Big relief for BPO industry: Outsourced services won’t attract 18% GST, clarifies govt
In a big relief for India's $180 billion back-office sector, the government has clarified that services outsourced to India or carried out in the country for foreign entities will not be treated as intermediary services, and hence not face 18% goods and services tax (GST). This was approved by the GST Council on Friday, the Economic Times mentioned in a report.
The clarification issued by the government will free up hundreds of crores in tax refunds to entities in the information technology (IT), IT-enabled services (ITeS), financial services, and research and development sectors as well as resolve the four-year-old issue that has led to large-scale litigation.
Worth mentioning here is that tax authorities had begun treating back-office services providers, or business process outsourcing (BPO) entities, as intermediaries, denying export status to their services to overseas entities. Exports are zero-rated under GST and not liable to the tax while intermediaries face an 18% charge.
At present, there are more than 200 companies involved in disputes over the definition of ‘intermediary’ services. The circular provides five prerequisites to define what service will qualify as an intermediary service.
The move is part of the government’s plan to reduce GST disputes. Experts say this will aid the services export sector.
"This is a welcome clarification and shall benefit the entire BPO Sector. Back-office services provided by BPO companies to foreign clients will not fall under intermediary service and thus would qualify as exports of services. This will also result in grant of refund of accumulated input tax credit. Even internationally BPO are not covered under intermediary services," said Tushar Aggarwal, Founder Partner, Tattvam Advisors.
The removal of the 18% levy will help the back-office model that operates on thin margins and faces competition from emerging low-cost jurisdictions such as the Philippines and Malaysia among others.
According to the circular issued by the government, an intermediary is an entity that arranges or facilitates the supply of goods or services or securities between two or more parties. Hence, there has to be a minimum of three parties in an intermediary arrangement. The intermediary arrangement also has to have two distinct supplies, one between the two contracting entities and an ancillary supply provided by the intermediary. An intermediary service provider has to have the character of an agent, broker or similar. Additionally, anyone supplying goods or services or both or securities on his own account is not an intermediary. Even subcontracting for a service would not fall in the category of an intermediary service.
Taken together, these conditions mean back-office services would be considered exports and not intermediary services.
“An intermediary essentially arranges or facilitates another supply (the ‘main supply’) between two or more other persons and does not himself provide the main supply,” according to the circular. “The role of intermediary is only supportive.”
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