The Goods and Service Tax after its implementation has left its imprint on all major business verticals of the Indian economy. Companies have had to apply for GST registration for service provider if their operations involved any kind of supply of service. In this article, we are discussing the GST impact on the services sector of the country. The sector is one of the major driving forces of the Indian economy contributing significantly to the nation’s GDP and creating numerous job opportunities. A large number of enterprises located in various business domains like FMCG, IT, finance, telecommunications etc. have been affected by the new indirect tax. Let’s take a look at some important points to understand the effect of GST on the services industry.
1. Elimination Of Double Taxation
The new tax regime has eliminated double taxes on transactions involving the supply of services. Earlier companies had to pay VAT as well as service tax on such transactions. With a clear distinction between goods and services, apart from defining principal supply, composite supply, and mixed supply, the new law has removed any ambiguity in its interpretation. Moreover, the law also defines the supply of software, works contracts, and leasing transactions making it simple to calculate the GST associated with them. This is a much-needed reform that has simplified tax calculation and strategizing for lowering the tax burden for business owners.
2. Benefit Of Input Tax Credit
Service providers now enjoy the facility of claiming the input tax credit. This was not the case earlier when they could not set off VAT payment for input and capital goods against output liabilities. For instance, in the older system, an entrepreneur would have paid VAT on purchasing goods and collected service tax from customers on providing a service. There was no provision for setting off VAT against Service Tax which increased the input cost. The introduction of the new law has meant that both the transactions would be chargeable under GST making it possible to claim an input tax credit.
3. Multiple Registrations According To Places Of Business
Earlier, corporations running their operations in multiple locations opted for centralized registration for service tax as the levy was collected by the central government. According to the new law, taxation of services occurs at the location of the service recipient. This makes it mandatory for service providers to get their GST business registration separately for each state where they run operations. This forced enterprises involved in inter-state supply to make major structural changes and decentralize their service delivery mechanism. It also resulted in escalating the operational costs of most businesses with facilities in multiple states.
4. Increased Burden Of Compliance
The new law has increased the burden of compliance of all organizations located in the services sector of the country. Earlier, they had to file a half-yearly service tax return but now companies have to filemonthly, quarterly, and annual goods and service tax returns depending on the nature of their business. Enterprises have to make changes to their digital infrastructure for saving and maintaining important documents. They have to keep track of all the due dates as late payment attracts penalties. This has increased their cost of ensuring their business is compliant with the new law.
5. Easier For Intra-state Operators
The new tax has subsumed a lot of older levies like service tax, VAT, octroi etc. Instead of calculating all these taxes to set the final price, only the applicable GST rate needs to be known for the purpose. This has made it easier for operators involved in the intra-state supply of services. They have to deal with lesser taxes as well as simpler compliance requirements. With their operations limited to a single state, they have to apply for GST registration in only one location. This is a positive GST impact on service sector’s smaller players.
6. Increased Prices Of Some Services For End-users
There are four tax rates in the GST slab- 5%, 12%, 18%, and 28%. While the government has kept most essential items under the lower tax rates, some sections have seen an increase in the applicable rates when compared to earlier service tax charges. This resulted in an increase in the final price of some products and services. The burden of the increased cost ultimately fell on the end-user. It led to slow growth in some business domains as consumption fell due to escalated prices.
7. Better Revenue Generation From The Sector
The new tax regime not only simplified India’s indirect tax structure but it also filled up government’s coffers. The implementation of the new law along with a completely online system for return filing has led to an increased collection of revenue from all business sectors. Moreover, the state of Jammu & Kashmir which enjoys a special status given to it by the country’s constitution was also brought under the ambit of the new law. This has also contributed to better revenue generation figures.
8. Brought Unregulated Operators Into The Taxation Ecosystem
One of the biggest problems that the government faced over the years was tax avoidance by unregulated business entities. Business domains like logistics had a large number of such operators who did not pay any taxes. The new law made it compulsory for all service providers to get GST registration if their annual turnover was more than the specified threshold limit. In certain cases, even entities whose turnover was below the limit had to apply for registration. This brought unregulated players under the country’s taxation umbrella.
The GST impact on the services sector of the country has largely been positive with the removal of double taxes but it has increased the compliance burden of enterprises who must now maintain more documents as well as file more returns.