Since its introduction, GST has had a huge impact on the Indian economy. Unsurprisingly, it has both its supporters and its detractors. In this article, we are not discussing these supporters or detractors, but the impact of the GST regime on India’s software industry. We will also discuss issues like GST rates, input tax credits, etc.
What is the difference between goods and services?
To start, let’s address a basic question – is software considered a good or a service? To understand the difference, we refer to section 7 (Meaning and Scope of Supply) of the CGST Act, 2017. Section (1A) of the Act states that where certain activities or transactions constitute a supply in accordance with the provisions of sub-section (1), they shall be treated either as supply of goods or supply of services as referred to in Schedule II.
Furthermore, as per Section 7(1A) read with Schedule II, the development, design, programming, customisation, adaptation, upgradation, enhancement or implementation of Information Technology software shall be treated as supply of services. The temporary transfer or permitting the use or enjoyment of Intellectual Property Rights is also classified as supply of services.
However, if a ‘pre-developed’ or ‘pre-designed’ software is supplied which can be made available to the recipients immediately and does not need to be specially made to suit a particular purpose, it is treated as a supply of goods.
Should software companies register for GST?
There are a number of considerations here that software companies should think about.
For example, software companies with turnover under Rs. 20 lakhs can register under the ‘Voluntary Registration’ scheme to get access to the benefits of GST payments. However, this is not compulsory.
For companies with pan-India turnover greater than Rs. 20 lakhs (greater than Rs. 10 lakhs in Manipur, Mizoram, Nagaland and Tripura), GST registration is compulsory.
Software companies must also be aware of the GST Composition Scheme. The scheme provides a number of benefits but it is subject to various conditions which must be considered before companies opt for it. A supplier of pre-developed or pre-designed software (‘ goods’) can avail the benefits of this Composition Scheme and pay tax at 1% of the turnover of taxable supplies of goods and services. A supplier of software services can also opt for Composition Scheme and pay tax at 6% on all the outward supplies, provided that the aggregate annual turnover is less than or equal to Rs.50 lakhs in the preceding and current financial year.
At the time payment becomes due, a Composition taxpayer shall issue a Bill of Supply instead of a Tax Invoice as he cannot collect tax from the recipient on his outward supplies.
What is the rate of GST
For all kinds of software supply, the GST rate is 18%, to be collected from recipients.
Place of Supply and Type of GST
The type of GST to be charged depends on the nature and place of supply. This could be:
- Intra-state supply: When the software company provides goods or services within the same state or union territory, the supplier will charge CGST (Central Goods and Services Tax) & SGST (State Goods & Services Tax) from the recipient.
- Inter-state supply: When the software company provides goods or services to another state or union territory, accordingly the supplier will charge IGST (Integrated Goods & Services Tax) from the recipient.
Here, ‘place’ refers to the location of:
- Recipient: If recipient is registered OR
- Supplier: If recipient is not registered and his address is not available in the supplier’s records
Time of Supply and GST Payment
In addition to place and type, software suppliers must also know about the time of supply. This factor determines when they must pay GST (i.e. when they are liable to pay GST).
The time of supply depends on the time limit specified for issue of invoices.
For one-off supply of software services, invoice should be issued within a period of 30 days from the date of supply of services
For continuous supply of services (e.g. Annual Maintenance Contract or AMC) for a period exceeding 3 months with periodic payment obligations, the invoice should be issued either:
- on/before the payment due date
- before/at the time when the supplier receives the payment
- on/before the date of completion of the event when the payment is linked to completion of an event
Date of receipt of payment could be either the date on which:
- Supplier entity records receipt in its books of accounts
- Payment is credited to the supplier’s bank account
What details should be included in the software supplier’s invoice?
- Entities opting for Composition Scheme should raise a bill of supply with the following particulars:
- Name, address and GSTIN of the supplier
- Consecutive serial number not exceeding 16 characters, in one or multiple series, unique for each F.Y
- Date of issue
- If the recipient is registered: name, address and GSTIN
- If the recipient is unregistered: name, address and the name of the state
- If the aggregate turnover in the preceding financial year is over 1.5 crores, HSN Code for goods and services supplied
- Description of goods and services supplied
- Value of supply of goods or services (include account discounts, if any)
- Signature/Digital Signature of the supplier
- Entities not opting for Composition Scheme should raise an invoice with the following particulars (in addition to the above):
- Gross value of goods and services
- Taxable value of goods and services (include account discounts, if any)
- Rate of tax (IGST, CGST+SGST)
- Amount of tax (IGST, CGST+SGST)
- Place of supply
- Include name of the state in case of Inter-state supply
Regardless of whether the supplier is raising a bill of supply or an invoice, they must prepare the document in duplicate. They must provide the original to the recipient and keep a duplicate for their own records.
Conclusion
The previous tax system posed many challenges for IT and software companies. Since software is listed as both a good and a service, such companies were required to pay both VAT and service tax. The introduction of the GST regime has amalgamated service tax, VAT and excise duty under one entity with a flat rate – 18%. This means that software businesses now need to pay only a standard single tax, which eliminates the problem of cascading (and expensive) taxes, reduces confusion and also introduces transparency. That’s why it’s critical that such companies understand the various implications of GST and how it can affect their business. We hope this guide gives you a good starting point. To know more, leave a comment below.
Disclaimer: The information is provided purely for informational and educational purposes only. It should not be misconstrued as legal advice. Taxguru cannot take any responsibility for the result or consequences of any attempt to use or adopt any of the information presented herein.
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