JULY 25, 2016

By S Sivakumar, LL.B., FCA, FCS, ACSI, MBA, Advocate

WE are repeatedly told by the Government and its officers that the services sector constitutes about 65% of India's GDP. A significant part of the services sector is constituted by the software services sector (including ITeS/BPO), which exports services worth a staggering Rs 6,00,000 crores (US$ 90 billion). It would therefore be interesting to discuss the overall impact of the model GST law on the software sector.

Consider these…

The software sector is beset with multiple indirect tax levies on the same transaction value. One very good thing that would happen under the GST is that, this levy of multiple taxes on the software sector would vanish. Under the current indirect tax dispensation, licensing of software licenses and products are subjected to a service tax levy of 15% as well as a VAT levy of 5 to 5.5% depending on the State in which the software player is located. VAT is levied on, the transfer of right to use the software products, what are known as packaged software. In the case of a manufacturer and seller of original software licenses, central excise duty of 12.5% is levied and over and above this, VAT at rates between 5 to 5.5% is levied. Thus, there is a clear case of a double levy on licensing of software products. Under the GST regime, this anomaly would get rectified, as the licensing of software being movable goods would be treated as a 'supply of goods'.

The software products industry also has this issue of multiple levies, in terms of the software maintenance contracts executed by its players, wherein, service tax is charged on 70% of the maintenance value in terms of Rule 2B of the Service Tax (Determination of Value) Rules, 2006, with VAT being levied on 75% of the maintenance value (in Karnataka) and thus, the tax base for levy of service tax/VAT is a hefty 145%. This anomaly is also likely to be rectified under the GST regime.

Insofar as software service is concerned, only service tax is currently levied @ 15%. The overall output tax rate would increase depending on the GST rate to be finalized. Notwithstanding this the software services sector would be able to avail of the credit of the CGST and IGST paid on purchase of inputs and goods, which is not currently allowed, as software services players are not treated as 'dealers' under the VAT laws of the States. In fact, the benefit of availment of credit on inputs would be a big boon to the software services sector inasmuch as these players can take credit on a variety of inputs including computer hardware, furniture, play stations, etc. under the GST regime. Under the current VAT laws of most States, input tax credit is disallowed on items such as furniture, etc. (refer to Fifth Schedule to the Karnataka Value Added Tax Act, 2003.

Insofar as licensing of shrink wrapped software by distributors is concerned, some players are only paying VAT at rates of 5 to 5.5% and in these cases, the GST output rate of around 18% could mean a steep increase in the overall tax rates. Also, the buyers of software licenses who are services providers themselves would tremendously benefit from the GST regime, as they can take credit of the SGST paid on these licenses?. Under the current VAT regime, services providers being not 'dealers' are not entitled to avail of credit of the VAT paid on purchase of inputs.

Be that as it may…software exporters could suffer on account of issues concerning refund of the input tax under the GST regime. Under the current dispensation, software exporters (or, for that matter, services exporters) are finding it very difficult to obtain refund of unutilized credits from the service tax department due to bureaucratic hurdles. Under the GST regime, these software exporters would also be required to knock the doors of the State Governments for obtaining refunds of the SGST. Despite that the model law does talk of the release of 80% of the input tax credit claimed on an ad-hoc basis, one is not sure of the success of this scheme, given the rather disappointing response of the service tax department to the similar scheme operating under the current service tax law. To this extent, I would presume that software exporters would suffer from the need to seek refunds from both the Central Government and the State Governments.

If both the Central and the State Governments can find a way of ensuring speedier flow of refunds to the software services under the GST regime, this sector can tremendously benefit, given the fact that a significant portion of the output from this sector is exports and consequently, the higher GST rate would affect this sector to a lesser extent.

As regards input tax credit under the GST regime, it would seem that the software players who are already suffering under the current cenvat credit regime on account of the denial of credit on the so called 'personal' expenses or usage of the employees, would continue to suffer under the GST regime, as input tax credit is sought to be denied on the non-business use of inputs/input services under the GST regime, as well.

Of course…. the software sector, like any other sector, would also benefit from the broader input tax credit regime under the GST law, as credit would be available on a wide range of input services, inputs and capital goods, as compared to the current dispensation, wherein, CENVAT credit is disallowed on many input services.

Before concluding…

The software players would need to face the cultural shock of getting themselves registered with the State Government, as under the current dispensation, most software services players are not registered under the VAT law.

Given the need to register themselves in each of the States where they have development centres, the medium and large software exporters would have to seek refunds from the respective states as the concept of a centralized service tax registration would not work under the GST regime.

But, in my view, the benefits flowing out of the abolition of multiple taxes and the availability of input tax credit on inputs would immensely benefit the software sector and if only the Government can find a better mechanism for ensuring speedier flow of refunds, the software sector would have a lot to feel good under the GST regime.