GST: The Narrow Relief For Intermediary Services
Back in 2018, India’s support services industry got a goods and services tax surprise. Maharashtra’s Authority for Advance Ruling ruled in the Vserv Global Pvt. case that support services to overseas clients will qualify as intermediary services.
Consequently, they’d attract 18% GST. As against if they were treated as export of services which is zero rated.
The AAR ruling adversely impacted the BPO, IT-ITES sector and similar businesses that did data processing, software development, insurance claims processing, call centers etc., Pratik Jain, partner at Price Waterhouse & Co LLP, said.
In many states like Maharashtra, Haryana, Karnataka, the GST department started rejecting refunds stating that such supplies do not qualify as zero-rated supplies but are taxable in India as such businesses qualify as ‘intermediaries’.Pratik Jain, Partner, Price Waterhouse & Co LLP
For instance, Jain explained, an overseas entity is doing some data processing work for its client and is getting its Indian subsidiary to do some of this work. The domestic entity is also interacting with the client. In such cases, the department would view this as the Indian company facilitating a transaction between these two entities and categorise it as an ‘intermediary’.
Call center of, let’s say, a foreign bank who would assist in client queries also met with the same fate, he said.
Last week, the GST Council agreed to clarify the scope of "intermediary services".
Intermediary Services: The Pre-requisites
For an entity to qualify as an intermediary, certain requirements must be met. In its clarification, the government has listed five:
There should be a minimum of three parties involved. An intermediary essentially arranges or facilitates another supply (the main supply) between two or more other persons and, does not himself provide the main supply.
There are two distinct supplies. Main supply—between the two principals, which can be a supply of goods or services. And ancillary supply—service of facilitating or arranging the main supply between the two principals.
Intermediary service provider should have the character of an agent, broker or any other similar person. Its role is only supportive.
It doesn't include a person who supplies goods or services or both on his own account.
An important exclusion from intermediary is sub-contracting. This is when supplier of main service may decide to outsource the supply of the main service, either fully or partly, to one or more sub-contractors.
Taxpayers who meet the criteria specified in the clarification circular but have concluded orders against them will have to approach high courts for relief, Jain said. The GST law, he elaborated, doesn’t have a provision for the tax officer to recall an order if a clarification is issued contrary to such order. 'Businesses have to necessarily follow a complicated and litigious process in such circumstances'.
The clarification was much needed after the tax authorities started treating BPOs and KPOs as intermediaries and denied export refunds to them on export of services, Jigar Doshi, founding partner at TMSL, pointed out.
Other than BPOs and KPOs, another affected industry was indenting agents, he added.
Typically, domestic entities who conduct market research, identify potential customers, do marketing for foreign brands, especially in the pharmaceutical and FMCG sectors have argued that this is a principal to principal service—whether the potential lead actually converts into a customer is not something which they are concerned with.Jigar Doshi, Founding Partner, TMSL
With this argument, intermediary still remains to be a grey area for such entities, Doshi said.
Finally, another allied issue on "intermediary services" that’s pending before courts and hasn’t been addressed in the clarification is the constitutional question.
Taxpayers have argued against the differential treatment accorded to intermediary services under GST law as compared to other export services. This is arbitrary and irrational and it effectively leads to imposition of GST outside India.
While in July last year, the Gujarat High Court had upheld the constitutionality of GST on intermediary services, a division bench of the Bombay High Court had given a divided view earlier this month.
Justice Ujjal Bhuyan had observed that the Constitution of India doesn't empower imposition of tax on export of services by treating the same as a local supply. The GST provisions in question have created a fiction and transformed an export of service to be a local supply, he had noted. Justice Abhay Ahuja had disagreed. The matter is now before the high court’s chief justice.