Does Software/IT Industry Comes Under Goods and Services Tax (GST)?

The Indian economy has witnessed a major transformation with the introduction of Goods and Services Tax (GST) in July 2017. By combining multiple indirect taxes into one, GST created a more transparent and uniform system across different sectors, including the Software and IT industry. However, many businesses and professionals still struggle to fully understand how GST applies to software services, software products, and IT-enabled services which lead to ongoing confusion.

In this blog, you will learn in detail whether the Software/IT industry falls under GST, how it is categorized, the applicable rates, compliance requirements, and other key aspects.

Understanding GST and Its Purpose

In order to expedite the taxation process, India implemented a comprehensive indirect tax system known as the Goods and Services Tax (GST).

Overview of GST

Launched on July 1, 2017, the Goods and Services Tax (GST) combined several Central and State taxes into one simple system. This major reform was designed to reduce the problem of double taxation and build a single national market. GST is charged on the supply of goods and services, replacing taxes like Central Excise Duty, Service Tax, and VAT. The implementation of GST marked a significant shift in India's tax structure. It promotes transparency and efficiency in tax administration. 

Purpose of GST

The primary objectives of GST are:

• Elimination of Cascading Taxes: By integrating various indirect taxes, GST reduces the tax-on-tax effect. It decreases the overall tax burden on consumers.
• Creation of a Unified Market: GST facilitates the seamless movement of goods and services across state borders. This helps create a unified national market.
• Simplification of Tax Structure: Businesses find it easier to comply with a single tax system, which eliminates the burden of dealing with several tax regulations.
• Enhancement of Revenue Efficiency: A streamlined tax system improves tax collection efficiency and broadens the tax base.
• Promotion of Transparency: GST's digital infrastructure ensures better compliance and minimizes tax evasion.

The GST Council, which consists of both Central and State government representatives, is in charge of regulating and implementing the GST. This collaborative body works together to decide on tax rates, exemptions, and administrative rules for making decisions.

Does the Software/IT Industry Comes Under GST?

Yes, the Software and Information Technology (IT) industry in India comes under the purview of the Goods and Services Tax (GST) regime. The GST rates and classification depend on the type of software or IT service offered. Different services and products may attract different GST rates based on their nature. Here is a detailed explanation:

• Classification under GST
• Software as Goods:
• Definition: Pre-packaged or off-the-shelf software supplied on tangible media such as CDs, DVDs, or USB drives.
• Classification: Software and IT (Information Technology) Industry treated as goods under GST.
• HSN Code: 8523

The code 8523 in the Harmonized System of Nomenclature (HSN) refers to "Discs, tapes, solid-state non-volatile storage devices,'smart cards' and other media for the recording of sound or of other phenomena, whether or not recorded." This covers software that is delivered on tangible medium.

• GST Rate: 18%

As per the GST rate schedule, software supplied on physical media falls under the 18% tax bracket. This rate is applicable uniformly across India.

Software as Services:

• Definition: Software delivered electronically, including downloads, cloud-based applications, and Software as a Service (SaaS).
• Classification: IT and Software Industry treated as services under GST.
• SAC Codes: Commonly 998313 for software development and application services.

The SAC 998313 covers "Information technology consulting and support services," which includes software that is provided online among other IT-related services. This classification is outlined in the Annexure: Scheme of Classification of Services provided by the Central Board of Indirect Taxes and Customs (CBIC).

• GST Rate: 18%

As per the GST rate schedule, services falling under SAC 998313 attract an 18% tax rate. This rate is uniformly applicable across India.

Applicability to IT Services

Various IT services are subject to GST, including:

• Software Development Services: Custom software creation and implementation.
• IT Consulting Services: Advisory services related to IT systems and infrastructure.
• Cloud Computing Services: Provision of cloud storage, computing power, and related services.
• Data Processing Services: Handling and processing of data on behalf of clients.

Most Software and IT services are charged 18% GST. However, some services can get exemptions or lower tax rates. This usually happens in special cases, such as when services are provided to government departments or businesses in Special Economic Zones (SEZs) under certain conditions.

Taxes on Export of Software and IT Services

Exports of software and IT services are treated as zero-rated supplies under GST. The tax rate is 0% even though these services are theoretically taxable. This allows exporters to reclaim the input taxes they have paid to reduce their financial burden. To qualify, the following conditions must be met:

• The supplier must be located in India.
• The recipient must be located outside India.
• Where approved by the Reserve Bank of India, the payment must be made in Indian rupees or convertible foreign currency.
• Compliance Requirements

IT companies are required to follow GST compliance guidelines, which include:

• Registration: GST registration is mandatory if the aggregate turnover exceeds the prescribed threshold or if inter-state supplies are made.
• Invoicing: You must issue invoices that comply with GST regulations, including the correct HSN or SAC codes for accurate documentation.
• Returns Filing: Regular filing of GST returns, according to the prescribed schedule, grants compliance with tax regulations and helps avoid penalties or interest for late submissions.
• Input Tax Credit (ITC): If you maintain proper documentation, you can claim ITC on eligible inputs and input services.

GST Registration Requirements for IT and Software Companies

Under India's Goods and Services Tax (GST) framework, IT and software companies are required to register for GST based on specific criteria. The Central Board of Indirect Taxes and Customs (CBIC) provides comprehensive guidelines on GST registration. Here is a detailed explanation:

Mandatory GST Registration Criteria

IT and software businesses must obtain GST registration under the following conditions:

• Aggregate Turnover Threshold: If the aggregate turnover exceeds Rs. 20 lakhs in a financial year (Rs. 10 lakhs for states in special categories), registration is required.
• Inter-State Supply: Businesses supplying goods or services across state lines are required to register, regardless of turnover.
• E-Commerce Participation: Entities selling through e-commerce platforms must register, irrespective of turnover.
• Reverse Charge Mechanism (RCM): If liable to pay tax under RCM, registration is compulsory.

Registration Process

The GST registration process involves:

• Access the GST Portal: Visit the official GST Portal and navigate to “Services”, “Registration” and then, “New Registration”.
• Complete Part-A of Form GST REG-01: Fill up Part A of Form GST REG-01 first. Select 'Taxpayer' and input your PAN, email address, mobile number, and legal name. Then, verify it through OTP to get a Temporary Reference Number (TRN).
• Fill Part B of Form GST REG-01: Log in using the TRN, then enter business details, promoter information, the main business address, and bank details. Next, upload the necessary documents for verification.
• Verification and Submission: Authenticate the application by using a Digital Signature Certificate (DSC) or Aadhaar-based e-Sign. Then, submit it to get an Application Reference Number (ARN).
• Processing by Tax Authorities: If all details are correct, the GSTIN is issued within 7 working days. However, if additional information is needed, a notice is issued, and the applicant must respond within 7 working days.
• Issuance of GSTIN: Once approved, a unique 15-digit GST Identification Number (GSTIN) will be issued. The GST portal offers the ability to download the GST Registration Certificate.

Conclusion

The Software and IT industry is undoubtedly covered under GST, which applies to both goods and services based on the specific offering. GST has increased transparency with its stable 18% rate. This allows businesses to claim Input Tax Credit and simplifies the tax system. However, understanding classification rules, invoicing, and compliance is essential for companies to fully benefit from this framework. The IT sector’s growth depends on staying informed about GST to ensure long-term success. If you want to do a GST Registration for your business, contact Online Legal India to get assistance.