Clarity likely on BPO sector today at GST Council meet

Panaji: In what could bring relief to India’s $180 billion IT/ITeS industry, the Goods and Services Tax Council could consider on Friday a proposal to clarify that business process outsourcing services will qualify as exports and not be taxed at 18% here.

“We have received representations... the law committee has examined the matter,” a government official said, adding that it could figure at the GST Council meeting here.

The government had clarified the issue in July, but part of the circular left the matter of classifying whether a company offered intermediary services or carried out exports to the discretion of tax officers.


Tax officials started to apply this part of the clarification as a general principle and issued notices to IT companies, even some that operated in special economic zones, although the circular said BPO services would not be considered intermediary in nature as long as the provision of service is on its own account. An intermediary is an entity that facilitates or arranges the supply of goods and services.

“The ambiguity in the definition of intermediary in the GST law has been further accentuated by the interpretation of the earlier circular by certain field formations, classifying almost all IT and ITeS exports as intermediary services and hence liable to GST in India, effectively taking away the export status of these STP and SEZ units and making them unviable in India,” said Bipin Sapra, a partner at EY.

The National Association of Software and Services Companies and other industry bodies had represented the issue before the government as well as the GST Council.

The sector was in turmoil after the Appellate Authority for Advance Ruling in Maharashtra said that back-office support services didn’t qualify as “export of service” and were in the nature of arranging or facilitating supply of goods or services between overseas companies and customers. It said these services fell in the category of intermediary services and were liable to GST.

Typically, taxes on exports are neutralised through refunds in the country as they are consumed outside. Back-office services enjoyed this status in the previous service tax regime as well.

India has more than 500 global inhouse delivery centres, employing over 350,000 people. As per the industry, an 18% levy on these services upsets the cost dynamics of the back-office model, which operates on wafer-thin margins with competition growing from low-cost jurisdictions such as the Philippines.

Sapra said it needs to be clarified unambiguously that such services are not covered and only services where there is clear facilitation alone may be covered. Specific and clear examples for field formations to differentiate would help, he added.