Large companies have the bandwidth to invest in the technology upgrades to support their ERP platform in the process of being GST compliant
From a small beginning of three services accounting for Rs 450 crore of tax revenue in 1994 to 120 plus services garnering Rs 211,414 crore in 2016, the Services Sector has contributed substantially to the exchequer of the Central Government. The dominant sector per se with an array of establishments employing largely unskilled people, it also accounts for 53.66 percent of India's overall Gross Value Added (GVA) of Rs 137.51 lakh crore.
This golden goose of the Central Government – tax revenue from the Services Sector – will be shared between the States and Centre, with effect from July 1, 2017 equally, according to a four-tier GST rate structure – 5 percent, 12 percent, 18 percent and 28 percent. The bulk of the services will be taxed at 18 percent, likely increasing revenues further. However, the sector is expected to witness a challenging period in the initial stages of the GST regime.
Dual GST framework poses compliance challenges
Under GST, the revenue collections are going to be shared between the States and Centre, with Maharashtra likely to be the single-largest beneficiary state. The Centralised Registration concept has been done away with, and state-wise registration and compliance will be initiated. Hence all taxpayers must pay taxes in the respective states where they operate from, irrespective of where they are headquartered. Multiple registrations for a pan-India operator, when compared to a Centralized Registration with only two half-yearly returns, is a big compliance burden.
Example: If a taxpayer is present in 29 states and 7 union territories, he shall file a whopping 1,404 returns in 36 places. Refer to the table below for details.
Under the GST regime, the location of the supplier and the recipient of services along with the place of supply is essential to determine whether the supply is an inter-state or an intra-state supply. It will be doubly challenging when there are bundled services of clearing, warehousing and forwarding services, banking and insurance services, financial products and leasing, works contract services and real estate services, wherein the pre-dominant object test has to be applied to determine the taxability of the supply.
For instance, when a construction company ABC Ltd does carry out projects in multiple states, the attribution for value of goods and services inter-state vs. intra-state itself is a challenge. Adding further to this segregation and attribution, if bundled services are offered for commercial & industrial construction and Erection & Commissioning, predominance test at each of the states and IGST billings will be more perceived, leading to valuation challenges. Can standard cost basis be a more appropriate and acceptable method for similar activities/ projects carried out across states and multiple works contracts simultaneously?
Banking & Financial Services, Insurance, Telecom, Airlines, Third Party Service Providers / sub-contractors, Transportation and logistics services will see a major impact in terms of valuation of the services, payment of taxes in each of the states they operate and complying with the filing of tax returns and audit.
The time of supply and attribution of value for services in case of a bisected or vivisected or continuous supply contracts is very critical to determine the date for taxability of the supplies. Transaction value shall be the price to be adopted when the transaction takes place between unrelated parties. However, if both the provider and receiver are related to each other, then cost based valuation method shall be followed. Adding to this, GST shall be payable under reverse charge by the recipient of services, if availed from goods transport agency, taxi or cab operator through e-commerce operators, sponsorship services and services received from non-taxable territory etc.
The following services sectors which cater to pan India will face a huge challenge in managing its tax compliance and tracking the Split vs. composite, Pre-dominant vs. incidental, Bundled vs. unbundled, Taxable vs. exempt, Transaction Value if price being the sole consideration vs. related party transactions & no consideration situations.
Input Tax Credit – Raising questionsBy retaining all the provisions made available under the Service Tax Rules, the interpretative disputes are going to remain and aggravate, given that there is a multiple state registration process in a decentralized environment from States to Centre looking through the data.
The sweeping definition of Services in Finance Act, 2012 that “any activity carried out by a person for another for consideration and includes declared services except few exceptions” brought every activity under the service tax net without leaving any scope for interpretation.
Under GST, there is lot more flexibility to avail Input Tax Credit, as it states that “any supply of services performed or agreed to be performed for a consideration by a person in the course or furtherance of business.” There is no direct nexus required between the Input Services and the Output Services. However, the “course of business or furtherance of business” shall put the brake and be restrictive, for use only by that registered taxpayer. For example, ABC Ltd.,’s branch A of TN holds a sales conference in a hotel in Bangalore. It may not be eligible to take Input Tax Credit if it does not have a registration in Mumbai, even if the ABC Ltd.’s branch B is situated in Bangalore.
The Input Tax Credit shall not be available if the services are used for any personal use or for the consumption by employees. The question arises – How will one segregate the personal angle to Partners or Directors or employees’ expenses?
On July 1, 2017 – the appointed day, every taxpayer who is registered shall be entitled to take credit of Input Tax within 90 days of the appointed day, submit a declaration electronically in Form GST TRAN- 1. Upon verification and approval only, the same shall be available to off-set against the Output Tax Liability.
With rate of tax increase and Input Tax Credit available getting deferred, the service providers might be put to hardship to increase working capital, under GST environment. The service receivers will clear the invoices only after verifying the same from the GSTN portal and taking Input Tax Credit, irrespective of the due dates mentioned in the contract.
GST – Access to technology
Since the entire GST ecosystem is an electronic-based upload and download of tax information, are we self-sufficient in terms of IT and bandwidth requirements?
Large companies have the bandwidth to invest in the technology upgrades to support their ERP platform in the process of being GST compliant, of course subject to errors in data entry. However, the big challenge in front of small and medium players who are mostly in the unorganized sector, is to upload invoices well before the 10th of the following month and ensuring Input Tax Credit for their service receivers by 15th of the following month. Not to mention that many of these establishments are in rural India.
The Government must come up with a simple and easy solution for migration and process follow-up. GSTN could mandate Suvidha Providers nearer to their place of business to support smooth transition into GST by these players, rather than leaving it open for them to spend on building an IT capability and infrastructure to comply with, which they are not used to.
Author is Senior Vice President – Global Taxation, Hinduja Global Solutions