A Service exporter should register under service tax, rather than wait for GST
India’s services sector contributed about 61% to India’s Gross Domestic Product in the year 2015-16 and is currently the second fastest growing services economy in the world. Information technology, in which the country is a global leader, accounted for $ 108 billion worth of service exports in the last financial year, exporting primarily to the United States, United Kingdom and Europe.
To promote exports, the policy of Government has always been to ensure that no tax is exported along with export of service. For this reason, services are not subjected to service tax if the same exported outside India. A further incentive given to an exporter of service is eligibility to claim refund of service tax and central excise duty paid on its expenses. However, for all practical means, this benefit is available only if the person is registered under service tax law.
In India there are a number of small size IT or other service providers who export services either directly or through freelancing portals like Upwork. They are generally not registered under service tax. Many of them incur service tax on various expenses such as rent, telephone and internet, software purchase etc. But due to lack of proper guidance they miss out taking such benefits for which they are genuinely eligible.
Is registration mandatory under GST
As per Section 22 of the Central Goods and Service tax Act, “Every supplier shall be liable to be registered under this Act in the State or Union territory, other than special category states, from where he makes a taxable supply of goods or services or both, if his aggregate turnover in a financial year exceeds twenty lakh rupees.”
However, this limit of twenty lakhs is not applicable where inter-state supplies are made. Since export has been deemed to be an inter-state supply, all exporters of services would mandatorily be required to take registration under GST.
Benefits of registration under GST
As discussed above, a service exporter is eligible to claim refund of service tax paid on his expenses. The current rate of service tax is 15%. Under GST, the standard rate of tax on services is expected to be 18%. So this increase in rate of service tax will increase the cost of such service providers if same is not availed as a credit.
In addition, the greatest benefit of GST is that it allows a business to take credit of GST paid on any purchases made for business. It can be anything from laptops, mobiles, furniture, AC, stationary, other office expenses etc. This will essentially increase the amount of GST eligible as refund manifold times for any service exporter. But to take this benefit, it needs to be mandatorily registered under GST.
Why take service tax registration now
We discussed above that the current service tax law allows a person to claim refund of service tax paid on any expenses. Taking a lenient view, the law facilitates that in case a person has missed taking credit of service tax paid on expenses, he can take it within 1 year of the date of invoice.
It means that a service exporter can even today take full credit of service tax paid on expenses incurred in the last one year – provided he takes a service tax registration now. After taking credit, he may either take a refund of the same or carry forward the same under GST regime. It may be noted that if we miss taking any credit of service tax by 30 June 2017, it will lapse after implementation of GST from 1 July 2017.
Therefore, to conclude, it is advisable that such persons take service tax registration now to avail any missed credit. They can then take such credit in their service tax returns to be eligible to carry forward the same to GST regime.
Written by CA Mudit Goyal and Silky Gaba