Impact of GST on Service Sector: The services sector is not only the dominant sector in India’s GDP, but has also attracted significant foreign investment flows, contributed significantly to exports as well as provided large-scale employment. The government has unveiled a four-tier GST rate structure for the sector — 5 per cent, 12 percent, 18 per cent and 28 per cent. The bulk of the services will, however, be taxed at 18 per cent. The sector is currently taxed at 15 per cent, so the GST regime will likely increase tax incidence for this sector. India’s services sector covers a wide variety of activities such as trade, hotel and restaurants, transport, storage, communication, financing, insurance, real estate, business services, community, social, personal services, and services associated with construction. The sector contributed around 66.1 per cent of its Gross Value Added growth in 2015-16.

Impact of GST on Service Sector

Present Taxation on Service Sector

  • The service sector at present is taxed at the rate of 15% including Swatch Bharat and Krishi Kalyan Cess (KKC). The GST rate is likely to be higher widely speculated at 15-20%. This means that there will be an impact on the services which will become costlier by the differential tax amount from the current levels.
  • Presently there is no input tax credit from VAT and Sales Tax paid while creating infrastructure or while providing service where as now under a unified tax regime,Service providers are able to claim those tax credits resulting in lowering the tax.

GST Rates on Services

The Goods and Services Tax (GST), set to be launched from July 1, will have rates of 5, 12, 18 and 28% for services, in line with those applying to goods. It is a big departure from the current regime, where a single rate of 15% is applied on most services. check more details for GST Rates from below…

Opportunities and Challenges for Service industries:

  • Costlier Services: In current tax regime, service tax is applicable at the rate of 15% on Services rendered which includes 0.5% for Swatch Bharat Cess and 0.5% for Krishi Kalyan Cess but it is expected that under GST regime services will be charged by higher rate of tax at 18%.
  • Notices from Taxation Authorities: In current tax system, both Central and State Govt. have right to collect the tax according to the rights given in list I, II and III in the Constitution and because of that sometimes it becomes so confusing to find out to pay taxes to which department in regards to goods and services like software, works contract etc. Having disputes between Central and State Government and what’s happening is that the person paying tax to service tax department getting notices from the VAT/CST department and the person paying the VAT/CST liability gets the notifications from the Services tax department.

But with the introduction of single tax GST regime, the double taxation effect due to disputed goods and services in the current tax system will get eliminated. In GST tax structure both supplies of goods and services will be treated once with the unique rate of tax respectively.

  • Registration of Place of Business: Currently there are centralized registration provisions under Service tax that mean provider of services can render services from any place in India after getting registered once but in GST regime centralized registration will not be available as the dealer or the service provider needs to get registered with that particular state govt where he has the provision for registering business site office as well from where he is intended to provide services.

Input credit:

Under the current scenario the service sector is unable to claim of VAT and sales tax incurred but in GST regime service sector company able to take credit of Vat/CST/ Excise duty. This is likely to change in the favour of the service providers.

Multi-location taxation:

The GST is a destination based tax and is proposed to be levied at the point of sale. The service providers especially the IT sector is used to service tax compliance from a centralized location. Under the GST regime the CGST, SGST, IGST will have to paid depending on the jurisdiction of the service provided. In other words if the service provider is making the software installation for a company which has 6 offices in 6 different states, It would be required to split the GST payment across six states.

Key Points:-

  • Service providers take registration at each place where service are provide
  • Change IT Infrastructure
  • Service providers take credit of sale tax/vat/excise duty
  • Service becomes costlier.

The main challenge for the sector in the GST era is multiple registration. Service tax will be collected by the Centre under a system of centralised registration. States have been reluctant to agree to centralised registration; the government is now exploring an arrangement for centralised compliance verification. There is a provision to grant centralised registration, but it has to be seen if the Centre can persuade the States through the GST Council.


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