Previously, service sector especially real estate and restaurants have been a subject matter of significant interest to authority in terms of investigations and orders passed.
Interestingly, the rate reduction impacts not only the B2C service sector but also a wide range of Business-to-Business and Business-to-Government contracts.Impact of rate reduction on service industries:
- Insurance – General and Life:
Expectations around reduction in GST rate for health and life insurance will have significant impact on pricing of insurance products by both health and life insurance sectors.
Further, in case of exemption, the cost increase due to non-availability of ITC needs to be factored in to understand and price the product, which depends on various factors including market conditions, customer type, age and health, etc.
- Restaurants / hotels:
Various food products are presently covered in 12% GST rate. Any reduction in GST rate on such food products will result in significant cost reduction for restaurant industry in cases where tax is payable at 5% without input tax credit.
This reduction in GST rate will reduce the tax cost in supply and consequently require restaurants to re-look at their prices keeping in mind tax benefits and other factors.
- Airlines:
Similar to restaurants / hotels, airlines will be affected on account of any reduction in GST rate on such food products which will result in significant cost reduction in cases where output tax is payable at 5% without input tax credit.
This reduction in GST rate will reduce the tax cost in supply and consequently require airlines to re-look at their prices keeping in mind tax benefits and other factors.
Further, in case of any increase in rate of tax, the tax increase and cost benefits from reduction in rate of tax on inputs need to be examined to arrive at the amount required to be passed on.
- Real estate B2C sector:
Cement is presently covered in 28% GST rate. Any reduction in GST rate on cement will result in significant cost reduction for the real estate industry engaged in supply of residential complex construction services, since tax is payable at 5% without input tax credit.
This reduction in GST rate will reduce the tax cost in supply and consequently there is a need to examine whether the real estate industry is required to re-look at its prices keeping in mind tax benefits and other factors, in respect of existing buyers as well as prospective buyers.
- Real estate B2B sector:
Where ITC is available and used for providing works contract services, reduction in rate of GST on inputs will only result in working capital reduction impact. Whereas, in cases where ITC is not available to the extent of expenditure incurred on inputs since the outward supply is exempt, or in cases where ITC is disallowed for any reasons, reduction in rate of tax on inputs will certainly result in certain benefits. It needs to be seen whether such benefit is governed by provisions of Section 171 of the CGST Act.
Checklist and implementation guide:
- Review prices, especially considering rate reduction on inputs
- Impact of increase in rate of tax on output / inputs
- Impact on goods in stock
- Impact on cost increase, including costs incurred due to rate change, demonstration and documentation, entitlement for increase in terms of contract, negotiated contracts
- Credit notes for past transactions
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
