The FAQs give clarity on various issues affecting the IT/ ITES sector and cover several topics such as classification, rate, registration requirement for SEZ units, place of supply, input tax credits (ITC), input service distribution (ISD), composite supply, export of service, cross-charge and invoicing, etc.
Please find below the summary of the key clarifications arising out of the FAQs:
Classification of Software
- Classification as Service: It has been clarified that development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of IT software and temporary transfer or permitting the use or enjoyment of any intellectual property right are treated as “services” in terms of Schedule II of the CGST Act 2017. With respect to software licensing, it is clarified that the contract of supply and terms and conditions of End User License Agreement (EULA) are important to determine whether or not there has been ‘temporary transfer or permitting the use or enjoyment of any intellectual property right’.
- Classification as Goods: Where 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.
Registration for SEZ units in different zones within the same State
- It has been clarified that a single registration can be taken for all the SEZ units within a State, whether located in one SEZ or more than one SEZ.
Determining place of supply for services delivered from multiple locations under a single contract
- Normally a contract or agreement with the recipient is entered into by one of the branches (referred to as “Main Branch”) for delivering services from various locations which involve consolidated pricing for the contract as a whole, which is the norm in IT/ ITES industry.
- Therefore, in such cases of service delivery from multiple locations of the supplier to the recipient, it has been clarified that the supply could be visualised as consisting of following 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 on both the above distinct supplies accordingly.
- It has also been clarified that in such a scenario, the main branch would get ITC of GST paid by the other branches on supplies made by them to the Main Branch.
- With respect to valuation of inter-branch supplies, where the Main Branch is eligible for full ITC, the value declared in the invoice shall be deemed to be the open market value of goods and services.
Tax liability on replacement of parts under warranty and credit eligibility
- As parts are provided to the customer without a consideration under warranty, no GST is chargeable on such replacement.
- Further, as the value of supply made earlier includes the charges to be incurred during warranty period, the supplier undertaking the warranty replacement is not required to reverse the ITC on the parts/ components replaced.
Transfer of defective parts to mother warehouse
- Where defective parts are sent to the mother warehouse/ repairing centre for repair by the downstream repairing centres, it has been clarified that the defective parts shall be sent for repair on a delivery challan accompanied by such e-way bill as may be prescribed.
- In such a case, GST would be chargeable on the repair amount, including the cost of parts, charged by the repairing centre.
Tax implications on outsourcing of repair services
- Where an Original Equipment Manufacturer (OEM), who has an obligation to provide repair services to their customers in the warranty period, outsources the said activity to a third party (who will bill the OEM), it has been clarified that the third party is providing service to the OEM. GST would be payable on the value of any supplies made by the said third party to OEM.
Input service distribution mechanism
- The ISD provision is not mandatory and it only provides the manner of distribution of ITC wherever the business entity wishes to distribute the ITC as an ISD.
Taxability of laptop bag along with laptop
- In case 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 ancillary. Therefore, it is a composite supply and the rate of tax would be that as applicable to the laptop.
Export of software services and supplies to SEZ
- Exports and supplies to SEZ units and SEZ developers are zero rated in GST, whereby no tax is payable under the two options (i) refund of integrated tax paid on export of services or (ii) refund of input tax paid on inputs and input services in relation to export supplies under a bond or letter of undertaking.
- For the purpose of determining whether IT services constitute exports, certain conditions are prescribed which includes that the place of supply of service is outside India. In the context of IT/ ITES services, the place of supply is the location of the recipient. The location of the recipient is determined by the place of business where he receives the services.
- The formation of various sectoral groups and issuance of FAQs for the purpose of spreading awareness and education is a welcome step. The FAQs address many important issues faced by the IT/ ITES sector.
- There was a lack of clarity on requirement for separate registration for SEZ units where two or more units are located in different zones in same state. The clarification addresses the ambiguity and clarifies that single registration for all such SEZ units would suffice, although the rules are not yet amended to support the above.
- The clarifications regarding (i) classification for pre-packaged software as “goods” (ii) invoicing mechanism where supply has been made from multiple locations and invoicing from head office, (iii) determining the location of service provider and recipient, and (iv) composite supply of laptop and bag, would provide much needed relief to the sector.
- The clarifications are quite industry friendly and would serve the purpose of educating the stakeholders in this new regime.
You may click HERE to access a copy of the FAQs.
If you have any questions, please do not hesitate to contact Anita Rastogi on firstname.lastname@example.org.
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