After GST, Services Sector Face New Challenges in India

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By Vasundhara Rastogi

The service sector is a key driver of economic growth in India, contributing to over 50 percent of the country’s overall Gross Domestic Product (GDP). Key services in terms of revenue generation include business activities such as trade, hotel and restaurants, real estate, logistics and warehousing, finance, and insurance.

The Goods and Services Tax (GST) launched on July 1, 2017 is likely to have a significant impact on the growth of these services. This is because it substantially affects the valuation of the service categories, their operations in each state via multiple returns filing, and stringent tax compliance.

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Some of the major challenges faced by service providers under GST are discussed below.

A four-tier rate structure

Unlike the previous tax regime wherein a uniform service tax of 15 percent was applicable, including a 0.5 percent Swatch Bharat cess and 0.5 percent of Krishi Kalyan cess, services under GST will be taxed under a four-tier GST rate structure: 5 percent, 12 percent, 18 percent and 28 percent.

As per the latest rate schedule released by the government, most services such as banking, insurance, credit card, and information technology (IT) will fall under the 18 percent tax bracket. This will inevitably make most services and work contracts costlier by the differential tax amount from the previous tax system.

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Multiple registration of place of business

The main challenge for the services sector under GST is the provision for multiple registration. Previously, services were taxed only by the federal government and could benefit from an optional facility of centralized registration. Services could avail input credits, discharge service tax liability, undergo audits and apply for refunds from a selected single location.

However, the transition into a dual tax structure entails compliance related challenges for service providers operating in more than one state. Under the new tax structure, both the federal government and state government are empowered to collect tax on services.

In other words, the service providers must register with every state government where they have operations. This provision is in particular challenging for the financial, logistics, and IT service providers that have a pan-India presence. Companies offering such services need to have secured separate registration in all 36 states in the country, including union territories, to comply with GST norms.

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Filing multiple returns

While previously taxpayers were required to file only two returns per financial year, under GST they must file three returns on a monthly basis.

The provision for service providers to register in every state where it operates also means that they will now have to file returns in every state counting up to 61 returns in total in one financial year, instead of 3 return files.

Besides this, the returns must be filed electronically, which is both a financial and technological challenge for small service providers.

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