Issue of GST on intermediary services to foreign clients may get resolved

However, there could be issues in claiming input tax credit by these intermediaries

Deciding the place of supply under the goods and service tax (GST) is a complicated issue with different interpretations of the tax regime. The complications got accentuated with regard to intermediaries like agents, brokers, and middlemen to clients located outside India.

Suppose a foreign company wants to sell its products in India and hires a commission agent to facilitate this trade. The agent will facilitate this by charging a commission.

The issue at the crux now is whether this kind of commission can be taxed under the GST regime when services are consumed outside India, and if yes, which tax would apply to them -- integrated GST (IGST), central GST (CGST) or state GST (SGST).

Currently, these services are taxed in India through a provision under the IGST Act. However, SGST and CGST are imposed on them. The provision --  Section 13(8)(b) -- has carved out an exception for these services by not treating them as exports even as these are consumed outside India. Consequently, these services do not enjoy the zero tax liability given to pure export services. This provision means that even if an intermediary provides services outside India, they will be deemed to have been provided in the area where the supplier of services is registered.

The issue around the constitutional validity of this provision along with another provision -- section 8 (2), which says that the supply of services where the location of the supplier and the place of supply of services are in the same state, shall be treated as intra-State supply -- went to a couple of high courts. Earlier, a division bench of the Bombay High Court was divided on the issue. While one judge said the provisions are constitutionally valid, the other said these are ultra vires. The matter went to the third judge.

Hearing a couple of petitions, the third judge last week upheld the constitutional validity of the provisions so long as they are confined in their operation to the provision of the IGST Act only. As such, it said the Centre cannot impose CGST and states cannot impose SGST on these services. He referred the matter back to the division bench. The division bench will now hear the matter and decide the taxability on the matter.

Though the division bench will decide the matter of taxability of these services, experts said the third judge has laid the groundwork which would not allow these services to be taxed under the GST regime. This is so because IGST can also not be levied when the place of supply of services and the location of suppliers are in the same state and there is no intra-state movement.

For instance, Abhishek Rastogi, founder of Rastogi Chambers who argued for the petitioner before the Bombay High Court, said the third judge has very clearly provided that these provisions of IGST must be confined in their operations to the provision of IGST only.

"Hence the division bench will synchronise this confinement to the earlier order passed by it. The combined consequential impact will be that the Indian intermediaries would not be subject to the levy of CGST and state GST and these intermediaries will be technically not liable to IGST as the statute does not provide to do so," he said.

Saurabh Agarwal, tax partner at EY, said the judgement may bring relief to assessees engaged in intermediary services as the same cannot be taxed under GST legislation any more if one goes by principles laid down in the judgement (of the third judge) of the Bombay High Court though final ruling will come from division bench.

In case the intent of the law makers is to levy GST on such services, it may require an amendment in the law, he said.

However, there could be an issue now about claiming input tax credit by these intermediaries when there is no tax on final services provided by them to foreign clients.

Agarwal said while the issue with regard to levy of GST on such services may be going in favour of the assessee, the eligibility to claim the input tax credit in such cases may get challenged.

The issue regarding the constitutional validity of the said provisions of IGST was decided by the Gujarat High Court too. It upheld the constitutional validity of the provisions.

However, there is a judicial review filed in the court.

Rastogi, who argued the case in the court, said he would incorporate the findings of the third judge of the Bombay High Court when the matter comes up for hearing.