easily.
Let us understand the same with an example, Mr. X sells cardboard cartons. He has 10 computers in the office for which he pays AMC of Rs. 10,000.
|Particulars||Previous Tax Regime||GST Regime|
|Sale of Cardboard cartons||2,00,000||2,00,000|
|VAT @ 15% (Approx)||30,000||–|
|GST @ 12%||–||24,000|
|AMC of Computers||10,000||10,000|
|Service Tax @ 15%||1,500||–|
|GST @ 18%||–||1,800|
|Output Tax Liability||31,500||25,800|
In addition to this, the huge capital amount invested by the IT companies on buying hardware can also be adjusted against the tax paid on services and other miscellaneous repairs.
Export of IT Services
The export of IT services is an important source of foreign exchange, as India is one of the biggest exporter of IT Services across the world.
Under the GST regime, the exports come under zero-rated goods category and the taxpayer can take a refund for any input taxes paid by him or her.
It shall be noted that the place of supply in case of export of service is the location of the recipient (if the location is known). So, it is the responsibility of the exporter to show the address proof of the recipient in case the GST authorities ask for it.
Here is the list of IT companies that falls under the default rule:
(i) Software development companies
(iii) Software consultancy companies
(iv) Software support or maintenance
Apart from the above-listed companies, it also includes IT companies that provide intermediary services.
The Bottom Line
The bottom line is that the GST rate of services may have increased t0 18%, but the IT industry is surely enjoying the GST benefit. As under the GST regime, the IT sector has seen an immense boost in the sale of software. Factors like availability of Input Tax Credit (ITC) have brought down the operating cost of IT companies that has, in turn, increase profitability.