Model GST Law - Impact on IT and E-commerce sectors

The information technology sector has arguably held fort as the country's bellwether sector for the past couple of decades. More recently, e-commerce, one of the fastest growing sectors, seems to be emerging as a strong contender. In this backdrop, here is a look at how the proposed GST regime, unveiled through the release of the Model GST Law, could impact ease as well as cost of doing business for these sectors.

On the positive side, the proposed GST law should effectively address the emerging trend of destination states rushing to tax e-commerce consignments being delivered into their state. Being a destination-based consumption tax, destination states can rightfully stake claim to the element of State GST built into integrated GST levied on interstate supplies of goods.

Similarly, the Model GST Law seems to tackle well the issue of dual taxation of intangibles including software as both 'goods' and 'services'. The clear articulation of intangibles as a 'service' should go a long way in dousing this legacy issue for all types of electronic supplies and digital downloads with a possible grey area remaining on the characterisation of software products supplied on media. Also, GST should technically enable service providers in the IT/ ITeS sector including e-commerce companies to avail additional credits with VAT/ sales tax cost on capex being hopefully replaced by a creditable GST.

On a worrying note, the Model GST Law appears to appease the demand by States to collect tax from e-commerce companies operating under the marketplace model through a tax collection mechanism, in addition to requiring them to furnish information relating to transactions carried out through the online portal. While the requirement to furnish information is reasonable, the mandate of tax collection could result in unintended credit build-up as well as cash flow issues for the vendors of goods and services listed on the marketplace.

From a place of supply perspective, the determination of place of supply of B2B services (under the standard rule) basis location of the recipient of service is overall a welcome move from an ease of business perspective. However, when read in conjunction with various related concepts, the apprehensions of a decentralised billing, registration and compliance being warranted in each state of operation (where services are provided/ received) appear to be confirmed by the Model GST Law. Consequently, service providers may need to value and discharge GST in each state of operation in respect of services delivered under a single contract from multiple offices across the country. Whether the IT industry is sufficiently prepared for this is moot.

While the Model GST Law rightly preserves 'zero-rating' for export of goods and services, the option of an upfront exemption (by way zero rating) on procurements of goods and services by export oriented units is a significant miss. A discontinuance of exemption (other than basic customs duty) to export oriented units runs counter to the objectives articulated in the Foreign Trade Policy as well as Special Economic Zones policy. The only recourse in terms of tax benefit for an exporter being refund / rebate is indeed worrisome given past experience with refunds, especially for service exporters in the IT/ ITeS sector. More worrisome would be a scenario where such refund is restricted to credit of taxes paid as opposed to the entire taxes paid on goods and services used in authorised operations.

Lastly, the impact of GST possibly being levied on free supplies in the furtherance of business (such as promotional offers of goods/ free supply of services) requires detailed evaluation. While on one hand this could be viewed as a mechanism to recoup GST credits on the input side in some cases; on the other hand, its impact on cash-flow would merit equal consideration in other cases.

Clearly, the proposed Law appears to be a mixed bag with concerted efforts required to address some of the issues above.

The author is Partner, BMR & Associates LLP. Views are personal