New Delhi: The IT-BPO industry said the GST Council’s clarification on businesses’ intermediary status will resolve litigation and allow the industry to get large refunds that had been held up owing to uncertainty about exports being considered as intermediate services.
“The principles established will govern tax treatment across sectors,” Nasscom stated. The sector has also appreciated clarification on subsidiary Group businesses’ GST export status. On Tuesday, the IT industry organization announced on Twitter that “this will ensure that the Global Capability Centers (or captives) no longer face the danger of GST on their exports to parent or group businesses throughout the world.”
The government has clarified that services outsourced to India or performed in India for foreign entities will not be considered intermediary services, and thus will not be subject to the 18 percent goods and services tax (GST), which is seen as a huge relief for India’s $180 billion technology sector.
The clarification issued on Monday, which was approved by the GST Council on Friday, will free up hundreds of crores in tax refunds for entities in the information technology (IT), ITeS, financial services, and research and development sectors, as well as resolve a four-year-old issue that has resulted in large-scale litigation.
Back-office services providers, also known as business process outsourcing (BPO) firms, have been labelled as middlemen by tax authorities, who have denied their services export status to foreign entities. Exports are GST-free and are not subject to the tax, whereas intermediaries are subject to an 18% penalty.
Disputes over the definition of “intermediary” services have engulfed more than 200 businesses. The circular lays forth five requirements for determining whether a service qualifies as an intermediate service.
“If the Indian arm is set up as a wholly-owned Indian subsidiary company incorporated under 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,” the CBIC clarified in December 2018.
Despite this, disagreements arose on the ground, and there has been a rise in litigation on the topic in recent months. According to Nasscom, the largest impact has been a potential demand of 18 percent on the whole topline of the firms. “We’ve seen this view adopted by a number of big IT/Tech firms. The clarification would guarantee that services offered by Indian IT businesses to their overseas group organizations are eligible for export status. This would also assist in addressing refund issues and clearing current disputes before appellate and judicial authorities,” the statement continued.
According to the circular, an intermediary is a person or company that organizes or facilitates the exchange of goods, services, or securities between two or more parties. As a result, an intermediate agreement must involve at least three parties. A separate supply between the two contracting entities and an additional supply provided by the intermediary must also be included in the intermediate arrangement. The character of an intermediate service provider must be that of an agent, broker, or similar. Furthermore, anyone delivering products, services, or both on his own behalf is not an intermediary. Even subcontracting for a service would not be considered an intermediate service.
These requirements, taken together, indicate that back-office services would be considered exports rather than intermediate services.
According to the circular, “an intermediary fundamentally organizes or facilitates another supply (the ‘primary supply’) between two or more other individuals and does not furnish the main supply himself.” “An intermediary’s function is purely supportive.”
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Article Credits –
timesofindia.indiatimes.com
