Intermediary services under GST law
Multi-national corporations have business operations across geographies to carry out cross-border trade and to benefit from the advantages specific to particular jurisdictions, such as where there may be an abundance of natural resources, lower costs, a competitive fiscal environment, or a rich talent pool. Distribution in multiple jurisdictions involves planning and efficient use of supply chain resources and may involve working with ‘intermediaries’.
There has always been uncertainty about the scope, amplitude, and tax treatment when intermediaries are involved in cross-border transactions, even before the GST came into force in India in July 2017. Even when an overseas service recipient who engages an Indian company and pays for such services in a foreign currency, India treats those services as intermediary services and imposes an 18% GST. Services that are not considered an intermediary service may be considered an export of service and therefore eligible for tax exemption on the output side as well as entitlement to claim a refund of tax suffered on the input side.
The tax authorities across the Country have not been consistent in determining the nature of service considered ‘intermediary’ or on the levying of GST on promotion and marketing services, back-end office support, networking, customer relations, liaising activities, accounting, administration, and on managing various documentation requirements provided to clients located outside India.
The divergence in views significantly, negatively impacts Information Technology/IT Enabled Service (IT/ITES) companies operating in India. Per the recent report of the National Association of Software and Services Companies (NASSCOM), India is ranked as the 3rd most significant country for start-ups and it is an outsourcing destination for major companies operating world-wide.
In Circular No. 107/26/2019-GST of 18 July 2019 the Government of India clarified, in the context of ITES, that if a person provides a service independently on his/her own account and not as an agent of a third party, he/she would not come within the shadow of being treated as an ‘intermediary’. This Circular resolves the adverse impact on Indian companies rendering back-office support services on their own account to Multi-National Companies (MNCs) located outside India.
Given the various changes in the law, the interpretational challenges, and the conflicting Advance rulings and Circulars issued by the Government, industry continues to be apprehensive as we await more clarity on this front.
Dinesh Kumar B