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GST on service sector: Vague orders by advance ruling authorities spell trouble

GST, GST Council, ITES exports, input tax credit, service sector, BPO industry

Change is always easier to talk about than to actually pioneer. India witnessed a tectonic change in the landscape of indirect taxation with the introduction of the GST. The government, business and the common man alike, were all cognisant of the initial bumpy ride that GST would show in its implementation. Adding credence to the above is the fact that the GST Council has had 32 meetings, which resulted in over 900 decisions and the issuance of over 290 notifications by the Central government. This is also a testimony of the government s resolve and dogged efforts towards addressing the concerns and challenges faced by the trade and public.

The services sector, often credited as the feather in the cap for India on the global stage, has had to deal with a plethora of changes in the backdrop of the implementation of GST. For starters, given the fundamental shift in taxation of services at a state level, service providers have been required to seek state-wise registration where they have their offices. This is in contrast to the previous regime where invoices could have been raised from a central location, with a single centralised registration, irrespective of the number of states of operations. Obtaining registration in each state of operation of the company has led to an increase in compliance for the industry as returns ought to be filed for each registration. This is also in the backdrop of a monthly return concept under GST whereas the service tax law had 2-half-yearly returns a year.

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The largest issue that the services industry would have to deal with, in the backdrop of state-wise registrations, is the issue of explaining business operations, tax positions, tax credits, etc, before multiple state authorities undertake audits, assessments, etc, at a state level. Another related issue which is being dealt with by the services industry is the accumulation of input credit in different states on account of varied proportions of billing patterns raised from different locations. Hence, it has been important for the services industry to determine such credit accumulations and appropriately address them. Another challenge has been to understand the principles laid down by various advance rulings issued by different state authorities. Constant changes in the tax positions adopted by the industry, on account of contradictory and pro-revenue advance rulings issued by various state authorities, has not helped the industry either. Some of the key contentious rulings include the following:

*For long, India has been in the forefront of back office support services with IT/ITES exports crossing $165 billion. The IT/ITES industry has historically treated supply of back office support services to overseas clients as export of services and this position has seldom been disputed. However, in a recent judgment, the advance ruling authority shook that foundation by holding that back office support services would be taxable in India on the premise that the Indian entity is engaged in facilitating supply of goods and services whose taxability shall always be in India, in case of an Indian service provider. This decision has created confusion in the BPO industry whose tax positions are not likely to be challenged in various states of its operations. This decision, if not clarified to be incorrect by authorities, could have far reaching implications

* The advance ruling in another case has observed that an employee is tagged to a particular branch and not to the company as a whole. As a result, activities undertaken by employees for different branches would be subject to GST. The very premise that an employee is tagged to a particular location and not to the company as a whole is not correct and needs to be set right

*It is a common phenomenon across any industry to incorporate penal clauses in case of shortfall of services or breach of contract. Revenue authorities are increasingly looking to take a broader view while determining taxability of liquidity damages and penalties. While a penalty under a contract is levied on account of shortfall of services or on account of breach of contract, which is penal in nature and not a service per se, there are advance rulings stating otherwise

The above rulings and the approach adopted by advance ruling authorities have caused additional burden on the industry as such rulings have increased the ambiguity in the minds of the industry. The recent announcement by the GST Council of a centralised appellate advance ruling, which would address situations of conflicting state appellate advance rulings, is a welcome one. However, the same does not seem to be an option in the case of an advance ruling from only one state, though appearing to be incorrect. Despite the above, from an impact of tax cost to businesses, the industry has benefitted immensely from the introduction of GST. Due to the structure of the law, the services industry is able to avail input tax credit of tax paid on goods and traders have been availing credit of services. As a result, tax leakages in the system have been plugged. Refunds of credit have been an important element for exporters and the government has supported the industry immensely by initiating special drives for fast tracking of refunds. This has ensured that the industry has minimal working capital blockage. While it has been an action-packed 18 months, the industry is hopeful that the ambiguities that have emerged due to the advance rulings will be addressed by the government in the near future. With a stable GST in place, the services industry would benefit immensely in the long-run.

(Article authored with inputs from Mamatha Anand, director, Deloitte India and Ankush Surana, manager, Deloitte India.)