It is said that uncertainty in law is the greatest tyranny. Software or Information Technology sector has been struggling with uncertainty in taxation matters for long. Firstly an issue was raised whether software is a goods or service. The issue was always contentious. Other issue was raised as to whether Service Tax or VAT is payable on IT services. The issue could not be decided by most of the Information Technology companies, and they ended up paying both Service Tax and VAT. It was a procedural nightmare to get refund of input taxes paid on inputs used in export of software. Proposed GST provisions are likely to remove these uncertainties. GST provisions have clarified such issues and this article is an attempt in answer various issues under GST Framework.
1. Goods of Services:
Off the shelf or canned software is goods. Development, design, programming, customization, adaptation, upgradation, enhancement, implementation of Information Technology software shall be treated as service [Clause 5(d) Schedule II of the CGST Act]. Supply of keys, access code etc. shall be treated as supply of services.
2. 'Place of Supply' of software:
- Determine if the supplied software is goods or services, in terms of para (1).
- Place of supply for goods is the place where the movement of goods terminate [Section 10 of the IGST Act]. If there is any agent in between, location of the agent is place of supply of goods.
- Place of supply in case of services is location of the recipient. If location of the recipient is not known, it is location of the supplier [Section 12 of the IGST Act]
3. Payment of Tax:
If location of supplier and place of supply falls within same state, pay CGST plus SGST. If location of supplier and place of supply falls in different state, pay IGST.
4. Single Location Supplier:
When IT service provider is located at one place, and provide services from that place. The place can be registered under GST. That registered place shall be treated as location of the supplier. From that place, all taxes can be paid based on whether recipient is located within state (CGST plus SGST) or outside state (IGST). All inputs shall be received at that place and input tax credit shall be taken.
5. Supply from single location but development at different places:
Sometimes it happens that although outward supply is made from a single location, the service provider has different development centers at different location situated in different states. These different development centers at various locations can be also be registered. Input tax credit received at various locations may be taken there. At the end of the month these development centers can issue an invoice to the principal place based on month wise costing data of development center. The tax shall be paid on a value equivalent to the 110% of the cost [Rule 30 of the CGST Rules]. This way all input tax credit received at various locations can be transferred to the principal center from where invoicing is done. These credits can be used to pay GST on outward supplies.
In case of different centres in the same sate, single registration shall be enough, with declaration of other centres as additional place of business.
6. Import of Services:
Occasionally the IT service provider may import services from outside India. In such situations, on these import of services IGST shall be payable and full credit of IGST shall be available.
7. Export of Services:
Section 16 of the IGST Act places export of goods and services on the same footing. Export of IT services shall be treated as zero rated supply. The supplier can either export services after paying IGST and claim refund or can export services without payment of IGST under bond or under letter of undertaking.
Rule 96 of the CGST Rules provides for procedure of export of services. Any registered person availing the option to supply goods or services for export without payment of integrated tax shall furnish, prior to export, a bond or a Letter of Undertaking in FORM GST RFD-11 to the jurisdictional Commissioner.
Alternately services can be exported after paying IGST and refund of the taxes paid can be claimed after export, and receipt of bank realization certificate.
8. Anomaly in definition of export of services:
Two conditions have been imposed in the definition of export of services [Section 2(6) of the IGST Act], which shall create unnecessary hardship to the service exporters.
The first condition is receipt of payment in convertible foreign exchange. It is unfortunate and it appears that tax authorities are not aware of the fact that INR is a convertible foreign exchange. Many exporters prefer contract value in INR to protect themselves from vagaries of currency market. No such conditions are there in case of export of goods.
The second condition is even more unreasonable and illogical. It says that supplier of service and recipient of service must not be merely distinct persons. It is like saying that if a development center of TCS in India is supplying services to TCS in some foreign countries, it shall not be treated as export. Nobody knows why this condition is there. No such condition is there in case of goods. If Suzuki export goods to Suzuki outside India, it is very well an export.
It appears that Government has not been able to understand the basic premises of GST. If you want to tax services as goods, services must get all benefits goods are getting. There must not any distinctions between goods and services in case of exports. I hope service exporters shall raise the issue with GST council to eliminate this step-motherly treatment to service exporters.
Despite these anomalies, GST law brings certainty in taxation of Information Technology services. It shall be a great assistance to development of IT service sector.
The author is an advocate and can also be reached at firstname.lastname@example.org