GST Council | Nasscom: Clarification issued by GST Council on intermediary status will ease litigations: Nasscom

“Principles laid down will guide tax treatment across sectors”, said Nasscom. The industry has also welcomed clarification on the GST export status of subsidiary Group companies. “This will ensure that the Global Capability Centres (or captives) stop facing the risk of GST on their exports to parent or group companies across the world,” said the IT industry body on Twitter on Tuesday.

The government has clarified that services outsourced to India or carried out in the country for foreign entities will not be treated as intermediary services, and hence not face 18% goods and services tax (GST), which is being seen as a huge relief for the country’s $180 billion technology sector.

Approved by the GST Council on Friday, the clarification issued on Monday will free up hundreds of crores in tax refunds to entities in the information technology (IT), IT-enabled services (ITeS), financial services, and research and development sectors as well as resolve the four-year-old issue that has led to large-scale litigation.

Tax authorities had begun treating back-office services providers, or business process outsourcing (BPO) entities, as intermediaries, denying export status to their services to overseas entities. Exports are zero-rated under GST and not liable to the tax while intermediaries face an 18% charge.

There are more than 200 companies involved in disputes over the definition of ‘intermediary’ services. The circular provides five prerequisites to define what service will qualify as intermediary service.

The CBIC had clarified in December 2018 that “if the Indian arm is set up as a wholly-owned Indian subsidiary company incorporated under the Indian laws, the foreign company and the Indian subsidiary would not be governed by the provisions of distinct person or related person as both are separate legal entities”.

However, despite this, disputes continued at the ground level and there has been a trend of increased litigation on this subject in the last few months. The biggest impact of this has been a potential demand of 18% on the entire topline of the companies, said Nasscom in a post. “We have seen this interpretation being adopted for several large IT/Tech companies. The clarification will ensure availability of export status to services provided by Indian IT companies to their foreign group entities. This will also help in resolving refund issues and clearing litigations pending before the appellate and judicial authorities,” it added.

The circular says an intermediary is an entity that arranges or facilitates the supply of goods or services or securities between two or more parties. Hence, there has to be a minimum of three parties in an intermediary arrangement. The intermediary arrangement also has to have two distinct supplies, one between the two contracting entities and an ancillary supply provided by the intermediary. An intermediary service provider has to have the character of an agent, broker or similar. Additionally, anyone supplying goods or services or both or securities on his own account is not an intermediary. Even subcontracting for a service would not fall in the category of an intermediary service.

Taken together, these conditions mean back-office services would be considered exports and not intermediary services.

“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,” according to the circular. “The role of intermediary is only supportive.”