FAQ: Information Technology

1: Whether software is regarded as goods or services in GST?

Answer: In terms of Schedule II of the CGST Act 2017, development,
design, programming, customisation, adaptation, upgradation,
enhancement, implementation of information technology software
and temporary transfer or permitting the use or enjoyment of any
intellectual property right are treated as services.
But, if a pre-developed or pre-designed software is supplied in any
medium/storage (commonly bought off-the-shelf) or made available
through the use of encryption keys, the same is treated as a supply of
goods classifiable under heading 8523.

2: What are the implications of recognising the development, design, programming, customisation, adaptation, upgradation, enhancement, and implementation of information technology software as a service?

Answer: The primary implication is that the place of supply rules
applicable to services would apply in determining taxability of
the supply of software services. The same would be applicable in
situations of supply of services involving a temporary transfer or
permitting the use or enjoyment of any intellectual property right. The
other implication is that the supplier of software services would not
be eligible for the composition scheme.

3: ‘A’ is a dealer in Computers and Computer parts having turnover of Rs. 8 lakh in a year; does‘A’ have to register under GST?

Answer: Every supplier located in a State or Union territory, whose
“aggregate turnover” in a financial year exceeds twenty lakh rupees,
is liable to be registered under GST. This limit of turnover for a special
category State is ten lakh rupees. ‘A’, whose aggregate turnover is
only Rs. 8 lakh in a year, is therefore not liable to registration.

4: The registered person ‘B’ receives small portions of software code from individuals which he then integrates and supply as a package to clients. These individuals are having small turnover of Rs 5 to 10 lakh, and therefore are not registered in GST. Whether there is any liability on ‘B’ in respect of services provided by such individuals?

Answer: If the supplies are made by unregistered suppliers, GST
is liable to be paid by the recipient, who is a registered person,
under section 9(4) of the CGST Act, 2017. Therefore, in this case ‘B’
is liable to pay GST on services provided by these individuals.‘B’ can
claim credit of this tax paid by him on reverse charge.

5: What is the rate of tax on IT services?

Answer: The rate of GST on IT services is 18%.

6: Whether exports of software services attract GST?

Answer: Exports and supplies to SEZ units and SEZ developers are
zero-rated in GST. Zero-rating effectively means that no tax is payable
on exports but the exporter/supplier is entitled to the input tax credit
on inputs/input services used in relation to exports. The exporters
have two options for zero rating, which are as follows:

(1) To pay integrated tax on supplies meant to be exported and get
refund of tax so paid after the supply is exported.
(2) To make export supplies under a bond or letter of undertaking
and claim refund of taxes suffered on inputs and input services in
relation to such exports.

7: How do I determine whether IT services provided by me constitute export of service?

Answer: The supply of any service is considered an export of service,
where the following conditions are met:

(1) the supplier of service is located in India;
(2) the recipient of service is located outside India;
(3) the place of supply of service is outside India;
(4) the payment for such service has been received by the supplier of
service in convertible foreign exchange; and
(5) the supplier of service and the recipient of service are not
merely establishments of a distinct person in accordance with
explanation 1 of section 8 of the IGST Act, 2017.

8: How do I determine the place of supply of IT/ITES services?

Answer: Place of supply of IT/ITES services is the location of the
recipient in terms of section 12 and 13 of the IGST
Act, 2017. However, if the recipient is not registered and his address is not
available on the records of the supplier, the place of supply would be the
location of the supplier.

9: How to determine the location of the recipient?

Answer: Location of the recipient of service is defined in section 2(14)
of the IGST Act. A recipient of services is treated as located outside
India if his place of business where he receives services is outside India
or, if he does not have a place of business, his usual place of residence
is outside India.

10: Would I be liable to pay GST on reverse charge even if the foreign supplier of software from whom I buy for use in my firm registered under GST was to accept the payment in Indian Rupees?

Answer: Yes, you would be liable to pay GST. A supply is treated as an
import of service if the following conditions are satisfied:

(1) the supplier of service is located outside India;
(2) the recipient of service is located in India; and
(3) the place of supply of service is in India.

The place of such supply would be taken to be the location where the
firm is registered (in GST) and the supplies would attract integrated
tax (IGST). The factum of which currency was used to pay the
consideration is immaterial.

Answer: No. In this case, ‘C’ is covered by the definition of ‘intermediary’
section 2(13) of the IGST Act, 2017. The place of supply of such
intermediary service is location of the supplier in terms of section 13(8) of
the IGST Act, 2017. As ‘C’ is located outside India, GST is not
payable in this case.

12: What factors determine the location of ‘C’ (in question 11) as being outside India?

Answer: In terms of section 2 (15) of the IGST Act, 2017, the
location of a service provider is to be determined by applying the following
steps sequentially:

(1) where a supply is made from a place of business for which the
registration has been obtained, the location of such place of
business;
(2) where a supply is made from a place other than the place
of business for which registration has been obtained (a
fixed establishment elsewhere), the location of such fixed
establishment;
(3) where a supply is made from more than one establishment,
whether the place of business or fixed establishment, the
location of the establishment most directly concerned with the
provision of the supply; and
(4) in absence of such places, the location of the usual place of
residence of the supplier.
The location of ‘C’ is to be determined by applying the criterion from
(2), or (3), or as the case may be, (4).

13: I am an agent in India of a foreign IT/ITES provider (principal located outside India). For agency services, I bill the principal in convertible foreign exchange. Whether GST liability arises in this case?

Answer: You are an intermediary and the place of supply of the service
provided by you to the principal is in India irrespective of the mode of
payment. Hence, GST is payable on the services provided by you as an
intermediary to the principal.

14: I have more than one SEZ unit in different States; do I need to take separate registrations? Also, I have two SEZ units in one State. Can I take a single registration?

Answer:

(1) Yes. Under GST, every entity shall take GST registration in each State
from which it makes taxable supplies. However, a single registration
can be taken for all your SEZ units within a State, whether located in
one SEZ or more than one SEZ.
(2) A person having unit(s) in a Special Economic Zone as well as outside
the SEZ in a State shall make a separate application for registration
for SEZ unit(s) as a business vertical distinct from his other units
located outside the Special Economic Zone in that State (Refer Rule
8(1) of CGST Rules, 2017).

15: I have a unit in the DTA and another in the SEZ; can I take a common registration?

Answer: No. A person having unit(s) in a Special Economic Zone as
well as outside the SEZ in a State, shall make a separate application for
registration for SEZ unit(s) as a business vertical distinct from his other
units located outside the Special Economic Zone in that State (Refer
Rule 8(1) of CGST Rules, 2017).

16: If I supply a laptop bag along with the laptop to my customer, what would be the rate of tax leviable?

Answer: If the laptop bag is supplied along with the laptop in the
ordinary course of business, the principal supply is that of the laptop
and the bag is an ancillary. Therefore, it is a composite supply and the
rate of tax would that as applicable to the laptop.

17: I am obtaining online database access services from a company abroad over the net, would I have to pay tax on reverse charge?

Answer: The recipient, if registered, has to pay the applicable IGST on
reverse charge basis. If the recipient is not registered, the matter is
treated as an online information and database access or retrieval service
(OIDAR) and the OIDAR service provider is liable to take registration and
pay tax.

18: When would it be construed that I have made a supply of services involving temporary transfer or permitting the use or enjoyment of any intellectual property right?

Answer: Generally, the End User Licence Agreement (EULA) is the
legal contract between a software application author or publisher
and the user of that application governing the usage. The agreement
is renewable and/or could be amended from time to time. To find out
as to whether there is an element of supply involved when software
is delivered to its customer, the terms and conditions of EULA are
material.

The contract for supply therefore assumes significance in this test to
decide whether or not there has been ‘temporary transfer or permitting
the use or enjoyment of any intellectual property right’.

19: What special provisions are attracted in GST with regard to associated enterprises?

Answer: An enterprise which participates, either directly or indirectly,
through one or more intermediaries, in the management, or control or
capital of the other enterprise is an associated enterprise. In the context
of GST, associated enterprise is particularly relevant in the case of supply
of services, where the supplier is located outside India. In such cases,
the time of supply will be the earlier of date of entry in the books of
account of the recipient of supply or the date of payment – thus, within
‘associated enterprises’, the levy under GST is attracted once such book
entries are made even if no actual payment takes place or no invoice
is issued.

20: What would be the tax liability on replacement of parts (no consideration is charged from a customer) under a warranty and whether the supplier is required to reverse the input tax credit?

Answer: As parts are provided to the customer without a consideration
under warranty, no GST is chargeable on such replacement. The value
of supply made earlier includes the charges to be incurred during the
warranty period. Therefore, the supplier who has undertaken the
warranty replacement is not required to reverse the input tax credit on
the parts/components replaced.

21: An Original Equipment Manufacturer (OEM) has an obligation to provide repair services to their customers in the warranty period. This activity is outsourced by OEM to ‘D’, who bills the OEM for the services he provides to the customer. What is the tax liability of ‘D’?

Answer: ‘D’ is providing service to the OEM. GST is payable on the value
of any supplies made by ‘D’ to OEM i.e. in respect of bills raised by ‘D’ on
the OEM.

22: How will the defective parts be sent to the mother warehouse/repairing centre for repair by the downstream repairing centres? What is the tax liability?

Answer: The defective parts shall be sent for repair on a delivery
challan accompanied by such e-way bill as may be prescribed. GST
shall be chargeable on the repair amount, including the cost of parts,
charged by the repairing centre.

23: What is the tax liability in a scenario where supplies are made from multiple locations (in different States) of the supplier to the recipient under a single contract?

Answer: Delivering services from various locations and integrated
pricing for the contract as a whole is the norm in IT/ITES industry.
Normally the contract or agreement with the recipient is entered into
by one of the branches (let us say “Main Branch”). Therefore, in such
cases of service delivery from multiple locations of the supplier to the
recipient, the supply could be visualized as consisting of two distinct
supplies. First supply- the different branches of the supplier located
across different States are making the supply to the main branch
which entered into a contact or an agreement with the recipient for
the supply of such service. Second supply- main branch is making
a supply to the customer. GST is to be levied accordingly. In such a
scenario, the main branch would get input tax credit of GST paid by
the other branches on supplies made by them to the main branch.

24: In the scenario envisaged in previous question, the main branch is said to be entitled to ITC of the GST paid by the other branches. Thus, it is a revenue neutral situation. What are the valuation guidelines for such services?

Answer: The second proviso to rule 28 of the CGST Rules, 2017
provides that where the recipient is eligible for full input tax credit,
the value declared in the invoice shall be deemed to be the open
market value of goods and services.

25: Can payment of IGST on reverse charge basis on import of goods/services be done through book entry or ITC?

Answer: No. GST payable on reverse charge basis is to be discharged
through cash only. Rule 85(4) of the CGST Rules, 2017 refers.

26: Is the requirement of transferring of credit through ISD mechanism mandatory?

Answer: The ISD provision under the CGST Act, 2017 is not mandatory.
It only provides the manner of distribution of ITC wherever the
business entity wishes to distribute the ITC as an Input Service
Distributor.

27: What is the format for invoices to be issued in the case of reverse charge payment of GST?

Answer: No separate format for any type of invoicing including self-invoicing
has been prescribed. The contents of the invoice have been
prescribed in Rule 46 of the CGST Rules, 2017.

28: I am a software provider, registered at Mumbai. I supply software to my clients in Bangalore – would I be required to take a registration in Karnataka?

Answer: No. The supplies would be treated as inter–State supplies
and IGST is chargeable on the same.

29: I am an exporter of services. Would I be entitled to refund after the 1st of July (appointed day)?

Answer: For exports upto 30th June, 2017 refund may be claimed
under the provisions of the Chapter V of the Finance Act, 1994.
Exports made on and after 1st July would be eligible for refund under
the GST law.