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Cost of compliance would increase in the short term

Sandeep Sharma, Research Manager, Software and Services, IDC, spoke to Amit Singh on the benefits of GST as well as teething issues for IT channel partners

How would you evaluate GST in terms of benefits for IT industry?

Without an iota of doubt, the introduction of GST holds potential to simplify the prevalent complicated tax regime and to usher in benefits for the overall IT industry.

Sandeep Sharma, Research Manager, Software and Services, IDC

For solution providers, it’s clearly a Rs 5,000-6,000 crore opportunity. Besides one-time opportunities like upgrading the ERP systems, applications and IT infrastructure, there is a large opportunity around developing ERP packages to help SMEs record GST transactions.

For customers, tax rates have been rationalized, especially packaged software. Earlier packaged software attracted both VAT and service tax. Additionally, there was a lack of clarity on the excise tax being levied. These components cumulatively resulted in an effective tax rate of 25-28 percent. With the introduction of GST, this structure would get simplified and software vendors would have to deal with an effective tax rate of 18 percent.

On the IT services side, the effective tax rate that was around 15 percent pre-GST has been increased to 18 percent. However, this increase in the cost of IT services would be nullified as customers will be able to claim the tax input credit. This would enable IT players to pass on the benefits to their customers that would in turn lead to a positive cascading effect on their top-line and bottom-line.

However, the costs of GST compliance and administration would increase, as the companies need to register individually at the Centre as well as with the States where the services/products are being consumed.

What are the prospective effects of GST on accounting and compliance requirements of IT channel partners?

The costs of compliance – specifically accounting and administration expenses – would increase in the short term for businesses. This is because earlier, the registration was done only at the central level, and services could be provided through multiple branches.

With the introduction of the new regime, companies need to comply with the ‘local consumption’ principle, whereby the services will be taxed at the place of consumption. To give an indication, there could be up to 111 taxation points. Under the GST regime there are three tax points: central GST, inter-state GST, and state GST. Hence, with 37 jurisdictions the total number of points of taxation could be around 111.

This would lead to complications in registrations and increase in compliance for organizations having pan-India presence.

What are the teething issues you see in the transition period of GST?

We must realize that any major implementation of such a scale would have its own set of issues. The most critical challenge that the authorities would face is the attitude of the businesses, particularly the large set of small- and medium-sized enterprises, towards adopting GST and becoming a part of the mainstream. Already, we have witnessed sections of Indian business community seeking relaxation in the timeline for adoption, and for the modification in the tax slabs, citing scale and regional industry issues.

Moreover, IT services companies have observed some issues with regards to the valuation of services being provided to their branches in India or abroad. Though the GST has a simplifying tax theme, valuation issues for services can lead to disputes and litigations, giving rise to scenarios akin to transfer pricing for intra-company supplies. Additionally, complications in invoicing and billing will arise due to provisions such as local consumption of supplies. The government needs to work to resolve such issues at hand.

Further, lack of awareness of the benefits of GST is rampant and can act as significant blockade for the smooth execution of the GST regime.

For larger organizations, skilled human resources and IT infrastructure to support the implementation of new tax systems are the major issues that need to be looked at. They would be facing a tough time with regards to having all the necessary registrations within the stipulated time frame.

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