No GST on country's $180 billion back-office sector

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), a relief for the country's $180 billion back-office sector.

Approved by the GST Council on Friday, the clarification 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 an intermediary service.

Bid to Reduce GST Disputes
The move is part of the government's plan to reduce GST disputes. Experts say this will aid the services export sector.

"Intermediary has been interpreted conservatively in the GST regime, leading to multiple litigation and denial of export benefits," said Bipin Sapra, partner, EY. "The clarification will help the service exporters in getting the much-needed export incentives."

The removal of the 18% levy will help the back-office model that operates on thin margins and faces competition from emerging low-cost jurisdictions such as the Philippines and Malaysia among others.

Intermediary or Not

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."

The circular has also provided illustrations to make the point.

For example, A is a software company that develops code for clients. A has a contract with B for providing customised software for business operations. A outsources the task of design and development of a particular module of the software to C, for which the latter may have to interact with B to understand the specific requirement. In this case, C is providing the main supply of service of design and development of software to A and thus C is not an intermediary.

The circular also notes that there is no change in the scope of intermediary services in the GST regime and the earlier services tax regime, which treated BPO services as exports.

Experts say that the government should consider a legislative amendment in the wake of multiple disputes in various legal forums.

"There are multiple orders issued on 'intermediary' services, including a few advance rulings," said Pratik Jain, partner, Price Waterhouse & Co LLP. "Since the GST tribunals have not become effective as yet and orders are binding on assessees, in many cases, the businesses will have to approach their jurisdictional high courts to quash or remand back the orders."