Following write-up summarises the GST provisions as applicable to IT/ITES sector.
1. Goods or Services:
Though GST is applicable to both goods or services, it is necessary to determine as to whether the impugned supply is “supply of goods” or “supply of services” and all machinery provisions of GST law differentiates between “supply of goods” and “supply of services”. To determine the HSN code of the supply, rate of GST, place of supply, export of supply etc.; it is necessary to determine first as to whether the impugned supply is “supply of goods” or “supply of services” as GST laws make different provisions for “supply of goods” and “supply of services”.
The first question that is arises is to what are goods and what are services. Movability is a test of being goods. However, goods can be tangible or intangible. The Constitution Bench of the Supreme Court in case of State of AP v. National Thermal Power Corporation Ltd. [[(2002) 5 SCC 203: (2002) 127 STC 280 (SC)] held that merely because electricity is not tangible, it does not cease to be goods. It held,
“The definition of goods as given in Article 366 (12) of the Constitution was considered by this Court and it was held that the definition in terms is very wide according to which "goods" means all kinds of moveable property. The term "moveable property" when considered with reference to "goods" as defined for the purpose of sales-tax cannot be taken in a narrow sense and merely because electrical energy is not tangible or cannot be moved or touched like, for instance, a piece of wood or a book it cannot cease to be moveable property when it has all the attributes of such property. It is capable of abstraction, consumption and use which if done dishonestly is punishable under Section 39 of the Indian Electricity Act, 1910. If there can be sale and purchase of electrical energy like any other moveable object, this Court held that there was no difficulty in holding that electric energy was intended to be covered by the definition of "goods".”
In Tata Consultancy Services v. State of Andhra Pradesh [(2004) 178 ELT 22 (SC)], it has been held that canned software (Computer software packages) sold off the shelf like oracle, lotus etc. are goods. “A “goods” may be a tangible property or an intangible one. It would become goods provided it has the attributes thereof having regard to (a) its utility; (b) capable of being bought and sold; and (c) capable of being transmitted, transferred, delivered, stored and possessed. If a software whether customized or non-customized satisfies these attributes, the same would be goods. In Associated Cement Company v. CC [(2001) 4 SCC 593] it was held that computer software are goods.
In terms of Schedule II of the CGST Act 2017, development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software and temporary transfer or permitting the use or enjoyment of any intellectual property right are treated as services. But, if a pre-developed or pre-designed software is supplied in any medium/storage (commonly bought off-the-shelf) or made available through the use of encryption keys, the same is treated as a supply of goods classifiable under heading 8523. Off the shelf or canned software is goods.
Development, design, programming, customization, adaptation, upgradation, enhancement, implementation of Information Technology software shall be treated as service [Clause 5(d) Schedule II of the CGST Act]. Supply of keys, access code etc. shall be treated as supply of services as these are temporary transfer or permitting the use or enjoyment of any intellectual property right [Clause 5(c) of Schedule-II of the CGST Act].
Repair or Maintenance:
A maintenance contract is a composite supply and may involve some supply of goods too. Repair and maintenance are classifiable under HSN 9987. The heading specifically covers various goods however does not mention IT services specifically. In absence of any other specific heading, maintenance of IT software shall fall within heading 998713 [Maintenance and repair services of computers and peripheral equipment].
Authority of Advance Ruling held [In re: Cummins India Limited (GST AAR Maharashtra); Order No. GST-ARA 65/2018-19/B-161 Dated 19.12.2018] that since the supply of maintenance service for a single price with supply of spare parts/goods as and when required, the supply of both, goods and services are made in conjunction with each other in the ordinary course of business and therefore considering the provisions of the GST Laws, that supply of services/ goods in the present case is naturally bundled, with the supply of goods being incidental to the supply of services and therefore such contract are to be considered as a composite supply of service where the principal supply is service and the supply of goods is incidental to such supply of service. Thus, repair and maintenance of software [even when not treated as goods] shall be classified as service.
If some parts/software is provided/replaced to the customer without a consideration under warranty, no GST is chargeable on such replacement. The value of supply made earlier includes the charges to be incurred during the warranty period. Therefore, the supplier who has undertaken the warranty replacement is not required to reverse the input tax credit on the parts/components replaced.
2. “Place of Supply”:
Firstly, it needs to be determined as to whether the supply is supply of goods or service in terms of point (1).
If determined as goods:
If the supply of software treated as supply of goods, place of supply for goods shall be determined as per the provision of Section 10 of the IGST Act. Thus, the place of supply shall be location where the movement terminates, or where goods are delivered or where goods are installed. Say for example one purchases a software on CD. The CD was sent by courier. Place of supply shall be the destination of such goods.
If the same CD was delivered to a person in the shop itself, place of supply shall be the location of such delivery. If the CD was purchased by the customer asked to get the software installed on his computer- place of supply shall be the location of such installation.
If the CD is supplied on direction of some third person [normally agent or re-sellers or commission agents], place of supply shall be the location of principal place of business of such third person.
If such supply is “supply of services”:
If such supply is found to be supply of services, the place of supply shall be determined under Section 12 or 13 of the IGST Act. As these services do not fall in the exception clause, general rule of determination of place of supply shall be applied and location of the recipient shall be treated as the place of supply of services.
Thus, place of supply of IT/ITES services is the location of the recipient in terms of section 12 and 13 of the IGST Act, 2017. However, if the recipient is not registered and his address is not available on the records of the supplier, the place of supply would be the location of the supplier.
3. Payment of Tax:
Based on the location of supplier and place of supply appropriate amount of SGST/CGST or IGST shall be paid.
Rate of Tax:
GST rate for all kinds of IT Software supply: services, products, supply on media, electronic download and temporary transfer of Intellectual Property (IP) is 18%.
E-books has been treated as service, as information supply service [9984] and a concessional rate of 5% is applicable on supply of E-books.
4. Multiple Registration:
When IT service provider is located at one place, and provide services from that place. The place can be registered under GST. That registered place shall be treated as location of the supplier. From that place, all taxes can be paid based on whether recipient is located within state (CGST plus SGST) or outside state (IGST). All inputs shall be received at that place and input tax credit shall be taken.
Supply from single location but development at different places:
Sometimes it happens that although outward supply is made from a single location, the service provider has different development centres at different location situated in different states. These different development centres at various locations can be also be registered. Input tax credit received at various locations may be taken there. At the end of the month these development centres can issue an invoice to the principal place based on month wise costing data of development centre. The tax shall be paid on a value equivalent to the 110% of the cost [Rule 30 of the CGST Rules]. This way all input tax credit received at various locations can be transferred to the principal centre from where invoicing is done. These credits can be used to pay GST on outward supplies.
In case of different centres in the same sate, single registration shall be enough, with declaration of other centres as additional place of business.
Multiple registration to capture ITC:
Under the present GST regime, it is necessary to take multiple registration merely to capture input tax credit. Place of supply provision differs for different services. In case of people intensive businesses like IT/ITES; rent of office space, hotels invoices, conferences and meetings etc. are major expenses. Place of supply of these services shall be the location of the property or event. Thus, if a IT/ITES service provider procure such services in any of the states where it is not registered, it shall not get the input tax credit on these items and GST paid on these items shall become a part of the cost structure leading to cascading effect of taxes. Thus IT/ITES companies should take registration in the states wherever they have any development centres and should avoid states for conference/meeting/event etc. where they are not registered.
5. Import:
Import of goods means bringing goods into India from a place outside India. Thus, if canned software is imported, appropriate amount of custom duty and IGST is payable.
Occasionally the IT service provider may import services from outside India. In such situations, on these import of services IGST shall be payable and full credit of IGST shall be available. A supply is treated as an import of service if the following conditions are satisfied:
(1) the supplier of service is located outside India;
(2) the recipient of service is located in India; and
(3) the place of supply of service is in India.
The place of such supply would be taken to be the location where the firm is registered (in GST) and the supplies would attract integrated tax (IGST) on reverse charge method. The factum of which currency was used to pay the consideration is immaterial.
6. Export of IT/ITES goods or Services:
Section 16 of the IGST Act places export of goods and services on the same footing.
Export of IT services shall be treated as zero rated supply. The supplier can either export services after paying IGST and claim refund or can export services without payment of IGST under bond or under letter of undertaking.
The supply of any service is considered an export of service, where the following conditions are met:
(1) the supplier of service is located in India;
(2) the recipient of service is located outside India;
(3) the place of supply of service is outside India;
(4) the payment for such service has been received by the supplier of service in convertible foreign exchange or in Indian Rupees wherever permitted by Reserve Bank of India; and
(5) the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with explanation 1 of section 8 of the IGST Act, 2017.
Explanation 1 of Section 8 of the IGST Act provides that, for the purposes of this Act, where a person has, -
(i) an establishment in India and any other establishment outside India;
(ii) an establishment in a State or Union territory and any other establishment outside that State or Union territory; or
(iii) an establishment in a State or Union territory and any other establishment [* * *] registered within that State or Union territory,
then such establishments shall be treated as establishments of distinct persons.
Thus, when a service provider export services to its branch outside India, it shall not be treated as export of service. Though such supply shall not be treated as zero rated supply, such supply is exempted from payment of GST under the Notification No. 15/2018-IT (rate) dated 27.07.2018. Similarly, though supply to Nepal and Bhutan against payment in Indian Rupees may not be treated as export as payment is not received in foreign exchange, such supply is exempted from payment of IGST.
Exports and supplies to SEZ units and SEZ developers are zero-rated in GST. Zero-rating effectively means that no tax is payable on exports but the exporter/supplier is entitled to the input tax credit on inputs/input services used in relation to exports. The exporters have two options for zero rating, which are as follows: (1) To pay integrated tax on supplies meant to be exported and get refund of tax so paid after the supply is exported. (2) To make export supplies under a bond or letter of undertaking and claim refund of taxes suffered on inputs and input services in relation to such exports.
Rule 96 of the CGST Rules provides for procedure of export of services. Any registered person availing the option to supply goods or services for export without payment of integrated tax shall furnish, prior to export, a bond or a Letter of Undertaking in FORM GST RFD-11 to the jurisdictional Commissioner and can export services without payment of IGST. Alternately services can be exported after paying IGST and refund of the taxes paid can be claimed after export, and receipt of bank realization certificate.
7. Associated Enterprises:
An enterprise which participates, either directly or indirectly, through one or more intermediaries, in the management, or control or capital of the other enterprise is an associated enterprise. In the context of GST, associated enterprise is particularly relevant in the case of supply of services, where the supplier is located outside India. In such cases, the time of supply will be the earlier of date of entry in the books of account of the recipient of supply or the date of payment – thus, within ‘associated enterprises’, the levy under GST is attracted once such book entries are made even if no actual payment takes place or no invoice is issued.
[The author is managing partner of Rajesh Kumar and Associates. The author can be contacted on rajesh@rklegal.org]