The impact of GST on India’s IT Sector is significant. Goods and Services Tax collections in December 2022 exceeded Rs. 1 lakh crore for the third consecutive month, indicating sustained recovery in business activity. Additionally, the implementation of the e-invoicing system contributed to these positive numbers.
Previously, India operated under a complex indirect taxation system consisting of various taxes and taxation systems. However, the implementation of GST played a vital role in unifying all these taxes. This simplified the assessment process, making accounting and compliance more straightforward. In this blog, we will explore GST for IT services and the impact of GST on India’s IT Sector.
GST Applicability to Software Import
Yes, the Goods and Services Tax is applicable to the import of software and imported software falls under the HSN Code 997331, categorising it as an import of service.
Companies or individuals importing software are not required to file a Bill of Entry for services. Instead, they must pay the applicable Integrated Goods and Services Tax on a Reverse Charge Mechanism (RCM) basis.
The payment of IGST on the RCM basis is mandated by Notification 10/2017-IT, issued in June 2017. This notification outlines the specific requirements for the tax treatment of imported software.
Upon payment, the imported software attains the RCM status in the GST Return-1 (GSTR-1). This status reflects the compliance with the Reverse Charge Mechanism.
The importer becomes eligible for Input Tax Credit, which is then included in the Goods and Services Tax Return-3B (GSTR-3B). This inclusion ensures that the taxes paid on the imported software are accounted for and contribute to the overall tax credit.
GST Rate on Software Services
For understanding the impact of GST on India’s IT Sector, various aspects of IT software services are considered as service supplies.
The design, development, customisation, enhancement, implementation, or up-gradation of IT software is classified as a service supply under GST regulations.
GST Rate for Software Services
As of the latest rules, the Goods and Services Tax rate applicable to such software services is 18%. This rate is standardised for a range of activities related to IT software.
When software is in its physical form, it is categorised as goods according to the Customs Tariff Act. The Harmonised System of Nomenclature (HSN) Code for such software is 8523-80-20, and the applicable GST rate for physical software is 18%.
The transfer of Intellectual Property Rights related to software is also considered a service under GST. This service attracts an 18% GST rate, aligning with the overall rate for software services.
GST Applicability to Export of Software Services
Under the Goods and Services Tax regime, the export of software services is subject to specific provisions.
Exports to Special Economic Zone (SEZ) units and developers are accorded a zero rating under GST. This implies that no tax payment is required for such exports.
While no tax is levied on these exports, exporters can still avail themselves of the input tax credit on all inputs utilised in the creation of the exported software services.
Options for Zero-Rated IT Services and Exports under GST
There are two options available for zero-rated IT services and exports under GST:
1. Pay Integrated Tax and Claim Refund: Exporters can opt to pay integrated tax for their supplies and subsequently receive a refund after exporting the software services.
2. Export under a Bond and Claim Refund: Alternatively, exporters can choose to export supplies under a bond and then claim a refund on inputs and services related to that specific export.
Before registering for GST, businesses can utilise the GST Calculator India to calculate the GST liability. This tool assists in estimating the GST obligations, offering a proactive approach to compliance.
GST on Computer Parts
The table depicts the rates of GST on different computer parts that help us understand the impact of GST on India’s IT Sector:
| Sl No | Part | Computer GST Rate |
| 1 | Laptop | 18% |
| 2 | Desktop PC | 18% |
| 3 | Optical Drives | 18% |
| 4 | RAM and Memory Chips | 18% |
| 5 | Hard Drives (Internal and External) | 18% |
| 6 | Pen Drives | 18% |
| 7 | Monitors LED/LCD (up to 32 inches) | 18% |
| 8 | Monitors LED/LCD (greater than 32 inches) | 28% |
| 9 | Laptop Adapter | 28% |
What is the Impact of GST on the India’s IT Sector?
Under the previous tax regime, the sale of packaged software in the Indian IT sector was subject to VAT and service tax, with varying rates in different states. Excise duty was additionally imposed on the manufacturing of IT products. But the impact of GST on India’s IT Sector is different.
Previous Taxation Structure
- VAT: Around 5%
- Service Tax: 15%
- Excise Duty: Levied on the manufacture of IT products
For software distributed on physical media like CD, DVD, or hard disc, it incurred three different taxes, leading to complexities and double taxation issues.
Simplification and Elimination of Double Taxation under GST
The impact of GST on India’s IT Sector is significant as it aims to simplify the taxation structure and eliminate the complexities associated with double taxation on software products.
Presently, the GST rate for software services in the IT sector is 18%, applicable to services provided by software companies.
The impact of GST on India’s IT Sector is that the 18% GST rate in the IT sector will lead to an increase in the cost of software services. Additionally, businesses, regardless of size, will experience higher infrastructure and administrative costs.
Despite the increased costs, companies in the IT sector can avail themselves of Input Tax Credit (ITC) benefits, helping them mitigate expenses and maintain cost-effectiveness.
Hence, the overall impact of GST on India’s IT Sector is that these GST laws are expected to bring overall benefits to the Indian IT industry. The simplification of taxation and elimination of double taxation issues are anticipated to boost sales, particularly in the software segment.
Final Thoughts
The impact of GST on India’s IT Sector signifies a transformative shift in taxation, streamlining processes and mitigating the complexities of the previous regime. While the 18% GST rate on software services may increase costs and pose challenges in infrastructure and administration, the industry stands to benefit from the elimination of double taxation. Input Tax Credit provisions offer a crucial advantage, aiding businesses in cost management and enhancing overall profitability. The GST framework is expected to stimulate sales, particularly in the software segment, fostering a more efficient and growth-oriented environment for the Indian IT sector.
