Mastering GST For Software And IT Services: Everything You Need To Know

The Goods and Services Tax (GST) has revolutionized the taxation landscape in India, including the software industry. Understanding the applicability of GST on software and software service supply is crucial for professionals and businesses in the IT sector. Here’s a deep dive into the nuances of GST on software supplies.

Supply of Software in Different Forms

Software supply can manifest in various forms, each with its specific GST implications. The CGST Act's Schedule II clearly classifies activities related to IT software—such as development, design, programming, customisation, adaptation, upgradation, enhancement, and implementation—as services. This distinction is crucial as it affects how GST is applied, whether as a service or a good.

• Pre-Developed or Pre-Designed Software: When software is supplied via tangible media or storage devices, or even through encryption keys (commonly referred to as off-the-shelf software), it is treated as the supply of goods. This classification falls under heading 8523, affecting how such products are taxed under GST.

Online Software Supplies

The digital age has seen a surge in online software supplies, which include downloading or accessing software and its updates over the internet. These transactions are considered OIDAR (Online Information and Database Access or Retrieval) services. The key takeaway here is that any online software provision is categorized under OIDAR, impacting its GST treatment.

Exemptions

Not all software supplies are subject to GST. The government has exempted certain software, particularly those issued by itself, from GST. Additionally, software intended for specific uses and beneficiaries may have a Nil GST rate, providing relief in certain sectors.

Place of Supply

The place of supply plays a pivotal role in determining the applicable GST:

• In-State Sales: When both the supplier and recipient are in the same state, the transaction attracts both CGST and SGST, dividing the tax burden between the state and central governments.
• Interstate Sales: Conversely, when the supplier and recipient are in different states, IGST is levied, ensuring the tax revenue is shared federally.

Understanding these nuances is essential for anyone involved in the supply or purchase of software, enabling compliant and efficient tax handling. This insight into the applicability of GST on software and software service supply lays the groundwork for navigating the complexities of taxation in the digital domain.

Is ITC Available on GST on Software?

One of the critical features of the GST regime is the availability of Input Tax Credit (ITC), which allows businesses to reduce their tax liability by claiming credit for the tax paid on inputs. When it comes to software, understanding the nuances of ITC can significantly affect the financial planning of businesses and individuals alike.

For Businesses

Businesses can avail ITC on GST paid for software purchases or subscriptions if the software is used in the course or furtherance of business. This includes software used for processing data, managing business operations, or for security purposes. However, it's crucial that the business maintains proper invoices and documentation to support the claim for ITC.

For Consumers

Generally, end consumers, who are not registered under GST, cannot claim ITC. The benefit of ITC is primarily designed for businesses to ensure that tax is only paid on the value addition at each stage of the supply chain.

Impact of GST on the IT Sector

The implementation of GST has had a mixed impact on the IT sector, with both positive and negative aspects.

Positive Impacts

• Simplified Tax Regime: GST replaced multiple taxes and cesses with a single tax, simplifying the tax structure for the IT industry.
• Input Tax Credit: The availability of ITC under GST has improved the cash flow for IT businesses, as they can now reduce their tax liability by claiming credit for the tax paid on inputs.
• Boost in Exports: The zero-rating of export services under GST has made Indian IT services more competitive globally, as it eliminates the tax cost embedded in exports.

Negative Impacts

• Higher Tax Rate for Some Services: Some IT services have seen an increase in the effective tax rate, impacting the cost of services.
• Impact on Small Businesses: Small IT businesses and freelancers face challenges due to the compliance requirements under GST, including the need for regular filings and digital record-keeping.

Calculation of GST

Understanding how GST is calculated on software is essential for accurate billing and compliance. Here’s a simple breakdown:

How is 12% GST Calculated?

• For example, if the cost of software is ₹10,000, the GST at 12% would be ₹1,200, making the total cost ₹11,200. The formula is straightforward: Cost of Software + (Cost of Software × GST Rate).

Service Accounting Codes (SAC) and HSN Codes

For billing and GST compliance, it's important to use the correct SAC (Services Accounting Code) for services and HSN (Harmonized System of Nomenclature) codes for goods.

• Service Code in GST for Software Services: Typically, software services fall under the SAC 998313 for software and applications software licensing services.
• HSN Code for IT Services: For goods, including software on physical media, HSN codes like 8523 are used.
• HSN Code and GST Rate for Computer Service Charges: Computer services, including maintenance and repair, fall under SAC 998714, attracting a standard GST rate.

GST on Labour

When it comes to labour charges, particularly in the IT and software development sector, GST is applicable based on the nature of the services provided. The standard rate applies unless specific exemptions are available, and the place of supply rules determine whether CGST/SGST or IGST is charged.

In sum, the GST on software and software-related services encompasses a broad range of considerations, from the applicability and calculation of GST to the availability of ITC and the impact on the IT sector. By navigating these aspects effectively, businesses and professionals in the IT industry can ensure compliance, optimize their tax liabilities, and contribute to a streamlined tax environment.

Meta- Deciphering GST for software services, from development to delivery