In the wake of globalisation and digitisation of the manner in which the business are conducted, the IT/ ITES industry holds a significant place in the future business scenario. The Economic Survey 2017-18 mentioned that the IT/ITES services industry in India has scaled to around $140 billion during 2016-17.
India today is globally the top outsourcing destination accounting for more than half of the market share. The IT/ITES industry has contributed around 7.7% of the country's GDP and according to IBEF is a key employment generator with a projection of creating 1.3- 1.5 lakh new jobs annually.
The Government has also provided considerable impetus to the industry with its various flagship programmes such as Digital India, Smart Cities, e-Governance coupled with a drive towards a cashless economy. The Government has been pro-active in considering demands of the industry and providing timely respite from the teething troubles under
GST as well. The recent circular on relaxation of the process of obtaining the Letter of Undertaking and the GST refund fortnight programme were example of such measures.
IT/ITES industry primarily consists of service exporters and captive units who provide services to their foreign clients and hence most of these entities are eligible to claim refund of the input GST borne on its procurements made. GST regulations have now a specific provision for providing a provisional refund of 90% within seven days, which has the potential to resolve the issue of blockage of working capital for exporters. While the Government is taking various steps in the right direction there are some issues still faced by the industry which needs immediate attention and action.
Refund Formula
As per Rule 89 (4) of the CGST Rules, refund eligibility is determined by ratio of export turnover to total turnover. While export turnover is linked to receipts in forex, total turnover is linked to billings during that period. This is not apple-to-apple comparison, and may create some level of distortion. We believe that the purpose is to arrive at the percentage of export business and allow proportionate refund. In view of this, both numerator and denominator may be linked only to billings, which is in line with the practice followed historically.
Refund of ITC on Capital Goods
Section 54(3) suggests that exporters would get a refund of input tax credits; which is defined as credit of all types of GST paid on eligible items. There is no distinction made between capital goods and inputs/ input services. However, we note that the refund formula uses the 'Net ITC' which is defined as ITC on inputs and input services only. While this part of the formula is similar to the pre-GST regime, it needs to be relooked at. In the erstwhile regime, capital goods had a restrictive meaning limited to specified excise chapter headings, whereas in GST it covers any goods which have been capitalised. Also, pre-GST, businesses generally incurring VAT on such goods, which was not eligible for input tax credit for most, whereas GST applies on such capital goods.
Therefore, although eligible for ITC, seems to become ineligible for refund. This creates a concern for entities who have minimal or no domestic turnover. The restriction on capital goods is prescribed only under the CGST Rules. Judicial precedents suggest that if the Rules travel beyond the Act, they should be read down. We hope that this formula is updated to cover capital goods, else it may create accumulation of tax credits for exporters, and possibly trigger litigation.
In summary, in our view, the Government and the authorities have been addressing some of the major concerns of the industry and have created a conducive framework for the regime change from service tax to GST. Some of the challenges and issues which are open are expected to be ironed out by continued engagement with relevant stakeholders.
Source: economictimes.indiatimes.com