Services sector PMI shows scars of messy GST implementation

Business activity in India’s services sector took a harder hit than manufacturing, following the chaotic goods and service tax (GST) implementation in July last year.

The Nikkei Purchasing Managers’ Index (PMI), a monthly survey, showed that services PMI has slipped below the 50 mark thrice since July. A reading above 50 indicates economic expansion, while one below 50 shows contraction.

On the other hand, manufacturing PMI has fallen below this threshold only once during the same period. In general, the PMI for services has been lower than that for manufacturing after the GST implementation (see chart).

Here’s why.

Under GST, services are taxed at a rate of 18%, higher than the 15% levied earlier. Since GST is a destination-based tax, so goods/services are taxed at the place where they are consumed and not at the origin. “Given their intangible nature, the ‘place of supply’ provisions for services are more detailed than for goods, hence more detailing is required to determine the place of supply, which is complicated. That, along with steep increase in rates could have caused some decline initially in the activity levels,” said M.S. Mani, senior director at Deloitte India.

Also, a service provider is now required to get state-wise registration done for each state it operates in—this adds to the hassle and compliance cost, especially for pan-India service providers. In the earlier regime, a central registration was sufficient.

What made adapting to the new tax regime more difficult for service exporters in the first quarter was a clause under GST which required them to furnish a letter of undertaking (LUT) even before the services got exported, said Anita Rastogi, indirect tax partner at PwC India. “They were also required to pay output tax (under Integrated GST) before exporting services resulting in a stretched working capital cycle. It was only recently that services exporters were given an LUT for an entire year,” she added.

According to some economists, demand for discretionary services like entertainment and recreation may have fallen due to the rise in prices. However, the subdued business activity in the services sector could also be a reflection of slowdown in overall economic activity post-GST, they added.

Though GST has been implemented for more than six months now, businesses are yet to get a hang of other GST provisions such as e-way bills and invoice matching, so it could take longer than expected for overall business activity to stabilize.livemint