GST impact 3 on service providers: Compliance burden may rise, service tax to go up
December, 21st 2015
The proposed GST may change where and how the service tax is paid, which could increase litigation. In this third of the 5-part series, TOI finds out why service providers are anxious... Service providers are understandably anxious on many fronts as regards the proposed GST regime. Not only is the tax rate under GST expected to rise from the current 14.5% (which may make their services unattractive to customers), but the level of compliance requirements increases manifold.
Currently, most indirect taxes are `origin-based' and are payable at the place where the service provider is located. GST is a `destination based' tax. Thus, concepts such as determining the `place of supply' and associated challenges kick in.
Increase In Compliance Requirements
At present, service tax is a central levy, requiring a single registration and a half-yearly filing by the service provider. GST is a dual tax structure and this is where the problems begin. As Siddharth Mehta, indirect tax partner, KPMG, illustrates: "Currently, a telecom operator with pan-India operations can discharge its service tax compliances through a single `centralized' registration. However, under GST, such operator would need to obtain a separate registration for each state where the company operates."
In addition to registration, compliance burden as regards filing of returns has also increased substantially -in terms of the periodicity of returns, number of return formats and level of details required in these returns. "If the service provider, has offices in six states, it may be required to file 78 returns annually, as compared to only two at present. Further, if back-end operations are not planned well, the taxpayer will run the risk of a credit accumulation in one state and a cash outgo in another," says Utkarsh Sanghvi, indirect tax partner at EY.
Determining Place Of Supply
As tax has to be paid where the service recipient is located, it throws up many challenges. "India Inc hopes for simple, unambiguous `place of supply' (POS) rules to ensure that multiple states don't try to levy tax on the same transaction. It is also essential that the rules should not result in input tax credits getting blocked in any circumstances," stresses Mehta. He illustrates: If a company organizes a business conference in Delhi (where it is not located), if the hotel treats it as a `local supply' in Delhi and charges Delhi GST, how will this company claim credit?
The draft model GST law, which is widely in circulation, provides some indicators of how `POS' will be determined under GST. However, government officials say that this document was not released by the government, drafting work is on and a version will be made available for stakeholder discussion in the coming weeks. In case of mobile connections for telecommunication and internet services, provided on `post-paid' basis, the `POS' will be determined based on the customer's billing address. If the mode is `pre-paid', the POS will be the location where the payment is received or vouchers are sold (in case payment is made electronically, the customer's address with telecom service provider will determine the POS), says the draft.
Rohan Shah, managing partner, Economic Laws Practice, suggests a solution: "For sectors such as insurance or telecom, which typically have consumers who may keep moving from one state to another, given the difficulty of keeping track of addresses, the POS should be based on the location of the service provider."