The word most apt to describe the government’s efforts to bring in the goods and services tax (GST) has to be “relentless”. The sheer amount of negotiation in trying to get the constitutional amendment bill passed can leave the most determined practitioner overwhelmed, not least aggravated by the accompanying political shifts, which has often made it seem like a tightrope walk.
The Indian IT BPM (business process management) industry, a $150 billion one at that, is the front runner of services export—upwards of 70% share. While GST will simplify the existing tax regime, for the services sector in general and IT BPM in particular, implementation will have challenging consequences. It would not be unreasonable to say that likely disputes related to determination of place of supply, valuation of services among others, may put export competitiveness at risk.
Nonetheless, it is not to give the impression that we do not welcome the long-pending reform and much-awaited passage of the constitutional amendment, but to put forward certain suggestions, which would address some of the concerns with no adverse impact on revenue.
It is noteworthy that IT BPM is a dominant contributor to the country’s total export of services, and GST in the form proposed will bring about a very high degree of complexity in terms of paperwork, as evidenced by registrations, returns, refunds, and tax claims.
One must be mindful to not look at IT services through the same lens as goods. For instance, IT services are intangibles and can be, in fact most often are, provided remotely to one or multiple client locations, often supplemented with part of services delivered at client site. There is no physical movement of any commodity. Within India, typically IT services are provided across the country to recipients.
While contracting parties are usually two—the head offices of the service provider and the recipient—the delivery and use of services rendered may be at multiple locations/states.
As is the norm today, there are geographically dispersed teams with domain expertise. Therefore, to service clients, companies tap into multiple teams. Under the current framework, it is apprehended that multiple invoices will have to be generated, which is contrary to business practices.
Further, the impossible task of disaggregating and valuing services delivered across multiple locations by the service provider, with no visibility on the consumption and usage pattern internal to the organization, further aggravates the concerns.
Besides, decentralizing the tax administration even for central levies will adversely impact India’s Ease of Doing Business index ranking, and increase the cost of compliance as well.
There are two pillars of the GST reform—ease of doing business and empowering states to tax supplies within their respective area, i.e., destination-based tax. Fortunately, the two are not irreconcilable. Our suggestions are simple, and in fact, in some cases, a simple clarification under the model law provisions would address many of them.
Offer simplicity in compliance by establishing a single point of levy and collection for IGST (Interstate GST) and CGST (Central GST), where the central government continues to levy, collect and administer CGST and IGST. This will ensure a central registration offering a single window, and the states should be empowered to administer supplies made to their states through state GST registration.
Mitigate disputes and litigations by allowing for flexibility in determining the valuation of services, especially urgent for intra-company supplies, as well as allowing contracting parties to decide place of supply of services, along with a reliance on simple credit portability framework, for example, using a transfer document as is practised in the European Union.
There are provisions already in-built, which with some clarifications or extensions would enable implementation of our suggestions. With GST being a tax on transaction, we anticipate no revenue losses as for B2B supplies, the tax credit distribution mechanism has been defined under the GST framework.
Therefore, we meet the twin objectives of sustaining ease of doing business without either compromising on jurisdictional powers of the state or sustaining revenue loss.
In e-commerce, the introduction of tax collection at source is a matter of substantial concern. Technology enabled e-commerce platforms would not find it difficult to track information and they do so even now as much as they share information with the state revenue department. But an implication that e-commerce marketplaces offer avenues for tax evasion is contrary to the truth. There are other concerns on how to treat sales returns, one of the realities in e-commerce sales today.
Further, tax collected at source introduces working capital challenges for small vendors, who rely on e-commerce marketplaces to enhance their market outreach, thereby discouraging SMEs from leveraging such platforms. There are concerns on dual levy of GST for online aggregators that further add to the worries of e-commerce and digital entrepreneurs.
There is no doubt that GST on IT services needs to be thought through carefully so as not to adversely impact export competitiveness. Equally, it should not discourage businesses from adopting digital platforms, as any such effects would be in complete contradiction to the government’s Digital India and Start-up India focus.
The export-driven IT industry needs agility in dealing with overseas clients to maintain its global competitiveness. There is a need to deliberate on the concerns of digital businesses and the best ways to address them.
We look forward to the effective resolution of the concerns of the IT BPM industry by revisiting relevant provisions of the model law.