From revenue collection, GDP contribution, to generating large-scale employment, the importance of the service sector in India has increased quite significantly in the last decade. As a matter of fact, studies suggest that the service sector makes up more than 50% of the nation's GDP. Moreover, it is also one of the sectors to attract the highest foreign investments.

How has the GST regime affected the service sector? Has the GST impact on service providers positive or has it made taxation more expensive for the sector?

Let us have a look-

Prevents Double Taxation

One of the biggest benefits of GST for the service sector is that it prevents double taxation. With the previous indirect tax system, there were several disputes with regards to whether a supply, like a restaurant or work contract, is a service or product. Due to the ambiguity, businesses were required to pay VAT as well as service tax. GST treats both in the same manner and eliminates double taxation.

4-Tier Tax System

Like all the other prominent sectors, the service sector also has the same 4-tier GST rates at 5%, 12%, 18%, and 28%. However, most of the services are taxed at 18%. With the previous tax regime, the taxes stood at 15%. So, the impact of GST has been as such that it has slightly increased the tax incidence for the service sector, which in turn, has increased the cost of services such as the ones related to hotels and restaurants, communication, business services, and financing for the end consumers. But keeping in mind the interest of the masses, many of the necessary services fall under the 5% and 12% tax bracket.

No Centralized Registration and Tax on Free Services;

With the previous tax regime, many the service providers could register their businesses at multiple places from a single, centralised location. However, GST has eliminated this privilege. Service providers are now required to register the businesses in respective states and pay Central GST or CGST. Moreover, businesses also used to offer several free services. But such services are now taxed under GST. This has made service providers wary of providing services for free.

Service Sector and GST

It can be said that the GST impact on service sector has been mixed. It has benefitted the sector in several ways but has also created a few barriers. While it has eliminated double taxation, and added more clarity to the taxation process, some services have become more expensive, and the lack of central registration has increased the compliance burden.

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DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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