The earlier VAT and service tax system in India was complex due to the presence of multiple taxes, extensive compliance requirements, and the issue of tax cascading. The introduction of GST has streamlined the tax structure, making it simpler and more efficient, particularly for the IT sector.
Under the previous tax regime, the sale of packaged software attracted both VAT and service tax. VAT was levied at around 5% in most states, while service tax was charged at 15%. In addition, excise duty applied to the manufacturing of IT products.
For example, when software was supplied on physical media such as a CD, DVD, or hard disk, the following taxes were applicable:
- Excise duty on manufacturing
- VAT on sale
- Service tax on the provision of services, as software could be downloaded multiple times
GST has eliminated such complexities and instances of double taxation by subsuming these multiple taxes into a single unified system.
GST Registration
Most IT service providers are required to obtain GST registration, as they are often involved in inter-state supply of services or in providing OIDAR (Online Information and Database Access or Retrieval) services. Under the GST Act, registration is mandatory for any person who:
- Provides taxable services exceeding ₹20 lakhs per annum (in all states except Special Category States), or
- Is engaged in inter-state supply of goods or services, or
- Provides OIDAR or other online services.
GST Invoice
A GST invoice is a document issued by the supplier to the recipient of goods or services. It is mandatory for a GST invoice to contain the following details:
(a) Name, address, and GSTIN of the supplier
(b) A consecutive serial number, in one or multiple series, containing alphabets, numerals, or special characters such as hyphen (-) and slash (/), unique for a financial year
(c) Date of issue of the invoice
(d) Name, address, and GSTIN or UIN of the recipient, if registered
(e) Name and address of the recipient and delivery address, along with the state name and code, if the recipient is unregistered and the taxable value is ₹50,000 or more
(f) HSN code of goods or accounting code of services
(g) Description of goods or services
(h) Quantity of goods and unit or Unique Quantity Code, where applicable
(i) Total value of supply of goods or services or both
(j) Taxable value after considering discounts or abatements, if any
(k) Applicable tax rate (CGST, SGST, IGST, UTGST, or cess)
(l) Amount of tax charged for each tax component
(m) Place of supply along with the state name, in case of inter-state supply
(n) Address of delivery, if different from the place of supply
(o) Whether tax is payable under reverse charge
(p) Signature or digital signature of the supplier or their authorised representative
If the aggregate turnover of a taxpayer exceeds ₹5 crore in any financial year from 2017–18 onwards, e-invoicing becomes mandatory for B2B invoices.
Time Limit for Issuing an Invoice
A registered person providing taxable services is required to issue a tax invoice either before or after supplying the service, but within the prescribed timeframe. The invoice must contain all mandatory particulars. As per Rule 47, the tax invoice for services must be issued within 30 days from the date of supply of services.
GST Rates
After the introduction of GST, tax rates on IT services and goods have seen a marginal increase. However, GST has eliminated the cascading effect of taxes and the earlier multiple tax structure. Earlier, IT software services attracted service tax, VAT, and excise duty separately. Under GST, only a single tax is applicable, which is broadly similar in overall impact.
The IT sector is subject to GST at the rate of 18% on the supply of services.
HSN Codes
HSN refers to the Harmonized System of Nomenclature. According to Notification No. 78/2020 – Central Tax dated 15 October 2020, taxpayers are required to mention a minimum of 4-digit or 6-digit HSN codes in Table 12 of GSTR-1, depending on their Aggregate Annual Turnover (AATO) in the preceding financial year.
Guidelines for Mentioning HSN / SAC Codes
| Aggregate Annual Turnover (AATO) | HSN Code Requirement |
|---|---|
| Less than ₹1.5 Crores | Not required |
| Between ₹1.5 Crores and ₹5 Crores | Two-digit HSN |
| ₹5 Crores and above | Four-digit HSN |
For import and export transactions, 8-digit HSN codes are mandatory to align GST with international standards and practices.
Common HSN Codes Used in the IT Sector
| HSN Code | Description |
|---|---|
| 998311 | Management consulting and related services including financial, strategic, HR, marketing, operations, and supply chain management |
| 998312 | Business consulting services, including public relations |
| 998313 | Information technology (IT) consulting and support services |
| 998314 | IT design and development services |
| 998315 | Hosting and IT infrastructure provisioning services |
| 998316 | IT infrastructure and network management services |
| 998319 | Other information technology services |
| 998144 | Research and development originals in computer-related sciences |
Place of Supply
The place of supply for services determines whether IGST, CGST, or SGST is applicable on a tax invoice. Correct identification of the place of supply is essential to decide the appropriate tax to be charged on the taxable value.
Incorrect classification of a supply as inter-state or intra-state, or vice versa, can cause compliance issues under Section 19 of the IGST Act and Section 70 of the CGST Act. In such cases, the taxpayer is required to pay the correct tax along with applicable interest for the delay, based on the revised or corrected classification.
Continuous Supply of Goods and Services under GST
As the term indicates, continuous supply refers to transactions where goods or services are provided on an ongoing or periodic basis, and payments are also received at regular intervals, such as monthly or quarterly.
Example – ERP Implementation Services
Consider the taxability of installing a new ERP system. ERP implementation is generally executed in phases and involves a long-term contract that may extend over several years. ERP professionals analyze business requirements, develop customized software, train employees, and provide ongoing maintenance and updates. Payments for such contracts are usually spread across multiple years, and earlier, service tax was charged accordingly. Under GST, such arrangements qualify as continuous or periodic supply and are taxed as per the applicable GST provisions.
Common Questions for Better Understanding
Is GST applicable on the import of software?
Imported software is classified under HSN Code 997331 and treated as an import of services. Since it is a service, filing a Bill of Entry is not required. However, the recipient is liable to pay IGST under the Reverse Charge Mechanism (RCM).
Is software in physical form treated as goods or services?
Software supplied in physical form is considered goods under the Customs Tariff Act and is classified under HSN Code 8523-80-20, attracting GST at 18%. Additionally, the transfer of software intellectual property rights is treated as a service and also attracts GST at 18%.
Is GST applicable on the export of software services?
Exports of software services to SEZ units or developers are treated as zero-rated supplies under GST. This means no GST is payable on such exports, while the exporter is still eligible to claim input tax credit on inputs used for providing the services.
E-Way Bill Requirements
If the principal supply is purely a supply of services and does not involve the movement of goods, generation of an e-way bill is not required. However, if the supply of services involves movement of goods along with it, an e-way bill may be required, depending on the nature of the transaction.
Maintenance of Books of Accounts under GST
Every registered person is required to maintain GST records at their principal place of business. The following records must be maintained:
- Details of inward and outward supplies of goods or services or both
- Input tax credit availed
- Output tax payable and paid
- Any other prescribed records
These books and records must be preserved for six years from the due date of filing the annual return (31st December) for the relevant year.
Income Tax Provisions – IT Company Perspective
Income tax is a direct tax levied on the income of an individual or entity, calculated based on prescribed income slabs.
Tax Rates Applicable to Companies
A resident company is taxed on its global income, whereas a non-resident company is taxed only on income received, accrued, or deemed to accrue in India.
| Category | Tax Rate (%) |
|---|---|
| Domestic company with turnover not exceeding ₹400 crores (FY 2020–21) | 25 |
| Other domestic companies | 30 |
| Foreign companies having PE in India | 40 |
Domestic Company refers to an Indian company or any other company that has made prescribed arrangements in India for declaration and payment of dividends.
Foreign Company means a company incorporated outside India. Such a company may be treated as a domestic company if it fulfills prescribed conditions under Rule 27.
What Constitutes Company Income?
Company income generally includes:
- Business profits
- Capital gains
- Rental income
- Income from other sources such as interest or dividends
Profits Earned from Business
IT companies primarily earn income from:
- Consulting services
- Software development
- System integration
- Hardware deployment and training
- Data management and cloud computing
- Internet of Things (IoT) and artificial intelligence
- Digital transformation and edge computing
- Web and email services
- Technical support and troubleshooting
The IT industry in India broadly includes IT services and business process outsourcing. Business profits are taxed at the applicable corporate tax rates after allowing eligible deductions.
Key Points Related to Business Income
- Tax is levied on net profit after deducting allowable expenses
- Expenses must be incurred during the previous year and for business purposes
- Pre-incorporation expenses are not allowed
- Depreciation on business assets is allowed as per prescribed rates
- Expenses related to discontinued business are not deductible
- Provisions for contingencies or anticipated losses are not allowed
- Depreciation on investments is not deductible
Set-Off and Carry Forward of Business Losses
Business losses can be set off against any income except salary income. Any unabsorbed loss can be carried forward for eight years to be set off against future business income.
Example
If an IT company earns revenue of ₹250 crores and incurs business expenses of ₹165 crores, tax will be payable on the net profit of ₹85 crores.
Tax Audit Requirements
Under the Income Tax Act, certain entities are required to get their accounts audited and submit a tax audit report along with the income tax return. This audit must be conducted by a Chartered Accountant and submitted by 30th September.
As per Section 44AB:
- Businesses with turnover exceeding ₹1 crore must undergo tax audit
- The threshold increases to ₹10 crores if cash transactions do not exceed 5% of total receipts or payments
- Professionals with gross receipts exceeding ₹50 lakhs are also subject to tax audit
Failure to comply attracts penalty under Section 271B, which is the lower of:
- 0.5% of turnover or gross receipts, or
- ₹1,50,000
Capital Gains for IT Companies
As per Section 45 of the Income Tax Act, profits from the transfer of capital assets are taxable under the head “Capital Gains.” IT companies often sell assets such as computers, machinery, furniture, and other equipment, which may result in capital gains.
Capital Gains Tax Rates
| Type | Conditions | Tax Rate |
|---|---|---|
| Long-Term Capital Gain | Equity shares / equity mutual funds | 10% above ₹1 lakh |
| Long-Term Capital Gain | Other assets | 20% |
| Short-Term Capital Gain | STT not applicable | Normal slab rates |
| Short-Term Capital Gain | STT applicable | 15% |
Set-Off and Carry Forward of Capital Losses
- Capital losses cannot be set off against income under other heads
- Long-term capital loss can be set off only against LTCG
- Short-term capital loss can be set off against STCG and LTCG
ITR Filing
Companies are required to file ITR-6, with the due date being 31st October.
Salary Payments and TDS Compliance
Under Section 192, tax must be deducted at source on salary payments based on estimated income and applicable slab rates. TDS is deducted at the time of payment and deposited with the government. Employers must issue Form 16 to employees.
Income Tax Slabs for FY 2023–24 (AY 2024–25) apply under both old and new regimes as prescribed.
Client / Customer Perspective
- IT companies provide services such as website development, cloud solutions, and email services
- Payments made to IT companies for professional or technical services attract TDS under Section 194J
- TDS is deducted at 10% or 2%, as applicable
- The deducted tax is deposited in the company’s PAN, and the company can claim credit while filing returns
Maintenance of Books of Accounts under Income Tax Act
If turnover exceeds ₹25 lakhs or income exceeds ₹2.5 lakhs in any of the preceding three years, maintaining books of accounts becomes mandatory. These include:
- Cash book
- Journal
- Ledgers
- Copies of bills and receipts
Books must be preserved for six years from the end of the relevant financial year.
Frequently Asked Questions (FAQs)
1. What is considered an IT service for taxation purposes?
IT services include software development, IT consulting, system integration, maintenance, cloud services, technical support, and digital services provided using information technology.
2. Are IT services taxable under GST in India?
Yes, IT services are generally taxable under GST at a standard rate of 18%, unless they qualify as exempt or zero-rated services.
3. When are IT services treated as export of services under GST?
IT services are treated as export of services when the supplier is located in India, the recipient is outside India, the place of supply is outside India, payment is received in foreign currency, and the supplier and recipient are not related establishments.
4. Is GST registration mandatory for IT service providers?
GST registration is mandatory if the turnover exceeds the prescribed threshold or if IT services are provided to foreign clients, even when the services are zero-rated.
5. Can IT service providers claim Input Tax Credit (ITC)?
Yes, IT service providers can claim Input Tax Credit on eligible GST paid on business expenses such as software tools, rent, internet, and professional services.
6. What is the place of supply for IT services under GST?
The place of supply is generally the location of the recipient, except in specific cases covered under GST rules.
7. How are IT services taxed under direct taxation?
Income from IT services is taxed as Income from Business or Profession under the Income Tax Act, based on applicable slab or corporate tax rates.
8. Can IT professionals opt for presumptive taxation?
Yes, eligible IT professionals and consultants may opt for presumptive taxation under Section 44ADA, subject to turnover limits and conditions.
9. Is TDS applicable on payments for IT services?
Yes, TDS may apply under relevant sections depending on whether the payment is made by a resident, non-resident, or government entity.
10. Are foreign payments for IT services taxable in India?
Foreign payments received by Indian IT service providers are taxable in India but may qualify as export of services under GST, making them zero-rated.
11. What records should IT service providers maintain for tax compliance?
IT service providers should maintain invoices, contracts, bank statements, GST returns, expense records, and foreign remittance documents.
12. What income tax return form should IT service providers file?
Most IT service providers file ITR-3 or ITR-4, depending on whether they opt for regular or presumptive taxation.
