The Goods and Services Tax (GST) was implemented in India to replace the many indirect taxes collected by the Central and State Governments with a unified tax structure.
Businesses are required to pay GST on the value of the products and services they supply or deliver.
Unfortunately, the GST does not treat all services equally. Certain services fall under the category of pure services, which are taxed differently from products or services that have physical components.
With its adoption, the indirect tax system known as GST has made taxes simpler and completely transformed the Indian economy.
Nonetheless, there is still significant ambiguity among businesses, particularly those that provide services, regarding the categorization and taxation of their services under the GST.
The idea of pure services comes into play here. Pure services are those that don't include the supply of commodities at all and don't have any physical components.
In this blog, we will go into more detail about the definition and GST categorization of pure services, their tax ramifications, and other relevant topics. Now let's get going!
What are Pure Services?
Pure services are services that do not involve the supply of any goods or the use of goods as a material for rendering the service.
Examples of pure services include consultancy, training, software development, accounting, legal services, etc. Pure services are intangible and cannot be touched, tasted, or seen.
Pure services are essential to the Indian economy and contribute significantly to its growth.
As mentioned earlier, they are services that do not have any physical components, such as goods or materials, associated with them.
They are often delivered in the form of knowledge, expertise, or skill and require specialized training, experience, or qualifications.
For instance, a business that provides consultancy services for tax compliance or accounting does not deal with any goods, but its services can be valuable to other businesses.
Similarly, a law firm that provides legal advice and representation is not dealing with any goods but is providing a service that is essential to its clients.
Pure services can be delivered in various forms, such as over the phone, online, or in-person, depending on the service's nature and the customer's preference.
The concept of pure services is important in the context of GST, as the taxation of services differs based on whether they are pure services or involve the supply of goods.
Taxation of Pure Services under GST
GST has simplified the taxation system for businesses by creating a uniform tax regime across the country.
As mentioned earlier, pure services are those services that do not have any physical components and are not related to the supply of goods.
These services are taxed at a standard rate of 18% under GST, similar to most goods' tax rates.
However, some pure services are exempted from GST, such as healthcare services provided by clinical establishments, educational services provided by educational institutions, and cultural activities.
These exemptions are aimed at making essential services more affordable and accessible to the public.
It is important to note that services provided by the government or local authorities are also exempted from GST.
These services include activities such as the issuance of passports, driving licenses, and birth certificate, among others.
The rationale behind this exemption is that these services are provided for the public good and not for commercial purposes.
However, if the government or local authorities engage in commercial activities, such as selling tickets for a public event, they are liable to pay GST on those activities.
It is also worth noting that some services are taxed at a lower rate of 12% or 5% under GST.
These include transportation of goods by road, air, or sea, renting immovable property, and construction services, among others.
The applicable tax rate for these services depends on various factors, such as the nature of the service, the place of supply, and the classification of the service under GST.
The tax implications of pure services under GST are straightforward, with most services being taxed at a standard rate of 18%.
However, businesses providing pure services must be aware of the exemptions and lower tax rates applicable to certain services.
Maintaining proper records and complying with the GST regulations is also essential to avoid any penalties or legal issues.
Input Tax Credit (ITC) on Pure Services
Input Tax Credit (ITC) is an important aspect of GST that allows businesses to claim credit for the GST paid on purchases of goods and services used for business purposes.
ITC aims to avoid the cascading effect of taxes, where businesses end up paying tax on tax.
Under GST, businesses can claim ITC on the GST paid on pure services if they are used for business purposes.
To claim ITC on pure services, businesses must meet certain conditions. Firstly, the service provider must be registered under GST and must have charged GST on the service.
Secondly, the services must be used for business purposes, i.e., they should be directly or indirectly related to the business activity. For example, a software development company can claim ITC on the GST paid on consultancy services related to software development.
However, if the consultancy service is related to a non-business activity, such as personal financial planning, ITC cannot be claimed.
It is important to note that businesses can only claim ITC on the GST paid on pure services that are used for business purposes.
If the services are used for personal purposes, ITC cannot be claimed. Moreover, businesses cannot claim ITC on the GST paid on exempted services, such as healthcare and education services, and services provided by the government or local authorities.
Businesses providing pure services can claim ITC on the GST paid on those services if they are used for business purposes.
However, businesses must ensure that the service provider is registered under GST and that the services are used for business purposes to claim ITC.
Proper record-keeping and compliance with the GST regulations are essential to claim ITC and avoid any penalties or legal issues.
Place of Supply for Pure Services
The place of supply is an important factor in determining the GST liability on a service.
Under GST, the place of supply for pure services is the location of the service recipient.
This means that if a business hires a service provider to provide pure services, the place of supply will be the location of the recipient.
For instance, if a company located in Delhi hires a consultant from Mumbai to provide services, the place of supply will be Delhi.
The GST will be charged based on the tax rate applicable in Delhi. However, if the same consultant provides services to a business located in Chennai, the place of supply will be Chennai, and the GST will be charged based on the tax rate applicable in Chennai.
It is important to note that the place of supply rules for services differ from those for goods.
In the case of goods, the place of supply is the location where the goods are delivered. However, in the case of services, the place of supply is the location of the recipient of the service.
The place of supply rules for services can be complex, especially for cross-border transactions.
Businesses must be aware of and comply with the rules to avoid any penalties or legal issues.
In case of doubt, businesses can consult a tax expert or seek guidance from the GST authorities.
The place of supply for pure services is the location of the recipient of the service.
Businesses must be aware of the place of supply rules and comply with them to determine the GST liability on services and avoid any penalties or legal issues.
Registration for Pure Service Providers
Registration for GST is mandatory for businesses providing pure services with an annual turnover of more than Rs. 20 lakhs (Rs. 10 lakhs for special category states).
GST registration can be done online on the GST portal. Businesses must provide their PAN (Permanent Account Number) and other required details to complete the registration process.
After registration, businesses are issued a unique GSTIN (Goods and Services Tax Identification Number), which is required for all GST-related transactions.
Once registered, businesses are required to file GST returns regularly, including details of the sales and purchases made during the period.
For businesses with an annual turnover of up to Rs. 40 lakhs (Rs. 20 lakhs for special category states), the Composition Scheme is an option that allows for lower tax rates but restricts the ability to claim ITC.
Under the Composition Scheme, businesses are required to pay tax at a lower rate, but they cannot charge GST to their customers or claim ITC on their purchases.
The Composition Scheme benefits small businesses with limited turnover, reducing the compliance burden and simplifying the GST process.
It is important for businesses to comply with the GST registration and filing requirements to avoid penalties or legal issues.
Non-compliance with GST regulations can result in heavy fines or even cancellation of the GST registration.
Registration for GST is mandatory for businesses providing pure services with an annual turnover of more than Rs. 20 lakhs (Rs. 10 lakhs for special category states).
The Composition Scheme is an option for businesses with an annual turnover of up to Rs. 40 lakhs (Rs. 20 lakhs for special category states) to pay lower tax rates but restricts the ability to claim ITC.
It is crucial for businesses to comply with the GST regulations to avoid penalties or legal issues.
Read More,
What is GST Registration Revocation or GST Cancellation Process?
GST Registration for Foreigners
Conclusion
In conclusion, pure services are services that do not involve the supply of any goods or the use of goods as a material for rendering the service.
They are taxed at a rate of 18% under GST, and ITC can be claimed on the GST paid on these services.
The place of supply for pure services is the location of the recipient of the service, and businesses providing pure services with an annual turnover of more than Rs. 20 lakhs are required to register for GST.
FAQs Related to Pure Services under GST
1. What is the difference between pure services and mixed services under GST?
Pure services are services that do not involve the supply of any goods or the use of goods as a material for rendering the service. Mixed services, on the other hand, involve the supply of both goods and services. Mixed services are taxed based on the dominant nature of the service. If the service component is dominant, it will be treated as a pure service; if the goods component is dominant, it will be treated as a supply of goods.
2. Are there any exemptions for pure services under GST?
Yes, some services, such as healthcare, education, and cultural activities, are exempted from GST. Moreover, services provided by the government or local authorities are also exempted from GST.
3. Can I claim ITC on pure services used for personal purposes?
ITC can only be claimed if the services are used for business purposes. Personal use of pure services does not qualify for ITC.
4. Can a pure service provider opt for the Composition Scheme under GST?
Yes, businesses providing pure services with an annual turnover of up to Rs. 40 lakhs (Rs. 20 lakhs for special category states) can choose to register under the Composition Scheme, which has a lower tax rate but restricts the ability to claim ITC.
If you are a business providing pure services and need assistance with GST compliance, consider partnering with Especia. Our team of experts can help you navigate the complexities of GST and ensure that you are fully compliant. Contact us today to learn more.
Contact Us for Bookkeeping Services, Outsource Accounting Services, CFO Services, ESOP Services in Delhi, Noida, Gurgaon, and all across India: write to us at accounts@especia.co.in. Or Call On :(+91)-9711021268 +91-9310165114
