IGST Archives - ProductNation

The GST was welcomed by all as a revolutionary measure. We had covered one earlier topic, “How GST will work for software exporters”. There have been many changes in last few weeks before GST was launched in the IGST law.

Please note that “GST law” treats Software as “Service”. Hence, there may be a mention on “Software” and “Services” in mixed manner in the write-up. This write-up is just focusing on problems and issues created for exporters by the GST process. On details of process there are many blogs on internet.

After launch of GST since 1^st July 2017, we came across many questions and concerns on how GST on Exports. I have been trying to write a piece on how the process works for Software exports under GST. However, the policy and process for export of “Services” was not at all clear. I have myself struggled through, and it has taken more than 6 weeks to understand the process, raise exports invoices and multiple documentations required.

GST has turned out to be nightmare, especially for Small and medium Software exporters and will continue to do so, unless corrective measures are taken up.

Let us look into how process required to be complied, caused problems.

Exporting Software under IGST law

IGST law on one hand treats exports as “Zero-rated” supplies and on the other hand treats exports as “inter-state” trade instead of “International trade”. These two corollaries of GST law are inherently paradoxical.

Being Zero-rated there is no tax or duty on export. However, being Inter-state trade (rather than being international trade) it requires payment of IGST under IGST law.

If one delves deep in to this application of IGST on exports, it clearly comes from concern of tax policy makers on “Goods”, moving in a container and a compliance assuring good reach port of export and gets exported finally. That this does not apply to services has not been thought over by the GST law makers. (the assumption may be services will adjust in due course of time)

Hence, as per IGST law an exporter is required to either

Pay IGST 18% on Software export and get it refunded

Or Export without IGST by

Filing a Bond if the exports in previous year were less than rupees one crore.
Filing a LUT if the exports in previous year were more than rupees one crore.

Filing a Bond requires submitting a Bank Guarantee to GST department up to 15% of the amount of duty applicable on estimated exports value in a given (say a year). The jurisdictional office of GST has a discretion to decide bank guarantee amount anywhere from Zero to 15%.

If the office approves zero % (or nil) bank Guarantee, the department asks a set of declarations and data of past year.

Anything that is based on discretion in regulation, also brings in corruption with it. Whereas there is news from many places that jurisdictional GST office are waving bank guarantee clause for Software/IT exports. There is also news that GST department is randomly asking for bank guarantees.

Problems created by IGST law

Locking of working capital

A small software exporter or a startup not having more than 1 crore of “export turnover” in past year will have to opt for either option a) Or b) from above choices i.e. either the exporter has to pay duty and get a refund or has to sign a bond with bank guarantee.

If the bank guarantee is not waved by the jurisdictional officer, the exporter will have to keep the bank guarantee replenished continuously to support regular exports.

In either of the cases the IGST law locks the working Capital of the start-up or small exporter.

The GST law therefore goes against policy of Government of India to promote startups. It also is going to be regressive measure for large number of small IT companies, IT consultants and freelancers.

Discretion causes corruption on ground

Anything that is based on discretion in regulation, also brings in corruption with it. For those who want to file bond, the jurisdictional office of GST has a discretion to decide bank guarantee amount anywhere from Zero to 15%.

Whereas there is news from many places that jurisdictional GST office are waving bank guarantee clause for Software/IT exports. There is also news that GST department is randomly asking for bank guarantees.

GST department’s manual intervention in Exports

Exports before GST were never allowed to report or get clearance from Indirect tax departments. Now, GST department has become a gateway for every exporter of Goods and Services, thus extending mandate from domestic tariff area to international trade also.

What is cause of concern is this intervention of GST department is manual as against the principle of making entire GST system end-to-end digital. This give power in hands of indirect tax officers to monitor exports.

This perhaps is a fundamental error that Government of India have made, against it’s public stance on “Ease of doing business.”

This is a problem for all exporters including those with “export turnover” more than 1 crore and eligible to sign a LUT with GST.

It is more of less like traffic policing the exports on regular basis and heavily increased compliance.

GST has no focus on Software exports

The entire GST law has been written with physical Goods in mind but applied equally to both Goods and Services. Once again Government of India has made a classical mistake. It is an irony that a nation that is known to be power house of Software has not focus of tax authorities on “Software exports”.

The concept of Bank-Guarantee is detrimental to Startup eco-system and SMEs

Startups and SMEs require removal of regulatory barriers for them to grow. GST law has done just the opposite. It requires small exporters and Startups to furnish Bank Guarantees.

GST for supplying to SEZ

SEZs are deemed to be considered outside the customs territory of India. Hence, supplies to SEZ units by exporters in India i.e. DTA will be treated in same manner as exports to clients located outside the country.

Therefore, if a Startup or a Software product company is selling to an SEZ unit, the process will be same as that of exporting.

Conclusions and Recommendations

Government of India has seriously lost focus on “Ease of doing business” agenda, startup policy, SMEs and supporting self-employed professionals while framing GST/IGST laws.

It is recommended that

Government of India should notify a clearly stated policy for Services and Software exports and not mix or generalize with remaining Goods exports.
The GST department should have no or minimum (limited to Digital medium) only in regulating exports of Services and Software
IGST duty and refund mechanism and also Bank-Guarantee or LUT should be done away for Services and Software export. A quarterly and annual reports is enough on digital platform, regulated digitally. In order to bring or include Services exporter under DGFT regulation, IEC can be made mandatory and used to regulate Services trade. IEC is same as PAN now, hence, IEC can be used by all size of exporters.

GST council has yesterday cleared all the bills required to implement the GST. Finance minister wants to kick-start from July 1 2017. This can be easily achieved is the model laws can be enacted in the current session of parliament. The GST is therefore set become a reality from the second quarter of the current financial year.

GST is going to catalyze greater IT adoption. We can see the business going digital in future and a Digital India emerging.

Apart from receiving GST as a catalyst for Software product industry growth, we also need to get prepared for adopting GST our selves. Not everyone has prepared for GST though. At iSPIRT we are starting discussion group on GST so that community can take advantage from shared learning. This blog is the first in series of this effort.

Few fundamental changes in the Goods and Service tax (GST) as it is called are

It is supply based and not sales based tax system
Being an indirect tax, it applies where the consumption happens
There are three statues and taxes that are part of GST i.e. SGST (state GST), CGST (Center GST) and IGST (integrated GST = SGST+CGST)
Both state and center will get tax on Goods and services supplied unlike earlier only Center received the service tax
The GST subsumes many of the indirect taxes prevalent at present

GST will significantly change the way of doing business. Also, it is bound to greatly impact the international trade regime e.g. excise duty will merge in GST and deemed exports benefits under excise laws may come to an end. The exports aspect will impact Software exporters, irrespective of whether they are operating under SEZ, STP, EOU, EPCG or outside as these export schemes. GST on Import is going to impact every one, as in globalized world with cloud penetration, everyone is bound to use goods and services imported.

In this blog we cover in brief the application of GST on the import and export of goods and services.

How it impacts Import?

Basic custom duty (BCD) is not covered under GST and it will remain same. There will be two components on each import to be paid i.e. Basic Duty + IGST.

IGST will subsume currently applicable countervailing duty (CVD) and additional duty of customs (SAD).

Integrated Goods and Services Tax (IGST) means tax levied under this Act on the supply of any goods/services in the course of inter State trade or commerce. IGST has two components SGST and CGST. A supply of goods/services in the course of Import into the territory of India shall also be deemed to be a supply of goods/services in the course of inter-state trade or commerce.

The levy of IGST will be payable for each transaction, as against the monthly payment in case of IGST payable on domestic interstate transactions.

The other difference in GST is aboput IGST computation. The IGST will be computed on transaction value of imported goods plus duties and taxes etc. charged under any statute other than the GST Law. Hence, ISGT will be applied on total landed value, basic customs duty and any other charges.

On import of services GST will be based on reverse charge method just as the Service tax is today i.e. IGST will apply on reverse charge mechanism. Hence, all Software or a SaaS bought online will be subject to reverse charge basis IGST.

But there is a input credit allowed in ISGT on imports. The service provider, trader or manufacturer of imported goods/services shall be eligible to offset IGST paid on import of goods/services against his output liability. The same does not apply to BCD as BCD is not part of GST.

Although it does not apply to Software sector, the anti-dumping duties and safeguard duties will continue to be applied as they were and have not been subsumed in the IGST.

Impact on exports

Exports under GST will be Zero rated i.e. there will not be any exports duty except on items that enjoy an export duty levy currently. Software exports will be zero rated.

The biggest impact will be on units presently enjoying exemptions on inputs like service tax in SEZ. Under GST all duties and taxes will be payable at the time of a transaction when procuring input goods/service and the exporter can get refund for these after exporting. Exemptions will be replaced by refunds after exports.

This will put lot of burden on arranging working capital for the inputs. This burden will be higher for manufacturing firms than services firms.

On pursuance of commerce ministry, in a recent announcement, the finance ministry has agreed to relax the refund pains. The finance ministry has agreed to refund 90% of the duties paid by exporters within a period of seven days under the Goods and Services Tax (GST) regime. If duty refunds could not be made within seven days, then government will pay interest to exporters. However, it is yet to be decided how much interest will be paid to exporters in such a scenario, as per announcement. (Source: livemint news item)

The remaining 10% refund will be made after verification by tax authorities.

This is a bit of relief to exporters. Compliance process will change from presently exemption based compliance to a refund claim filing in time. The crux here is to use digital technology to automate many of these issues in GSTN.

Whereas these announcements have been made, the details will depend upon how rules are notified.

GST will undoubtedly make the efficient in long run. However, the next one year will be full of challenges and adjustments by Ministry of finance to oversee a smooth rollout.

Should you have further questions on GST, please write to [email protected]

Tag: IGST

Software Exports – GST makes it difficult to do business