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The Finance Ministry will soon come out with a detailed circular clarifying the scope of intermediary services. This circular will be the first step to address the difficulties faced by trade and industry due to varied interpretations by tax officers on the issue.
“This will not just be for a particular goods or service, but for entire industry,” a senior Government official told BusinessLine .
Further, he hopes that this will end litigations over the issue. The circular follows the decision by the GST Council last week.
The issue was taken up as the government received a large number of representations citing ambiguity caused in interpretation of the scope of ‘intermediary services’ under the GST law.
“Considering difficulties faced by the trade and industry and to ensure uniformity in the implementation of the provisions of law across field formation, a circular is being drafted to bring clarity,” another official said.
Expert take
Meanwhile, experts say this move will largely affect Information Technology Enabled Services (ITeS) firms. “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,” MS Mani, Senior Director with Deloitte India said.
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. It does not include a person who supplies such goods, services or securities on his own account.
However, because of the interpretation of this definition, there have been litigations. Over a dozen applications were filed with Authority for Advance Rulings (AAR), of which majority went against the applicants. Although AAR rulings are applicable only on applicant and jurisdictional tax officers, it can still be used as a reference in similar matters.
The rulings by AARs created uncertainty, especially for ITeS such as back-office operation.
The issue was triggered by a ruling on VServglobal by the Maharashtra AAR which was upheld by the Appellate Authority for Advance Ruling (AAAR). Although the applicant said it is providing back office service to a Hong Kong-based firm, the AAR and later the AAAR rejected the contentions and said it is an intermediary service.
MNCs to gain
According to officials, clarity on intermediary along with clarity of distinct person will help companies in a big way. It is expected that post this circular, back office operation of multinational companies will not be treated as intermediary and hence, they will not be liable to pay GST. India is considered as a hub of back office operation with a large number of English speaking population.
“GST on services provided by back office will make this less competitive. This could result in India losing market to countries such as Philippines,” a leading GST consultant said.
The clarification is also expected to bring an end to the 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. 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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