The concept of intermediary services is a paradox in Indian GST law. Notwithstanding the fact that the overseas customer pays for such services in foreign exchange, Indian GST law imposes 18 per cent GST on intermediary services and thus flagrantly negates a primary canon of international trade — never export taxes.

As per GST law, intermediary means “a 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.”

Point to note here is that services of intermediary are those which are in the nature of what are provided by a broker or an agent for the process of intermediation. Easy examples are a real estate agent, stock broker, etc. But what is also important to note is that intermediary service does not include any services which are independent of such intermediation.

To illustrate, if the broker, separately agrees with the supplier, to carry out any inspection or quality control or transportation of goods or services which are being supplied by him for a separate charge, then such services are transacted on a principal-to-principal basis and cannot be termed as intermediary services, per the stated scope of intermediary services.

Intermediary services come to an end once a deal has been struck between the supplier and recipient of supply, and the so-called broker or intermediary gets his commission earned and crystallised for the same. Services provided subsequently are distinguishable and provided on his own account and hence cannot possibly be termed as intermediary service.

Misses the point

Circular 107/16/2019-GST dated July 18, 2019, issued by CBIC’s GST policy wing, misses this point. In illustrated examples the circular seeks to explain.

In scenario 1, the circular clarifies that information technology-enabled services (ITeS) such as those provided by call centres, data processing, insurance claims processing, translation services, medical transcription, etc., are not intermediary services as they are always provided on a principal-to-principal basis.

However, the circular in scenarios 2 and 3 refuses to acknowledge that back-end services, such as pre-delivery services that could include inspection/quality control services, delivery services such as transportation and post delivery services such as trouble shooting or maintenance services provided by, say X, in respect of a supply of goods or services between Y and Z, are also provided on own account and on a similar analogy as ITeS should fall outside the purview of intermediary services.

These back-end services should not be classifiable as intermediary services. This classification is important as for intermediary services, the location of the supplier of service is the place of supply (unlike the default rule wherein location of the recipient of service is the place of supply).

Thus even typical back-end services, such as inspection or quality control services, transportation or logistics support services provided to an overseas recipient by a service provider in India, if termed as intermediary services, become taxable and subjected to GST as the place of supply of such services is the location of the supplier of service, is India.

This makes Indian exports uncompetitive, as the foreign buyer cannot take input tax credit of GST imposed on such back-end services.

These back-end services are considered as exports and not subject to GST or VAT in all mature VAT/GST economies, including the European Union, Canada and Australia.

It is time this unfair policy of taxing intermediary services is remedied by either entirely doing away with the concept of intermediary services or by changing the place of supply rule in respect of such intermediary services as has been recommended by the 139th Report of Parliamentary Standing Committee on Commerce.

The writer is Senior Director with Deloitte India.

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