Software sector has been struggling with uncertainty in taxation matters for long. Firstly the issue was raised whether software is a goods or services. 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 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. It is said that uncertainty in law is the greatest tyranny.
Clause 5(d) Schedule II of the CGST Act provides that development, design, programming, customization, adaptation, upgradation, enhancement, implementation of Information Technology software shall be treated as service. This explanation removes the uncertainty as to whether such software is goods or service. As Information Technology software has been declared as service, place of supply of IT software can easily be determined. Place of supply of software shall always be the location of the recipient.
These two provisions remove all uncertainties from Service taxation arena. Various issues can be determined using these yardsticks.
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.
Supply from single location but development at different places:
Sometimes it happens that although outward supply is made from a single place, the service provider has different development centers at different location. 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. This way all input tax credit received at various locations can be transferred to the principal center. These credits can be used to pay GST on outward supplies.
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.
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.
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.
Conclusion: 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 email@example.com.