In the 45th GST Council meeting, government has decided that services outsourced to India and those provided domestically for foreign entities will not be treated as intermediary services, allowing them to avoid paying the 18 percent Goods and Services Tax (GST). This decision that will strengthen the country’s back office industry and relief for the country’s $180 billion technology sector.
The GST Council clarified this on Friday, and this decision will allow enterprises in information technology, IT ready services, financial services, and R&D to receive tax refunds. Disputes over the definition of “intermediary” services have involved more than 200 companies.
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Tax authorities began considering back office service providers or business process outsourcing (BPO) entities as intermediaries, denying them export status, resulting in the disputes.
“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, conflicts arose at the ground level, and there has been a surge in litigation on the matter in recent days. The most severe outcome has been a potential demand of 18% on the companies’ overall topline.
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An intermediary, according to the circular, is a person or company that arranges or facilitates the supply of goods, services, or securities between two or more parties. As a result, an intermediary agreement must involve at least three parties. A separate supply between the two contracting entities and an auxiliary 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 supplying goods, services, or both on his own behalf is not an intermediary. Even subcontracting for a service would not be considered an intermediary service.
These conditions, taken together, indicate that back-office services would be considered exports rather than intermediary services. According to the circular, “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. The role of intermediary is only supportive.”
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