This blog is with reference to blog dated on 11th March, 2017 as per latest govt. notification.
The old regime does not clearly distinguish between goods and services, leading to many instances of double taxation.There are concerns about increased compliance burden, and on the other side, there are expectations of simplicity and excellent features such as input tax credits. But how exactly will GST impact the service providers.
- Software is often treated as a good and as a service. The new regime clearly distinguishes goods from services, and also defines principal supply, composite supply, and mixed supply separately.
- When an individual books a Rajdhani train ticket which includes meals, it involves a composite supply wherein the ticket and the meals cannot be sold separately. Since the transportation of the passenger is the principal supply, the rate of tax will only be charged on the ticket.
Credits of CENVAT, Repairs, and Maintenance - under Previous Indirect tax regime, VAT and CST paid on the inputs are added to the costs of the service provider and thus increase the cost of services for the end customers. However, under the GST regime, a service provider would be able to claim input tax credits as IGST and SGST/CGST.
Similarly, under the previous regime, services providers could claim credits for only the input services. However, under GST they would be able to claim credits for the repair and maintenance costs of machinery and equipment as well.
Elimination of Double Taxation in Works Contract - A works contract is complex under pervious tax regime. In this, there is a transfer of goods as a part of the service contract, which means the invoice contains both the value of the services provided and the value of goods/materials used.
As a works contract involve both goods and services, it attracted both VAT and Service Tax both which are levied on 70% of each (total becomes 140%). GST would consider both as just a supply of service, and thus a single tax will be levied.
Input credit facility - VAT payment under the old regime was not eligible for setting off against output liabilities. The input credit facility is now made available to service providers as well, wherein tax paid on any inputs can be claimed and adjusted against tax paid on output. This will result in direct cost savings for service providers and may even offset the expected rise in end pricing. For example, an AC fitter who paid tax on the raw material for AC fittings (pipe, tape, solder etc.) will be able to claim that tax, and end up spending less on the cost of fitting the AC. This cost advantage can spill over to the customer as well.
Intra-state service providers - Due to the state level taxes being subsumed, it will become easier for service providers that operate within the state to know their tax obligations better. Such companies can move away from multiple tax calculations. For example, a CD with software incurs Excise, Service Tax, and VAT under the old regime; this is simplified to one unified rate under GST, making tax calculations and administration easier for intra-state service providers.
High Rate of Taxes -The service tax in the previous regime is 15%. However, in GST there are four tax slabs- 5%, 12%, 18%, and 28% which is applicable to high-end restaurants, hotels, race club service providers etc. Thus, these service providers have to pay a high rate of tax.
Returns Burden - Service providers will need to file as many as 37 returns every year from each of their service locations. This is a far cry from the current regime under which most providers have to file only 2 returns per year.
No Centralized Registration - There is no concept of centralized registration for business locations in different states. Thus, a service provider will need to get his business registered for every state they have a business facility in.
Anti-Profiteering Risks - GST came with an “anti-profiteering” clause which empowers the tax inspectors to take measures against businesses who don’t pass on the benefit of input tax credits to their customers. However, it’s possible that the officers misuse the same and create a hindrance for the businesses instead.
Composition scheme for Service Provider
Businesses dealing only in goods can only opt for composition scheme. Services providers have been kept outside the scope of this scheme. However, restaurant sector taxpayer may also opt for the scheme.
Registration for Service Providers
State-wise registration will be required: In the old regime, a service provider could operate with a single place of registration, since services were taxed only by the Central government. For example, if an IT services provider was present across states, they could carry out tax and delivery transactions from the main location. However, now a service provider that is offering services across states must register each place of business separately in each state. This is because the new GST regime entails taxation of services at “location of service recipient”, which will differ for different states. This means service providers will need to register afresh in new states and then carry out tax transactions separately in each state. For example, an IT company like TCS that has a widespread presence across states will need to decentralise service delivery
Return filing: The old service tax system required two half-yearly returns for services businesses. Under GST, this has been replaced by a number of returns provisions, depending on the type of taxpayer and the type of business. Since all these returns are required to be submitted online through a common portal provided by GSTN, the process is simplified and will help the government weed out regular defaulters. This in turn will result in a major boost in the contribution of the Service sector to the GDP.
GST offers clear benefits to the services sector, and while some of these measures entail additional cost and effort in the short term, businesses can look forward to simpler operations with the new taxation laws.