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GST Implications and Budget 2017 Expectations

itVARnews speaks to IT industry bodies and many industry players to understand possible implications of GST. We also collate a budget wish list.

After the liberalization of 1991, the GST is perhaps the most anticipated economic reform. So much so that more talk is centered on GST, slated for June 1, 2017 rollout, than on any other aspect of the 2017-18 annual budget.

While changes are still likely to be done to the draft GST bill, as it stands now, there are concerns from several quarters in the IT industry that it will lead to complexities in billing, and disputes in valuation, especially for services which are largely intangible.WEB-BANNER-TAG

What GST should have been: The idea of GST, in its ‘purest’ form was simply this: to bring various indirect taxes –like central service tax, and VAT levied by states – under a single scheme, with the idea of removing ‘tax on tax’. In the current scheme (without GST), only service tax qualifies for input credit. Service tax paid while receiving a service can be offset with service tax to be remitted to the government for offering a service. But VAT paid cannot be offset, leading to dual taxation. GST intended to move all indirect tax to the point of consumption, from the multiple points of production or sourcing. Therefore, GST should be a blessing, furthering ease of doing business.  Unfortunately, the current draft of GST is far from this ‘classical’ mechanism.

What it is now: After multiple rounds of negotiation between the center and the states, the bill now is three tiered –Central GST, State GSTand inter-state or Integrated GST. And this is where the problem begins, according to many in the information technology community. When sourcing as well as delivery spans across multiple states, there is complexity in billing as well as valuation.

IT Sector and Geographical Spread: Coming to the IT sector, and more specifically IT services, it is a bit of an irony that some of the very salient features of IT services which have bolstered the growth of the industry, are now likely to cause complications with GST. IT services relies on sourcing talent from multiple locations, for rendering services to clients who, too, may be spread geographically.

Examples include solutions and services related to CRM, HRM, or supply chain, which need to be deployed at customer’s locations spread across states.

Multiple sourcing and delivery locations a headache now: In this all too common scenario, the contract has to be divided state-wise, since the service is being rendered from the service provider’s offices spread across different states.

NileshKuvadia, President, Infotech Software Dealers Association (ISODA)

ITPV magazine spoke to NileshKuvadia, President, Infotech Software Dealers Association (ISODA), who shared with us his observations on the current draft of the GST bill. He questions, “How can the cost of development be bifurcated by the IT Company?”

“For example, let’s say an IT services company is developing and implementinga CRM project for a retailer, where the development team is in Hyderabad and the domain expertise team is in Gurgaon. The customer’s location is Bangalore. There are now two options for billing, and each has its own complications. One option is for the Hyderabad and Gurgaon centers of the service provider to bill the customer separately. The service provider will have to calculate how much each office contributed to the total value of the service. This is always a gray area, since services, especially IT services are mostly intangible.

The alternative provided under the GST law (bill) is that the service provider can do a self-supply from hisdifferent locations to a headquarters or any single location. These supplies will be liable to GST.Therefore, in the above hypothetical case, Hyderabad can become a supplier to the Gurgaon office (self-supply), pay GST on this and then a single invoice from that location can be presented to the customer. There will be input tax credit that will pile up in Gurgaon, leading to increase in tax cost.

In a few cases, IT companies maybe supplying from multiple locations to multiple locations, in which case, there is no end to the problem, and both the scenarios above come together to further complicate the tax environment.”

New Inefficiencies: The proposals under GST introduces inefficiencies and high tax costs for a companies serving both, overseas as well as domestic clients. It may force the IT industry to adopt segmented and complex billing practices which are against global business norms. Or, IT companies will consolidate self-supplies from their various delivery locations, ‘value’ them, and pay GST on each component, leading to ballooning of tax credit. Neither scenario contributes positively to ease of doing business.

Fear of increased litigation:Then there is always the problem of valuation of services, potentially leading to litigations, a la a transfer pricing like situation, but between states. “Self-supplies and its valuation will translate into disputes on valuation leading to a litigious environment. Further, with more than 50% cost attributed to manpower, there will be significant pile up of credit, leading to blocked working capital”, says ISODA.

Possible Impact: While the IT industry has grown six-fold in revenue terms over a decade and continues to be the largest private sector employer in the organized sector, the overall business environment remains extremely competitive, according to a NASSCOM statement released in November 2016.  The report further elaborates that the Indian IT sector has been catalysing business transformation for global clients with ~670 offshore development centres across more than 78 countries and 3.7 million employees in India. The sector is an export led sector, as well as a flag bearer of the innovative tech start-ups.

In the face of rising global competition and trade barriers, the sector needs more impetus. The current draft of the GST bill may saddle the sector with blocked working capital, litigations on valuation and place of supply, and huge compliance and tax costs directly impacting cost of doing business.

  • GST provisions in its current form will lead to a litigious tax environment for IT industry.
  • GST would subject the industry to needless compliance processes impacting its global competitiveness. This would have an adverse impact on ease of doing business for the IT sector as it adopts global and distributed delivery model, with a combination of onsite and offset services.
  • Companies will be compelled to adopt complex invoicing practice contrary to global business practice. This will impact both import and export of services.
  • The ambiguity in classification of software products has not been resolved, and the sector will continue to suffer despite a landmark tax reform.
AnirudhDhoot, Director, Videocon

Increased taxes: AnirudhDhoot, Director, Videocon, says,“The proposed GST rate of 28% for the CEHA industry will have a great impact on the product price leading to an unexpected hike. To address this issue, the industry body CEAMA is in touch with the Government. Going forward, we hope that the budget will be in favour of the manufacturing industry and encourage Government initiatives such as Make in India and Startup India.”

The Government’s efforts such as GST is a definitive step towards accelerating digitalization. The policies and measures taken by the Government should help bring in economic stability, investment-friendly policies, increase ease-of-doing-business, improve long-term tax incentives, along with timely deal-closures and project clearances. Additionally, corporates and enterprises are expecting a cut in tax rates at various levels to grow more business opportunities in India to further allow the Make in India dream come true ‘’ says  Vivekanand Venugopal, Vice President & General Manager, Hitachi Data Systems, India.

Budget Expectations

We asked IT channel partners and vendors what changes in the budget (apart from GST) they think will positively help their business. Here are some reactions:

Vinay Sinha, Head of Sales – India, Director – Commercial Business, AMD Asia Pacific-Japan (APJ) Mega Region

“The rapid adoption of the Digital India policy aided by the strong, decisive, and time bound rollout of each of the related pillars fueled the demand for computers and mobility devices in the country. The government must continue to push these programs that proliferate digital services and digital inclusion to the common man.

The demonetization move resulted in slowdown of cash purchases, however, the balance of slowdown on cash purchases was offset to a small extent by increased online and B2B growth. The robustness of the digitization move and its impact will only be understood once we have enough data to measure the market movement.”

PulkitPunj, Director at AnG India Ltd.:

PulkitPunj, Director at AnG India Ltd

“With governments mandatory move of CCTV cameras installations, centrally monitored systems and solutions in huge numbers in verticals like banking, transportation, public places and more,
the budget should invest significantly in video surveillance solutions. The Electronics industry can play a key role and the government should continue to offer necessary incentives, eased tax framework and infrastructure support, reductions in import duties of security equipment.”

Rostow Ravanan, CEO, Mindtree

“Currently the budget is viewed as an episodic event that highlights certain tax rates in some areas going up or down.  For corporate India and Indians to plan their medium and long term financial and investment priorities, we strongly recommend that the Hon’ble Finance Minister outlines a larger 3-5 year fiscal roadmap for the country, explaining the priorities seen by the government and reforms that are being evaluated. If we have that larger picture, we can make our plans accordingly.  Secondly the largest problem we face right now is that a country with our population size and GDP has very few tax payers.  Consequently, the bulk of the compliance headaches fall on the salaried tax payer.  We recommend simplification in tax administration to bring more people into the tax net and reduce the disproportionate burden on salaried tax payers. Thirdly the reported move to a January to December year is welcome and should be announced in this budget, this will help Indian businesses align with the global business practices.  For the IT industry, the biggest expectation is that the GST implementation plans need to be revisited urgently. The current model given in the draft rules make it very cumbersome for the IT industry. Lastly, at a personal level, some of the incentives given to an individual tax payer needs to be streamlined and updated for current realities, for example, the limit for medical expenses is set at Rs 15000 per annum which is very inadequate for a family of 4 in urban India.  I feel we should remove some of the older incentives which are not relevant anymore and increase the limits for other incentives which are more useful in today’s context”.

SanjaiGangadharan, Regional Director – SAARC, A10 Networks:

SanjaiGangadharan, Regional Director – SAARC, A10 Networks

“In 2017, we expect the Government to further promote cashless transactions. That is why we await the announcements in the upcoming budget to understand the government’s move on
additional SOPs for promoting cash less transactions and the announcements around Income Tax and GST. Regardless, this will mean an increased adoption of digital payment modes which can be vulnerable to cyber attacks. So, at this juncture holistic security measures are the need for the hour.”

Mrs. ShilpaMahnaBhatnagar, CEO & Co-Founder Evoxyz Technologies:

Mrs. ShilpaMahnaBhatnagar, CEO & Co-Founder Evoxyz Technologies

Afavourable budget means a tax holiday is given to Start-ups for up to 6 years and Contribution of Government of India in the early stage Start-ups through a simple seamless process.Also, extremely negligible or Zero import duties on goods that need to be re-traded inIndia will give a big boost to the Start-up ecosystem and help them to flourish in a big way.

Rajiv Srivastava, Managing Director, HP Inc. India:

Rajiv Srivastava, Managing Director, HP Inc. India

“The Government should look at rolling out initiatives to boost adoption of technology for education, skilling, manufacturing and infrastructure development that are key to India’s growth story. For the digital empowerment of citizens, the Government should look at making technology more affordable and introducing initiatives to encourage PC buying in the country.

On the business front, IT manufacturers are bracing themselves for the implementation of the much anticipated Goods and Services Tax (GST). The Government’s objective should be to enable this transition from the current taxation system as smooth and orderly as possible — both for itself and for businesses and consumers.”

Rajeev Jain, CFO, Intex Technologies Ltd.:  

Rajeev Jain, CFO, Intex Technologies Ltd

“The recent demonetisation reform by the Government has laid the ground for setting a cashless economy.  The entire country is looking forward towards mobile banking which shall create a new user base and fuel the growth in mobile Industry. As an industry, we expect a long-term and stable policy on mobile manufacturing in India. The industry has huge potential and can supplement government
initiatives of ‘Make in India’ with highly technical product if focused. Incentives to create sufficient technical manpower will lay the foundation of a strong and robust manufacturing base in India. Further, a clearly laid out research and development policy is necessary to succeed in a highly technical industry like ours and will help bring component manufacturing base in India to save precious foreign exchange.”

Aniketh Jain, CEO & Co-Founder of Solutions Infini:

Aniketh Jain, CEO & Co-Founder of Solutions Infini

“The upcoming budget is crucial to honest taxpayers and we look forward to a low taxation system, which will simultaneously promote a robust digital ecosystem. Moreover, the government should simplify the tax regime for ITs and startups to foster innovations and boost a healthy start-up environment in the country. Also, the union budget 2017-2018 should focus on digital inclusion across industries.“

PradiptoChakrabarty, Regional Director, CompTIA:

PradiptoChakrabarty, Regional Director, CompTIA

“The IT sector has never been recipient of incentives on R&D expenditure unlike the life sciences industry. An extension of such incentive to IT sector will be highly motivating for companies to invest in technology R&D. The global IT Industry is going through a rapid transition towards automation which leads to reduction of workforce and investment in automation. This is a key threat to the Indian IT sectorwhich earns a major chunk of revenue through manpower heavy services to international clients. It is high time that we focus on research and development related tocreating patented and saleable IT products. The future performance of the India IT sector will lie in its ability to transition from a purely service oriented business model to product oriented revenue opportunities.”

Inputs collected, and summarized by special correspondent Kailas Shastry


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