Ever since the Constitution Amendment 101st Bill was passed in the parliament (on the 8 August 2016), businesses and consumers have been talking about the ramifications of Goods and Services Tax (GST). GST is a refurbishment of the existing tax system to make it more simplified.
The existing system of levying an excise duty, value-added tax, and central sales tax has been “taxing” to the consumer and to the businesses. GST abolishes all these various taxes and levies only one tax rate across the nation. More importantly the point of levy is supply. Supply or sale of goods and services includes transfer, barter, rental, lease, etc. For example, GST will replace a lot of direct and indirect taxes such as, Central Excise Duty, Service Tax, Countervailing Duty, Special Countervailing Duty, Value Added Tax (VAT), Central Sales Tax (CST), Octroi. Entertainment Tax, Entry Tax, Purchase Tax, Luxury Tax, Advertisement taxes, and Taxes applicable on lotteries. According to the GST, goods and services are divided into four tax slabs of 5%, 12%, 18%, and 28% with lower rates for essential items and the highest for luxury and de-merit goods that would also attract an additional tax percentage.
GST will also allow easy compliance with the already complicated income tax system in the country. Since it brings uniformity in the tax rates, businesses need not worry about setting up stalls in a tax-friendly area bringing in more competitiveness in the trade industry boosting Indian Exports. GST will also remove hidden costs of doing business since it removes cascading taxes.
Even though GST is expected to provide an economic growth, the GST council is yet to determine the rules regarding tax refund, registration, invoice debit and credit, the framework on input-tax credit, valuation. The proposed sales tax under the GST will also serve to reduce the current costs of production and boost the manufacturing sector. It is expected that most goods may become cheaper after the implementation of GST, however quite a few services will become expensive after the tax comes into effect. To name a few, services like Telecom, Insurance, Banking, Healthcare, Education and Transportation are set to become more expensive. Surprisingly, the greatest sources of revenue for the government, petroleum and alcohol for personal consumption are kept out of the GST gambit.
GST Impact on the IT Industry
IT services have been taxed under the “services” category at 15%, the onset of GST will see IT services being taxed in the 17-18% category thus enhancing the cost of IT services. This is how GST will impact I T industry for the end-customers who do not claim tax input credit.
It certainly gets tricky with Annual Maintenance Service Contracts or AMCs, traders, under GST, will be eligible to avail the credit of services. Currently, IT service providers can’t claim credits of quality including the assessment or deal charge spent on setting the IT infrastructure. Also, services charged by an IT service provider to a client who is a broker is an expense incurred for the IT service provider. Under GST, both the IT service providers and their clients will be eligible to claim full credit of GST. This is expected to eliminate the cascading effects of the present tax structure. In the eCommerce space, the cascading tax will most certainly get stuck with the platform providers if they do not update the platform. For eCommerce traders, the GST is expected to increase administrative costs.
Also, since e-tailers have hundreds of sellers on their platforms, it significantly increases compliance burden. Small sellers will face cash-flow issues and will claim for refunds on the tax paid on inputs, which the eCommerce platform may not support. The tax collection at source (TCS) guideline under GST will increase the administration and documentation workload for eCommerce firms.
Triggering financials transformations across all major industries, the implementation is just a couple of months away. If you are a business, it is time to get in touch with experts and see if you need to enroll for GST. The accounting will certainly change, more importantly this may also be an opportunity to look for new business ideas.
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