Supply of services by “intermediaries” outside India is not an export, should be taxed at 18%: HC : 31-07-2020

MUMBAI: In a major setback to many BPOs, exporters, captive units of multinationals that supply services to other companies outside India, the Gujarat High Court said that the GST levied on these is constitutional. This would mean that these entities will have to cough up 18% additional GST, like any other domestic companies on such services provided to companies based outside India.

The High Court in a ruling on Thursday however asked the revenue department to consider the representations made by the petitioners in this regard. Indenting agents of foreign clients had filed a writ petition in the Gujarat High Court challenging the applicability of 18 per cent IGST on export services. The petitioners said that this was unconstitutional.

Due to certain provisions in the current GST law indenting agents have to pay tax on services rendered in India but if they open an office in Dubai, Hong Kong or Sri Lanka, they are exempted. The agents exporting services and earning foreign exchange feel they are being penalised for qualifying as “intermediary” under Section 2(13) of the CGST Act.

This ruling could also impact the BPOs and several other captive units of multinationals say tax experts. In 2018 Authority of Advance Ruling (AAR) ruled that back office support services qualify as “intermediary” support services and not exports. Tax department has been issuing notices to BPOs in this regard.

“While the court has held that the provisions for intermediary services are constitutional, the court has clearly held that it would be open for the respondents to consider the re-presentation made by the petitioner to redress its grievance in suitable manner and in consonance with the GST provisions. Appropriate legal remedies such as request for formation of High Level Committee are being explored so that the Indian service providers get the much needed relief to compete with the businesses situated in neighbouring countries”, said Abhishek A Rastogi, Partner at Khaitan & Co, who argued the petitions before Gujarat High Court.

Industry trackers said the debate was also whether BPOs are commission agents and brokers. If so, they would not be considered exporters and their revenues would be subject to taxes as only exports are exempted from domestic taxes and receive certain benefits. So, services provided by Indian entities to foreign companies would not be treated as exports and hence taxable in India.

Source : Times of India