Description of Supply
|Sl. No.||Chapter||Nature of Supply||Description||Rate|
|1.||8443||Goods||Printers which perform two or more of the functions of printing, copying or facsimile transmission, capable of connecting to an automatic data processing machine or to network printers; copying machines, facsimile machines; ink cartridges with or without print head assembly and ink spray nozzle||28%|
|2.||8523||Goods||Discs, tapes, solid-state non-volatile storage devices, “smart cards” and other media for the recording of sound or of other phenomena, whether or not recorded, including matrices and masters for the production of discs, but excluding products of Chapter 37||18%|
|3.||8528||Goods||Computer monitors not exceeding 17 inches, Set top Box for Television (TV)||18%|
|4.||8528||Goods||Monitors and projectors, not incorporating television reception apparatus; reception apparatus for television, whether or not incorporating radio-broadcast receiver or sound or video recording or reproducing apparatus [other than computer monitors not exceeding 17 inches]||28%|
|5.||8529||Goods||Parts suitable for use solely or principally with the apparatus of Headings 8525 to 8528||28%|
|6.||99733||Service||Licensing services for the right to use intellectual property and similar products||18%|
|7.||99831 (998314/5/6/9)||Service||Management consulting and management services; information technology services||18%|
|8.||9984||Service||Telecommunications, broadcasting and information supply services.||18%|
A clarification from the Government on the settled position of law that pre-packaged or canned software which is put on a media is in the nature of goods [Tata Consultancy Services vs. State of Andhra Pradesh [2002(178) ELT 22(SC)] would be highly appreciated. The IT industry, otherwise, is looking at a hassle-free tax treatment on supply of services moving from a 15% rate of tax to an 18% rate of tax on services. IT hardware firms are generally unhappy with certain items like monitors, printers, fax machines being taxed at the highest rate i.e. 28%.
Cross charges and cost allocations between units of the same entity having separate GST registrations will be treated as ‘supply’ under the GST regime and will be liable to tax based on the location of the units. While this provision is in line with the consumption-based taxation policy, the cause for concern is the fact that the valuation for such transactions will now have to be determined in line with the valuation rules, which require the open market value to be considered as a general principle. However, the rules make an exception to the determination under open market value method and provides that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of supply. Indicatively, the valuation in such a case cannot be questioned. Nevertheless, this is sure to open a Pandora’s box and will trigger tax disputes and entities need to be cautious.
c. Procurement from un-registered persons
Every inward supply of goods/ services effected from unregistered persons will be liable to GST under Reverse Charge Mechanism in the hands of the recipient in terms of Section 9(4) of the CGST Act, 2017 (subject to exemption of ₹ 5,000/- per day per supplier). For e.g., maintenance services, housekeeping services, purchase of office stationery etc. procured from an unregistered person.
Currently, all goods purchased from unregistered dealers under the VAT laws are liable to tax under reverse charge mechanism whereas only specific services (whether or not from a registered person), are taxable under reverse charge mechanism under the service tax laws. The IT industry, amongst others, would also face the challenge of identifying procurements from unregistered dealers and discharging appropriate GST on reverse charge mechanism on the same. Depending on the quantum of taxable procurement from un-registered persons, this will have an impact on the working capital of the IT companies since the taxes under reverse charge mechanism need to be discharged in cash only and the credit of such taxes paid, if eligible, can be claimed only after payment to the tax authorities.
d. Nature of Supply
The GST law has given birth to concepts of ‘composite supplies’ and ‘mixed supplies’, that were hitherto not present.
‘Composite supply’ is a supply consisting of two or more taxable supplies of goods/ services/ both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply. A principal supply would be the supply which constitutes the predominant element of a composite supply. Composite supplies will be taxed at the rate applicable to that of the principal supply.
‘Mixed Supply’ is a supply consisting of two or more individual supplies of goods/ services/ both, or any combination thereof, made in conjunction with each other for a single price where such supply does not constitute a composite supply. Mixed supplies will be taxed at the rate applicable to the supply attracting the highest rate.
The introduction of concepts like composite supply and mixed supply will expose the transactions of an IT industry to a whole new angle of classification which will impact the rate of tax, place of supply and other relevant provisions of the law and probably, litigation. Certain examples of supplies that require attention in this regard are:
1. Supply of software on CD and licence to use same – If the agreement is for licensing of software, the principal supply could be licensing
2. Supply of Tally (a packaged software) with 5% – 10% customisation
3. Supply of Laptop with carry case for a single price or Supply of Laptop and carry case given free.
e. Place of Supply
The principles for determining ‘place of supply’ are laid out in Section 10 to Section 14 of the IGST Act. The provisions of place of supply are largely similar to the Place of Provision Rules, 2012 (PoPs) existing under service tax law. Under the GST regime, broadly, the place of supply of goods would be the location of the goods at the time of delivery to the recipient and the place of supply of services would be the location of the recipient. ‘Location of recipient’ in cases where supply is received at more than one establishment, the location of the establishment most directly concerned with the receipt of the supply will be considered as the ‘location of the recipient’. The determination of the location on such a basis would be very subjective and prone to litigation.
IT Industries usually cater to a wide customer base across India. However, service tax, being a central levy, the need for determination of place of supply in each state of supply did not arise (except identification of whether the services are provided in the taxable territory/ non-taxable territory). Going forward, place of supply will have to be determined for every supply effected in order to classify them as intra-State supply (liable to CGST + SGST) or inter-State supply (liable to IGST); as entities will have to charge the appropriate taxes based on the nature of supply.
For instance, if the company provides ITeS from Bangalore to a recipient located in Noida, the company must indicate on the invoice that the place of supply is ‘Uttar Pradesh’, and the recipient would be eligible to utilise credits of integrated tax arising on this supply to discharge tax on its outward supplies from Noida (and not from any other location, even if it has operations in other locations).
The importance of identifying the ‘place of supply’ cannot be undermined and an error in determining the ‘place of supply’ would lead to payment of wrong type of tax. This is of critical importance since payment of wrong type of tax is equal to non-payment of tax itself and such tax wrongly paid has to be claimed as a refund.
f. Time of Supply
Sections 12 and 13 of the CGST Act, 2017 lay down the fundamental principles for determination of the time of supply. Under the GST regime, ‘time of supply’ of services is the earlier of the date of receipt of payment or the date of raising the invoice. Further, supply is deemed to have been made to the extent covered by invoice/ payment.
It is relevant to note that in case of continuous supply of services (i.e., services provided continuously for more than 3 months with periodic payment obligations), invoices need to be raised based on the due dates for payment specified in the contract (whether or not received). This will have an adverse impact on working capital of the entity. A more scientific approach would be to identify milestones in the contract, wherever possible, and raise invoices accordingly. This would put to rest the ambiguity of identification of the date of receipt of services, which is a mandatory requirement for claim of input tax credit (in the hands of the customer).
For instance, if the company provides Annual Maintenance Services (AMCs), the agreement may specify a billing cycle based on dates or events – in such a scenario, the tax invoices need to be raised based on the agreement, whether or not consideration is paid as on that date.
g. Export of Services
The concept of export of services is broadly borrowed from the provisions of the current Service Tax law. Under the GST regime, export of service will be treated as ‘zero-rated supplies’. Accordingly, while no tax would be payable on such supplies, the exporter will be eligible to claim the corresponding input tax credits. It is relevant to note that the input tax credits would be available to an exporter even if the supplies were exempt supplies as long as the eligibility of the input taxes as input tax credits is established.
The exporter will be eligible to claim refund under the following situations:
• He may export the services under a bond/ Letter of Undertaking, without payment of IGST and claim refund of unutilised input tax credit; or
• He may export the services upon payment of IGST and claim refund of such tax paid.
Furnishing a bond/ Letter of Undertaking is an additional requirement under the GST laws for export of services without payment of tax. Status holders can furnish a Letter of Undertaking to seek IGST exemption on exports, whereas other exporters will have to furnish a Bond to claim the exemption. In comparison, during pre-GST regime, export of services was exempt and was permitted without payment of any duty. At a time when the Government is working hard towards ease of doing business in India, these additional requirements needs another relook.
While all supplies made to a SEZ unit/ developer will be treated as an inter-State supply under the GST law in terms of Section 7(5)(b) of the IGST Act, 2017, such supplies made to SEZ unit/ developer will be treated as zero-rated supplies. Resultantly, the suppliers making any supply to SEZ unit/ developer will have two options:
1. Supply to SEZ unit/ developer under a cover of bond/letter of undertaking without charging IGST and file a refund claim of corresponding Input Tax Credit; or
2. Supply to SEZ unit/ developer by charging IGST, and then file a refund claim for such IGST paid.
Thus, unlike the previous regime, the onus of filing refund has been shifted from SEZ units to the suppliers and the now, the suppliers will be required to undertake the procedures of claiming refund for such supplies.
All upfront exemptions are expected to be discontinued under the GST regime. In turn, the units will be entitled to claim refund of taxes paid to the extent attributable to exports. In this breath, it is relevant to note that, refund of unutilised credits is expected to be made available to exporters as a whole and as such, STPI units will not be provided with special exemptions under the GST law. This will definitely have an adverse impact on the fresh registrations under the STPI scheme and the existing STPI units may opt out of the STPI scheme after undertaking a thorough cost-benefit analysis of compliances, additional benefits etc.
i. Input Tax Credit
The term ‘input tax credit’ has a wider meaning compared to the existing laws and means tax paid on goods or services or both used in the course or furtherance of business, and includes tax paid on reverse charge basis. However, input tax restrictions (as prevalent in the existing laws) will continue like food and beverages, outdoor catering, insurance, rent-a-cab (critical to the IT industry) and other staff related expenditure.
The requirement of nexus of input service with the output service (prevailing under the service tax law) for claim of credit has been replaced with the condition that the input should be used/ intended to be used in the course/ furtherance of business. This provides a much needed relaxation to the IT industry and paves the way for a smooth claim of credits that leaves less room for ambiguity and litigation for claim of credits.
Another major positive to the IT industry under the GST regime, would be the availability of credit on inputs used in the business. Currently, the service providers are not permitted to claim VAT credits on the inputs purchased. Under the GST regime, these entities would be entitled to claim input tax credit on all eligible goods and services, alike. Considering the huge investment made by such entities on computers, software packages, furniture, etc., the benefit of input tax credit in respect of goods would be significant.
In a major step to ensure compliance and plugging the loopholes in the existing tax system, 4 cumulative preliminary conditions for claim of credit have been prescribed:
a. The recipient should possess a tax invoice/ other tax paying document;
b. The recipient should have received the goods or services;
c. Tax on the supply of goods or services have been remitted to the Government, either by cash or credit (This has brought the onus of ensuring payment of tax on the supply on the recipient by means of a matching principle)
d. The receiver has filed valid returns
The new condition prescribed for entitlement of credits i.e., the receipt of goods/ services, will toss up many issues. Service being an intangible activity, the determination of stage of completion of services would prove extremely difficult. Further, in the case of supply of software, licensing, AMCs etc.. where the service is received continuously over a period of time but the payments are released based on timelines agreed in the contract, it would be extremely difficult to prove that the said services have been received.
Further, the recipient of service is burdened with the responsibility of ensuring that the tax on the inward supply effected by him (on which input tax credit is claimed) has been remitted with the department. This would mean the recipient has to validate the fact that tax has been remitted, every single time he is desirous of claiming input tax credit. Considering the volume of transactions and the timelines prescribed for the returns, it would be extremely strenuous on the recipient to ensure the same.
Where the contract with customer provides for recovery of certain expenses like conveyance, food etc., the recoveries made by the supplier will be included in the transaction value in the hands of the supplier while discharging tax. It remains to be seen whether such inputs, which are in-eligible in terms of Section 17(5) of the Act, will be eligible as credit as they are subjected to output tax by way of inclusion in the transaction value.
j. Input Service Distributor
Certain services, used commonly by few units of the entity located in different locations, are usually billed at the head office itself like auditor fees, professional fees etc. In such a case, the head office is not eligible to claim credit to the extent it relates to the other units and the head office will have to obtain an ISD registration to distribute the credit to the relevant offices to whom the credit pertains to, in a proportionate manner. It is relevant to note that the concept of ISD will gain immense importance in the GST regime vis-à-vis the existing laws, since the concept of centralised registration is done away with. Therefore, if credits relating to units in Chennai and Hyderabad are billed to the head office in Bangalore, the Bangalore unit will have to obtain a separate ISD registration to distribute the credits to such units under a cover of an ISD invoice as the units in Chennai and Hyderabad will be treated as distinct persons under the GST regime.
Under the GST regime, IGST credit can be distributed as IGST, CGST credit as CGST/ IGST and SGST credit as SGST/ IGST only, among the eligible recipients. This can be used by the entities to their benefit to distribute credits among their development centres. The entities must exercise caution to ensure that these provisions are applied to common input services only and the credits distributed thereon do not exceed the available credits.
Every supplier is liable to obtain registration under the Act in the State from which he makes a taxable supply of goods or services or both if the aggregate turnover of the person breaches the threshold limit of ₹ 20 lakhs (₹ 10 lakhs in special category States). Hence, entities will now require to obtain registration in each State where supplies are being effected.
This will increase the compliance cost of the entity as the compliances will now move from a centralised system to a more comprehensive decentralised system. Presently, under the service tax law, a service provider is permitted to obtain a single centralized registration (in respect of businesses across India) provided they have centralized accounting and billing. The units of the entity, spread across India, are to be declared as an additional place of business. This option largely opted for by entities in this sector, will not be available henceforth, as going forward, State-wise registration will be mandatory.
Separate State-wise registrations are a requirement of law and would necessitate that many number of returns to be filed by the units of the entity located in various States. Apart from the monthly returns that are mandated under the GST law, annual return and ISD return will also be required to be filed. The monthly return to be filed by a person in Form GSTR-3 (by 20th of the succeeding month) is further broken down into Form GSTR-1: Details of outward supply (to be filed by 10th of the succeeding month) and Form GSTR-2: Details of inward supply (to be filed by 15th of the succeeding month).
For e.g.: ABC Technologies, operating in 8 States in India is currently required to file 2 service tax returns annually (half yearly basis). Under the GST regime, ABC Technologies will have to file the following returns:
• 96 monthly returns (12 returns in a year in 8 States)
• 8 annual returns (1 per registration)
• 1 ISD return (assuming 1 unit has ISD registration)
The compliance costs involved in filing of the returns are thus expected to increase. Requirement of uploading the invoice-level details on a monthly basis, which is heavily cumbersome, is an added responsibility on the person filing the returns which warrants the entities to have a robust IT framework and a qualified team to cater to the return requirements.
In this article, the returns to be filed in Form 3B has not been discussed.
As discussed above, the invoicing pattern of the entities will have to undergo a radical change to provide for charging the appropriate tax i.e. CGST + SGST (on intra-State supply) and IGST (on inter-State supply) at every stage of raising the invoice. Further, the GST law mandates the maintenance of a consecutive number for all the invoices raised by one entity under a single registration.
Inward supplies effected from un-registered persons would be liable to tax under Reverse Charge Mechanism (RCM); thus, entities will have to issue a tax invoice in such cases also. This is a huge deviation from the current service tax law where only services were liable to tax under RCM based on the nature of service only and not based on the registration status of the supplier.
n. Transitional Issues
The transitional provisions play a vital role in transiting from the existing VAT/ Excise/ Service Tax laws to the GST regime. Primarily, no transitional credit will be allowed if:
• The said credits are not eligible under the GST law; and
• The returns under the existing laws are not furnished for the last 6 months
No tax is payable under the GST regime to the extent tax is leviable on services under the existing laws. Further, all refunds pertaining to taxes paid under existing laws would be processed and disposed as per the provisions of existing laws itself. Any refund found eligible would be paid in cash and if any refund is fully or partially rejected, such amount of claim shall stand lapsed. Appeals in relation to such rejection will be disposed under the existing laws itself. Pending refund balances cannot be carried forward as credit under the GST law at any cost.
o. IT Infrastructure
IT infrastructure is one of the basic requirements for successful implementation of Goods and Services Tax and it should be well in place before the implementation of GST in India. At present, the e-filing of returns (and forms w.r.t. State laws) under VAT, excise duty and service tax laws is a bitter experience for the taxpayers, especially around the due dates. This is despite the fact that invoice level details are not a mandatory requirement, which is a requisite under the GST law.
Further, input tax credit is available to the recipient based on pull-push mechanism only, thus requiring monitoring the details furnished by the supplier, probably on a real-time basis. Considering the volume of transactions, invoice level details that need to be uploaded, reconciliations required etc., a robust IT infrastructure would be a basic necessity.
The IT industry can rejoice on various fronts like removal of dual taxation and cascading tax effect on dealers, fungibility of input tax credit. However, while the law has come a long way from the Model GST law released in June 2016 with a promise of a simpler, uniform and efficient tax system, the concerns of the industry are primarily directed towards classification of goods and services, determination of nature of supply, refund procedures and ease of doing exports.