In recent times, the IT industry has been one of the key drivers of India's economic growth, thereby creating enormous entrepreneurial and employment opportunities. Since the time the economy was put on the liberalisation path, India has also witnessed significant changes in its system of indirect taxation.
In the present economic environment, Indian IT companies are facing multi-faceted problems such as an uncertain global outlook, regulatory hurdles for offshoring, increasing costs of relevant talent and skilled personnel. In addition, the recent amendments to the indirect-tax laws have further added to the already unresolved challenges faced by the IT industry.
In order to align with the proposed Goods and Services Tax (GST) regime, the Supply Rules, 2012 had replaced the Export Rules, 2005 and the Import Rules, 2006 with effect from July 1, 2012. The Supply Rules prescribe that the place of provision of a service would be determined on the basis of the categorization of the various services under one of the following criteria:
1. Where the services are actually performed
2. Taxable territory where the greatest proportion of the service is provided (the term "taxable territory" has been defined in the Supply Rules in order to levy service tax on services provided in the taxable territory i.e. India excluding the state of Jammu and Kashmir)
#budgetbt TweetsThe Supply Rules require the place of provision of service to be outside the "taxable territory" from the perspective of exempting export services from the levy of service tax. The said legal provision poses a significant challenge to service exporters engaged in providing services as an intermediary such as call centres facilitating the provision of services between the overseas-based principal and the third-party customer.
In such a scenario, the condition that a service will qualify as export based on the criteria set forth by the courts in various judicial decisions that the benefit accrues to a service recipient outside India is no longer pertinent under the present regime.
Further, the condition that the place of provision of service would be where the greatest proportion of the service is provided also pose a significant impact for contracts for the remote maintenance and management of the IT infrastructure of clients. In such a scenario, there is the possibility that the service tax may be applicable on such contracts merely on the basis that some infrastructure is located in India.
With effect from July 1, 2012, there has been a paradigm shift in the manner of taxation of services. As against the previous regime of defining the taxable services and the levy of service tax on the specified services, the present regime defines the services that are not taxable.
This, in effect, means that service tax would be applicable on all services excluding those that are specified in the negative list or are specifically exempted by means of exemption notifications. The introduction of the negative service tax list and the absence of any sectoral exemption for the IT segment has led to a wider service tax net and has had a significant impact on the industry.
Further, the liability to pay service tax on reverse charge basis is partly on the service provider and partly on the service recipient on certain specified services provided by non-body corporates such as cab services for employee transportation, works contract services and supply of manpower services. In addition, in certain states such as Andhra Pradesh, there is also the issue of the dual levy of Value Added Tax (VAT) and service tax on the same transaction of cab rentals.
At a time when the industry is already facing increasing input costs, this has further added to the tax burden. The difficulties of the service exporters are further aggravated due to the challenges encountered in ensuring faster service tax refunds from the tax authorities. As a result, non-issuance of quick service tax refund continues to pose one of the biggest challenges for this sector.
As the definition of what constitutes to be a works contract under the present regime has been aligned with the VAT laws of most states, the issue of the dual levy of VAT and service tax on contracts for customised software development and maintenance services still persists.
From an indirect tax perspective, the expectation of the industry is that the Union Budget 2014 would provide a clear-cut roadmap and rational timeline for the implementation of the GST. Industry is hoping that the GST would obviate issues of double taxation on transactions such as the right to use of software and maintenance contracts and also further simplify the present indirect taxation regime. This would also enable the industry to be globally competitive in today's economic environment.
Santosh Dalvi is Partner and Head of Indirect Tax (Western Region), KPMG India. With inputs from Yasodhara Roychoudhury, Senior Manager - Indirect Tax, KPMG India, Hyderabad.
(Views expressed are personal.)