On September 17, 2021, India’s Goods and Services Tax (“GST”) Council in its 45th meeting clarified the scope of terms “intermediary services” and “merely establishment of distinct person” (as per the Integrated Goods and Service Tax [“IGST”] act) in India.
This clarification was awaited, as it substantially impacted the Knowledge Process Outsourcing/ Business Process Outsourcing (“KPO/BPO”) service industry with respect to supply of services to foreign customers. Pursuant to GST Council decision, a circular giving the clarification was issued by Central Board of Indirect Taxes and Customs (“CBIC”).
Earlier pursuant to an Authority for Advance Rulings (“AAR”) order, there arose a need for clarification as to whether back-office services provided by BPO companies to foreign customers are to be treated as either exports (for tax /IGST purpose) or as intermediary services.
Export of services are zero-rated under GST and not liable to the tax while intermediary service is subject to 18% levy under GST. In case of zero-rated services, a refund of the input tax paid is available to the service provider.
The circular clarifies that the scope of intermediary service neither includes an independent supply of such goods and/or services (i.e. supplying on own account) nor any ‘sub-contracting for a service’.
Further, it clarifies that a person involved in supply of ‘main services which are not ancillary in nature’ on principal-to-principal basis to another person cannot be considered as ‘supplier of intermediary service’.
For terming a service as ‘intermediary services’ there is a requirement of three parties in the contract. An activity between only two parties (e.g. BPO/KPO and foreign client) therefore, cannot be considered as an intermediary service.
Separately, circular gives example of overseas software service provider who outsources part of software development work to Indian entity. The circular states that Indian entity may have to interact with foreign client to understand the specific requirements and it is the main supplier of software development service. Thus, it cannot be termed as intermediary.
Implication:
The clarification has given a much needed relief to USD 180 billion BPO sector in India. The BPO and KPO sector can now realize old GST refunds struck in the system. It also confirms that Indian affiliates providing BPO services to their overseas group entities would not be subject to GST levy.