Impact of GST on services

Over half the nation's GDP comprises of the services sector. As the country gears up to embrace Goods and Services Tax (GST), here is a recap on some key issues and challenges the services sector is likely to encounter and needs to overcome in the initial stages of GST levy.

Presently, 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. In this backdrop, 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 or proxies for specific types of services. Further to the same, it appears that, companies 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 proxies. In such a scenario, the value of supply in each State will have to be identified and valued for the discharge of GST. It is also possible that there may be a requirement to correlate the input tax to the output tax liability under each registration in each State.

Illustratively, if an IT company with offices across 10 Indian States, enters into an outsourcing contract for managing the IT systems of all branches of an insurance company (which possibly has a presence in all States and Union Territories), it is customary that only one contract would be concluded between the head office of the IT company and the insurance company. Similarly if a logistics service provider contracts with an e-commerce marketplace to provide delivery services on a pan India basis, a single contract would be entered into for such pan India services. In these examples, the IT company and logistics service provider shall discharge service tax on their services under a single service tax registration and the insurance company and the e-commerce market place shall avail service tax credits under a single service tax registration. Under GST, it is expected that these service providers need to track provision/ receipt of services state-wise based on where the IT/ logistics services are supplied from and to. 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.

From the perspective of ease of doing business in India, the service sector continues to press for the preservation of centralised registration under GST; possibly a tough ask 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.

Jayashree Parthasarathy is Partner and Dhiraj Agarwal, Associate Director, BMR & Associates LLP. Views are personal