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GST Bill Impact on Services

GST is India's 'biggest tax reform. The government has won a political consensus on the much awaited goods and services tax (GST) bill. The GST will create a common market for over 1.25 billion people and will affect the market cost.

GST has been envisaged as an efficient tax system, neutral in its application and distributionally attractive. The advantages of GST are:

  • Wider tax base, necessary for lowering tax rates and eliminating classification disputes
  • Elimination of multiplicity of taxes and their cascading effects
  • Rationalization of tax structure and simplification of compliance procedures
  • Harmonization of center and state tax administrations, which would reduce duplication and compliance costs
  • Automation of compliance procedures to reduce errors and increase efficiency

Here we discuss some key issues and challenges market and service industry have to face and how they can overcome to them.

At the present time services are taxed only by the Central government with the option of the facility of a centralised registration. In fact, most service providers with a multi locational presence have opted for centralised registration and enjoy availing input credits, issuing output invoices, discharging service tax liability, undergoing audits and applying for refunds from a chosen single location. So after the GST applied, a transition into a GST regime that entails taxation of services at the State level can be expected to pose some level of compliance challenges for the industry and administrative challenges for the Government.

The place or State of supply of services is expected to be determined by specific rules for specific types of services. All the companies those are engaged in the supply of services on pan-India basis shall be required to seek registration in every such state from where they provide services with the GST on the supply being paid based on the place of supply determined by the rules.

So for example if an IT company that have offices across different Indian States, comes into an outsourcing contract for managing the IT systems of all branches of an insurance company, it is customary that only one contract would be concluded between the head office of the IT company and the insurance company. The IT company provider shall discharge service tax on their services under a single service tax registration and the insurance company shall avail service tax credits under a single service tax registration.

Such determination of value of service for state-wise compliance under GST is likely to be practically inexpedient for a pan India service provider providing services to a pan India customer under a single contract of service for single price.

For the ease of doing business in India, the service sector continues to press for the preservation of centralised registration under GST. It will be hard to say if govt considering the dual GST framework. Atleast, a simple and flexible method to discharge GST on pan India contracts based on the contractual provision/ receipt of services needs to be prescribed without emphasis on tracking or valuing actual location of provision/ consumption of services. This should enable businesses to smoothly transition into decentralised GST reporting and compliances through a contract or business driven process as opposed to a legislation driven mandate.