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Contributed on June 26, 2020

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GST: Advocacy on early resolution of issues around ‘intermediary services’ for IT-ITeS sector

Blog: NASSCOM Official Blog

IT-ITeS industry has been grappling with challenges around being treated as intermediary and being exposed to GST on exports. NASSCOM has been diligently pursuing this matter with the Ministry of Finance, the Law Committee, the GST Secretariat and the Board (CBIC) and have made several submissions earlier. However, the industry is still awaiting a concrete resolution.

Lack of clarity in definition of “intermediary services” has led to tax authorities trying to classify ITeS back office support work involving three parties, i.e., customers of clients (including call centres, business process outsourcing for sales or procurement functions, etc) as “intermediary services” and not exports. Further, there were very limited to no disputes under service tax (prior to GST) on interpretation of “intermediary services” (through the same definition as under GST). However, the challenges have increased considerably under GST.

• Increased in number of cases involving denial of refunds;
• Increase in number of enquiries, audits/ investigations leading to unnecessary litigation;
• Contrary rulings/ decisions passed by Advance Ruling Authorities in various States.

It is also apprehended that if no immediate remedial relief is extended to Indian entity, this could trigger issuance of a show cause notice even on the export turnover for past periods of such companies.

The increasing trend of the Indian revenue authorities in trying to tax various categories provided by the ITeS sector is concerning. The magnitude of the issue can be gauged by the fact that the industry earned foreign exchange of USD 136 billion during FY 2018-19. Denying export status to the exporters in the ITeS sector and the alleged tax demand will hamper the sector’s business viability in India.

In this regard, we have made a submission to GST Policy Wing along with officials of CBIC requesting for early resolution of issues around “Intermediary services”. We have requested that:

• An amendment to IGST Act by way of insertion of an explanation to Section 13(8)(b) of IGST Act, 2017 be considered:

“Explanation.—For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply to services in nature of contract research and development services related to IT sector and information technology enabled services which are provided by a supplier located in taxable territory to a service recipient outside the taxable territory.”

• Alternatively, a notification under Section 13(13) be considered for specification of place of supply for services provided by the IT-BPM sector. This notification should be specifically stated for “uniform application of rules” and hence clarificatory or retrospective in nature.
• Where the above 2 options are not feasible, a revised circular may be expeditiously issued, taking cognizance of the above issue and clarifying that ITeS companies providing BPO services are not covered within the meaning of “Intermediary” as these services are supplied on their own account. Further, it should be explicitly laid down that provision of services under sub-contracting arrangements do not qualify as “Intermediary” services;
• No show cause notices should be issued for the past period alleging suppression of facts, given that the facts were clearly disclosed during all refund filings and no adverse action should be taken on the export turnover, till the “intermediary” issue attains finality in Courts or through a circular; and
• Subsequent refunds may continue to be sanctioned to allow the Company to have a continuous cash flow, as most of BPOs continue to enjoy the benefits in other tax jurisdictions, without a dispute over their export position.

We will continue to engage with the government on this. We will keep you posted on further developments in this regard.

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