Impact of GST on IT Sector

Abhishek Kumar

30 Mar, 2024

Introduction

IT sector is a hub for innovation. The IT sector plays a major role in the global economy as well as the country’s economy. IT sector is one of the fastest growing sectors that provide benefits like economic growth, employment opportunity, and technological advancement. The IT sector includes a wide range of activities like hardware manufacturing, software development, digital solutions, IT services, etc. IT sector acts as a bridge between different countries. Investing in an IT sector by the country results in high economic growth rates, as IT is one of the most advancing sectors on a global level.

IT sector before the implementation of GST in India

In the previous tax structure, service tax was 15%, VAT was 5%, and then there were inconsistent customs fees and excise duties. By giving a list of products and services that fall under different tax categories, GST streamlines this tax structure. The IT vendor would sell items with three distinct taxes under the prior tax structure, which ultimately resulted in an excess of tax. The former tax structure allowed for varying taxes in different places, which meant that corporate flexibility and ease of operation were concentrated in regions with lower service taxes. Additionally, the manufacture of IT Products is subject to the excise duty.

Impact of GST on IT sector

The current GST regulations state that a number of products utilized in the IT sector, such as ink cartridges, fax machines, photocopiers, and printers, would now be subject to an 18% tax. In contrast to the 15% service tax rate under the previous administration, software services are now taxed at a rate of 18% under the GST. The CDs will be subject to GST at a further 18% tax rate. To ensure that their system complies with the GST, the information technology companies will need to set up hardware and software. This will impair the capacities of the firm, especially start-ups and small enterprises, and will ultimately raise the cost of the infrastructure. The Input Tax Credit (ITC), which would be available to all IT businesses supplying services or commodities, is one of the most advantageous effects of the GST.

The design, development, customization, improvement, deployment, or upgrade of IT software is classified as a service provision under GST. According to the current regulations, this service is subject to an 18% software Goods and Services Tax Registration rate. Overall, the GST regulations will help the IT sector since they will increase sales of software, which will help the sector’s bottom line. The availability of ITC will also assist companies in reducing operating expenses and increasing profitability.

Place of Supply

Before to the GST taxes¹, the IT service was only provided from a single location, which was often the company’s main headquarters. However, a ‘Place of Supply’ provision has been introduced under the GST system, necessitating the use of several invoices and billings in the case of services provided under a single contract. The information technology businesses must register for this reason in the states where their majority of the consumers are living at the moment.

GST on export services of IT

One of the major sources of foreign exchange earnings comes from the export of information technology services, with India being the top exporter of these services. The input taxes paid by the exporters will be authorized as a refund. Therefore, exporters must ensure that all service recipients’ addresses may be shown to the authorities upon request. Typically, ITES/IT will fall within the purview of BPO operations, software consulting, and software development. In addition to these activities, this regulation will also apply to services like software support and maintenance for intermediary services because there is no GST exception.

GST on Freelancing in IT sector

Freelancers formerly paid service tax of 15%, which has now risen to 18% under GST, for IT services such as website creation, app development, designing, etc. The YouTubers and bloggers are also now imposed GST at the rate of 18%.

Conclusion

Every policy enacted with the assistance of the government has its own pro and cons, it is like every coin has two sides, and GST is no exception. Though it is a long-term strategy, and the impact would be seen in the long run, GST will serve as a historical proof for Indian businesses that continues to be feasible. The availability of input tax credit is one of the additional elements that will lower operational expenses. As a result, it will ultimately boost the IT sector’s benefits. Considering the fact that the GST for administrations has risen to 18%, the IT industry will gain from GST because of the need for programming, working expenditures will decline because of the availability of ITC, and therefore, the IT sector will benefit in the long run.

Frequently Asked Questions

Read our article:GST Impact on E-Commerce – The vision Behind it

1. https://www.gst.gov.in/