GST will be a game changer for the entire nation, but will it really help services sector? Bhavesh Jain, CFO – South Asia/North America/UK & Head – Global Finance Shared Services at IDP Education, wonders.
THE Proposed introduction of the Goods and Services Tax (GST) is being rightly termed as one of most important and landmark indirect changes which will be ushered in India. Through GST there is a potential to substantially restrict massive cascading impact of indirect taxes levy as it enables combining of central and state tax levies, which the current system does not allow, and thus does not enable pass through of input credit of taxes. Introduction of GST will enable higher consumption, decision on production and services availability based on proximity to consumers rather than tax arbitrage reasons. It will be impacting different sectors in varied ways.
There is no doubt that manufacturing sector will be benefitted with positives of GST, as it will cover big part of tax base for them, but thinking that benefits will be similarly extrapolated to services industry too, may be dragging discussion on benefits too far. India’s dual structure of GST will now enable both Centre and state to levy GST on common base, thus introducing state impact on services industry, which is not the case right now. Across India, there is central levy of tax on the service industry, i.e., service tax which is independent of the business model, whether intra state or inter state. However, under GST framework the law requires the tax payer to pay CGST (central GST) and SGST (state GST) and in case of inter state sale IGST (Integrated GST). This will bring to picture a complexity which did not exist till now for services industry and therefore it is important to decipher impact on it in detail.
1. Multi-State operations to have complex compliance management vs. current centralised compliances under service tax regime: The services industry is designed to manage centralised compliances under service tax regime. Under the GST regime, dual structure of levy – CGST and SGST – will have to be paid depending upon the state jurisdiction of service provided as per Provision of Place of Supply Rules. This will essentially become more difficult for companies which have pan India presence as they may be required to have multiple registrations basis their presence in specific states. Such companies will also be required to split their GST payments across the states. For companies with heavy online revenue collection and offline service delivery concept at decentralised state levels, there will arise multiple other challenges. For example, for a company that has centralised online order booking portal with servers in one state and provides services in another state (event management) and has presence of customers in third state. Place of Supply Rules interpretation is key to this (draft of the same is yet to be released in public domain). Each state’s compliances will add to cost structures. Hence, management of state level compliances shall become a challenge for the service sector. With this state-wise compliance under GST, Place of Supply Rules may throw its own hidden or unexplored challenges.
2. IT system challenges: From IT perspective, every company will be obligated to have a robust IT system in place as there will be a need of high level customisation or patch addition to make the existing model GST compliant. Under the proposed structure of GST, state-wise output GST liability and input GST credit register will be required to be maintained vs. current centralised structure. It would be extremely difficult for services companies to manage this without strong IT systems, which may help them to capture output and input GST levy state wise at transaction level itself. This will entail a preliminary but astronomical planning at designing stage of IT system along with considerable investment into the existing IT systems to make it in sync with the GST mandate. IT system will be required to support multiple GST returns, to generate invoices which are GST compliant (subdivision of tax into three segment of CGST, SGST and ISGT) and capture input taxes as well as output liability for all such states where service units of the companies may be required to register. This will lead to substantial complexity in IT solutions. This differs considerably from the current system followed by any service industry.
Facts & Trivia
Qualification:Chartered Accountant, ICAIPast Experience:Delphi Automotive Systems Private Limited
3. GST credits: With the set off of input GST credit vs. output liability in same state, there can be high level of mismatch between inputs credit of GST in one state vs output GST in another state as against the current service tax input credit set-off procedure which does not need statewise differentiation. To address this anomaly, the service industry will be forced to realign the terms of its existing/new commercial contracts in a way which can help it in not accumulating the GST input credit in one state. It is important for any business model to be cash conscious, thus accumulation of input credit in one state while paying output liability in another state, will surely impact cash flow in big way and needs to be taken care of. Even pricing structure will need revisiting and supply chain will be impacted in a big way.
4. Higher rate of GST: The suggested rate of GST is in the range of 17–19 per cent. The proposed GST rate will impact services, which are currently taxed at a rate of 14.5 per cent. Initial impact on consumers will be substantial till ultimate aim of GST, i.e., only taxing value addition at all stages, is understood by each intermediary in production and service delivery chain.
5. Challenges related to initial transition: Multi-state registrations for services industry vis-à-vis centralised registration currently, changes in reporting structures vs. current set procedures, accumulated credits of service tax for exporting units, etc., will add to initial challenges. What happens to long-term services contracts and revising existing framework of service delivery, among other things, will need attention of all in a company, especially CEO and CFO, as GST cannot be labeled solely as a tax change. It will encompass changes across all functions and need a top-down driven support to tackle it.
These are some of the factors which will render complexities for services industry under the proposed GST regime and may reduce ease of doing business on overall basis for this important sector in economy contributing nearly 60 per cent to Indian GDP. When on the one hand there is massive focus of government on improving and bringing in ease of doing business in India, at the same time to bring in complexities into the operations of services sector may not turn out fruitful for the overall growth of the service sector.
Therefore, serious efforts are required to reduce complexities for services industry under GST framework like acceptability of centralised registration for state GST compliances, clarity in Place of Supply Rules with respect to inter-state transactions, calibrated increase in GST rate vs. current service tax rate, etc.
Whether this contrarian view on GST is a false alarm or a wakeup call – only time will tell.