India's previous VAT/service tax scheme was quite a burden on India's IT sector. A simplified GST tax regime has made taxation in IT easy.
The impact of GST on India’s IT Sector is paramount. Goods and Services Tax (GST) collections in December 2020 exceeded ₹1 lakh crore for the third consecutive month, signifying sustained recovery in business activity. Further, the implementation of the e-invoicing system in October 2020 also scaled the numbers.
Previously, India relied on a complex indirect taxation system comprising various taxes and taxation systems. However, the implementation of GST aided in unifying all of these taxes. This simplified the assessment process and made accounting and compliance easier. This blog will look at GST for IT services and how it will affect India’s IT sector.
The following aspects of GST will be covered in this post –
- Is GST applicable to the import of software?
- What is the GST for software services?
- Is GST applicable to the export of software services?
- What is the GST on the computer parts?
- What is the impact of GST on the Indian IT sector?
Is GST Applicable to the Import of Software?
The short answer is Yes.
The long answer is that – As imported software falls under the HSN Code 997331, it becomes an import of service. However, companies or individuals need not file a Bill of Entry for services. But concerned individuals must pay the required IGST on the RCM basis, as stated in Notification 10/2017-IT, which came out in June 2017. After payment, it gets the RCM status in the GSTR-1. As this makes the importer eligible for Input Tax Credit, the same becomes a part of the GSTR-3B.
What Is the GST on Software Services?
Under GST, IT software’s design, development, customization, enhancement, implementation, or up-gradation becomes a service supply. As per new rules, such a service attracts a software Goods and Services Tax Registration rate of 18%. Any software in its physical form becomes goods as per the Customs Tariff Act. They have the HSN Code 8523-80-20, and the rate for such software is 18%. Furthermore, the transfer of software IPR is also a service, attracting an 18% GST rate.
Goods and Services Tax (GST) is the value-added tax levied on all goods and services we use within the country. We offer a GST rate finder service that lists out the GST rates of all goods and services available in India. This service is also known as the HSN Finder.
Redesigning Business Software
The challenge is updating the IT systems, which calls for collaboration between technology and tax departments. Many times, the ERP software needs to be upgraded and altered to comply with the new GST regulations. Businesses are primarily updating their accounting and enterprise resource planning (ERP) software to handle the intricacies of GST calculation.
Taxability of Installing New ERP
ERP and accounting systems are installed by businesses in batches. This is a long-term agreement that spans several years. ERP specialists analyse the needs of the firm, create software that meets those needs, train staff members, and maintain and upgrade the program on a regular basis. This contract’s payment will be made over time, and service tax will also be applied as necessary.
Freelancers
In the past, 15% service tax was paid by freelancers providing software services including website design, app development, and design. Under GST, this has now gone up to 18%. There is significant misunderstanding, nevertheless, regarding bloggers’ GST liability and registration requirements. They were previously exempt from the service tax. In due course, we expect the GST council would provide clarification on this matter. For a comprehensive examination of the GST’s applicability to bloggers, please see our article.
Advantages and Impact of GST on India’s IT Sector
The Goods and Services Tax (GST) is India’s all-inclusive and standardised indirect tax system that came into effect on 1 July 2017. It did away with many state and central taxes, including excise duty, service tax, VAT, CST, and others, in favour of a single national tax rate on products and services. The IT sector in India has benefited in a number of ways from the impact of GST. Here are the benefits of GST on the IT sector:
Reduced Tax Burden
Previously, the sector had to deal with multiple taxes at different stages, such as excise duty, service tax, VAT, and CST, leading to tax cascading and a high effective tax rate. For instance, packaged software faced both VAT and service tax, resulting in double taxation.
However, under GST, there is a single tax rate of 18% for goods and services, which has significantly reduced the tax burden on the IT sector.
Seamless Input Tax Credit
The implementation of GST has allowed for the availability of input tax credit (ITC) on both goods and services throughout the supply chain, resulting in reduced production costs and increased profitability for the IT sector. Previously, IT traders selling goods were not able to claim service tax paid on annual maintenance contracts (AMCs) for computers and software.
However, under GST, they are now able to avail ITC for such expenses. Likewise, IT service providers can also offset their input taxes against their output taxes. For instance, they can claim ITC on VAT for office supplies or hardware purchased for their business operations.
Improved Cash Flow
The implementation of GST has significantly streamlined tax payment processes for the IT sector, eliminating the need for multiple tax payments to various authorities. This has dramatically enhanced cash flow and working capital management within the industry.
Previously, IT exporters were required to pay upfront service taxes and wait for refunds, resulting in delays and blocked funds. However, under GST regulations, they can now export their services without any immediate taxation through the letter of undertaking scheme.
Increased Market Access
The implementation of the Goods and Services Tax (GST) in India has created a unified market for goods and services, eliminating the hurdles associated with inter-state trade. This has dramatically benefited the IT sector by providing increased market access. Before GST, IT companies had to register separately in each state they operated, adhering to varying state laws and regulations.
Is GST Applicable to the Export of Software Services?
Exports to SEZ units and developers have a zero rating under the GST regime. This means such exports do not require any tax payment. However, the exporter can avail of the input tax credit on all inputs used to create the exports.
The two options for zero-rated IT services and exports under GST are as follows:
- Pay integrated tax for supplies, and receive a refund after exporting.
- Export supplies as per a bond and claim refund on inputs and services related to that export.Before registering for GST, you can calculate your owed GST using our GST Calculator India.
What Is the GST on Computer Parts?
| Sl No | Part | Computer GST Rate |
| 1 | Laptop | 18% |
| 2 | Desktop PC | 18% |
| 3 | Optical Drives | 18% |
| 4 | RAM and Memory Chips | 18% |
| 5 | Hard Drives (Int and Ext) | 18% |
| 6 | Pen Drives | 18% |
| 7 | Monitors LED/LCD (up to 32 inches) | 18% |
| 8 | Monitors LED/LCD (greater than 32 inches) | 28% |
| 9 | Laptop Adapter | 28% |
What is the Impact of GST on the Indian IT Sector?
The sale of packaged software was subject to VAT and service tax under the previous tax regime. In most states, the VAT rate was around 5%, while the service tax rate was 15%. Excise duty was also levied on the manufacture of IT products. For instance, if the software is distributed on a CD, DVD, or hard disc, it is subjected to three taxes. GST will eliminate all such complications and double taxation. Presently, the IT sector’s GST will be 18% on software services provided by software companies.
Since GST in the IT sector has an 18% rate, the cost of software services will increase. It will also result in higher infrastructure and administrative costs for businesses of all sizes. However, such companies also avail themselves of ITC benefits, which will help them rescue costs.
All in all, the IT industry stands to benefit from GST laws with an anticipated boost in sales, particularly in software sales. The availability of Input Tax Credit (ITC) will also enable businesses to lower their operational costs, thereby improving profitability. Vakilsearch experts can assist you in navigating potential GST-related compliance difficulties and ensure the generation of GST-compliant invoices for your software firm. For further convenience, consider opting for GST online to streamline the process and enhance compliance efficiency.
