Finmin issues circular on intermediary under GST law

The Finance Ministry has issued a detailed circular clarifying the scope of intermediary services. This circular is the first step to address the difficulties being faced by trade and industry due to varied interpretations by tax officers on the issue.

“This will not just be for a particular good or service, but for entire industry,” a senior government official told BusinessLine . Further he hoped that this will end litigations over the issue. The circular is follow-up to the decision by the GST Council last week. The issue was taken up as government received large number of representations citing ambiguity caused in interpretation of the scope of ‘intermediary services’ under GST law.

The circular has been issued “in view of the difficulties being faced by the trade and industry and to ensure uniformity in the implementation of the provisions of the law across field formations.” While issuing the circular, Central Board of Indirect Taxes and Custom (CBIC) said the concept of ‘intermediary’ was borrowed in GST from the Service Tax Regime. There is no change in the definition “except addition of supply of securities in the definition of intermediary in the GST Law,” it said.

Details of the circular

The circular has listed primary requirements for intermediary services. These include minimum of three parties, two distinct supplies, intermediary service provider to have the character of an agent, broker or any other similar person, does not include a person who supplies such goods or services or both or securities on his own account, sub-contracting for a service is not an intermediary service.

“The specific provision of place of supply of ‘intermediary services’ under section 13 of the IGST Act shall be invoked only when either the location of supplier of intermediary services or location of the recipient of intermediary services is outside India,” the circular said.

Experts say the circular will largely impact Information Technology Enabled Services (ITES). "The much-awaited clarification on intermediary services would hopefully set at rest the multiple litigations that businesses were facing and would end the controversy on export of services,” said M S Mani, Senior Director, Delloite India.

GST law defines intermediary as broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account. However, because of interpretation of this definition, there have been litigations. Over dozen applications filed with Authority for Advance Rulings (AAR), out of which majority went against the applicants. Although AAR rulings are applicable only on applicant and jurisdictional tax officers, still can be used as reference in similar matters. Thus, rulings by AARs creating uncertainty especially for ITES such as back-office operation.

The issue was triggered by ruling on VServglobal by Maharashtra AAR which was upheld by Appellate Authority for Advance Ruling (AAAR). Though the applicant said it is providing back-office service to Hong Kong Based firm, but AAR and later AAAR rejected the contentions and said it is an intermediary service.

According to officials, clarity on intermediary along with clarity of distinct person will help companies in big way. It is expected that post this circular, back-office operation of multinational companies will not be treated as intermediary and thus not liable to pay GST. India is considered as hub of back-office operation in India with large number of English-speaking populations.

“GST on services provided by back office will make this less competitive. This could result in India losing market to country such as Philippines,” a leading GST consultant said.

Clarification also expected to bring end uncertainty regarding export of services by ITES. Once accepted as export, such an entity will be eligible for refund making businesses more and more attractive. Thirdly, the circular will more clearly define which business is intermediary and thus liable to pay GST at the rate of 18 per cent.

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