45th GST Council meeting: Woes continue for Indian intermediaries

The outcome of the 45th GST Council meeting was much eagerly anticipated as Indian intermediaries yearned for an arrogate explication on the elusive topic of GST on ‘intermediary services’ exported to foreign customers. A clarification that followed the GST Council meeting unfortunately eschews clarification on core issues that plague intermediaries to date. The problem exasperates amid obstreperous business climate and unyielding competition from other countries. GST burden on intermediary services, which cannot be invoiced to the customers abroad cannot bolster export competitiveness.

Place of supply for services rendered to foreign clients remains the most critical aspect that requires clarification from the GST Council as the law deems all intermediary services to be provided in India, irrespective of the location of the recipient of service. The definition of ‘intermediary’ has little scope for interpretation given the fact that it can bring into its fold, virtually every agency service. Further, it does not matter to a domestic agent whether it is providing ‘outsourced work’ or is acting as a ‘facilitating agent’ as both are amenable to GST when supplied within India.

Few intermediaries have questioned the constitutionality of GST when the state does not have power under the Constitution to levy GST for a service, which is provided outside the state. However, due to a deeming fiction in the law, states have been exercising such powers to collect GST from intermediaries, which otherwise should have been treated as exports, like other B2B services. A division bench of the Bombay High Court has expressed a divided opinion on the constitutionality of place of provision for intermediary services. One cannot fathom a reason why intermediary services rendered to foreign principals remain exempted from GST when goods are bought, moved and sold outside India whereas intermediary services that result in movement of goods into India suffer GST. Under the GST law, movement of goods from principal to buyer has no nexus with the intermediary services provided by the Indian agent.

The clarification issued on September 20, 2021, revolves around the limited context whether outsourced services can come under the definition of ‘intermediary’, which, given the expansive definition of intermediary, is abundantly clear. Interestingly, the clarification compares the treatment of intermediary services in the service tax regime with that of the GST definition. Legal implications change under the GST regime when ‘service recipient’ has been clearly defined as a person who pays or is obligated to pay consideration for service.

The controversy can only be put to rest by amending provisions to classify ‘intermediary’ services under the default recipient-based rule, thereby enabling intermediaries to seek benefits of zero-rating. While the Gujarat High Court had held that the writ must be considered as a representation, the recently issued circular not only deviates from the core issue but also leaves the graver problem unattended. Both Parliament and the GST Council must review taxation of exporting intermediaries as this lupine levy on exports cannot be justified by a clarification on certain aspects vis-à-vis the definition of intermediaries. It appears that the judicial review and the test of constitutionality on the taxability of intermediaries could settle the dust and provide the much-needed tax certainty!