After GST, Services Sector Face New Challenges in India
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.
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.
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.
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.
India Briefing is published by Asia Briefing, a subsidiary of Dezan Shira & Associates. We produce material for foreign investors throughout Eurasia, including ASEAN, China, Indonesia, Russia, the Silk Road, & Vietnam. For editorial matters please contact us here and for a complimentary subscription to our products, please click here.
Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout India and the Asian region. We maintain offices in Delhi and Mumbai and throughout China, South-East Asia, India, and Russia. For assistance with India investment issues or into Asia overall, please contact us at firstname.lastname@example.org or visit us at www.dezshira.com.
Dezan Shira & Associates is a pan-Asia, multi-disciplinary professional services firm, providing legal, tax and operational advisory to international corporate investors. Operational throughout China, ASEAN and India, our mission is to guide foreign companies through Asia’s complex regulatory environment and assist them with all aspects of establishing, maintaining and growing their business operations in the region. This brochure provides an overview of the services and expertise Dezan Shira & Associates can provide.
An Introduction to Doing Business in India 2017 is designed to introduce the fundamentals of investing in India. As such, this comprehensive guide is ideal not only for businesses looking to enter the Indian market, but also for companies who already have a presence here and want to stay up-to-date with the most recent and relevant policy changes.
In this issue of India Briefing Magazine, we discuss payroll processing and reporting in India, and the various regulations and tax norms that impact salary and wage computation. Further, we explain India’s complex social security system and gratuity law, and how it applies to companies. Finally, we describe the importance of IT infrastructure, compliance, and confidentiality when processing payroll in India.