The End of The Intermediary Conundrum: Omission of Section 13(8)(b) of The IGST Act By The Finance Act, 2026
1. Introduction
For over a decade, the taxation of intermediary services has been one of the most contentious and heavily litigated areas of indirect tax law in India. From the Service Tax regime to the Goods and Services Tax regime, the classification of a service as an “intermediary service” and the consequent determination of the place of supply have been at the heart of innumerable disputes between taxpayers and the Revenue. The Finance Act, 2026 (No. 4 of 2026), which received the assent of the President on the 30th day of March, 2026, has finally put this long-standing controversy to rest by omitting clause (b) of sub-section (8) of Section 13 of the Integrated Goods and Services Tax Act, 2017 (“IGST Act”) through Section 157 of the Finance Act, 2026.
This article analyses the significance of this legislative amendment, its date of applicability, the historical background of intermediary services taxation under the Service Tax and GST regimes, the definition of “intermediary” under the IGST Act, the litigation landscape that compelled this reform, and the practical implications for Indian service providers going forward.
2. The Amendment: Section 157 of the Finance Act, 2026
Section 157 of the Finance Act, 2026 reads as follows:
“157. In section 13 of the Integrated Goods and Services Tax Act, 2017, in sub-section (8), clause (b) shall be omitted.”
Prior to the omission, Section 13(8)(b) of the IGST Act read:
“(8) The place of supply of the following services shall be the location of the supplier of services, namely:— … (b) intermediary services.”
This provision created a statutory exception to the general rule under Section 13(2) of the IGST Act, which provides that the place of supply of services, where the location of the supplier or recipient is outside India, shall be the location of the recipient of services. By deeming the place of supply for intermediary services as the location of the supplier, Section 13(8)(b) effectively prevented Indian intermediary service providers from qualifying their services as “export of services” under Section 2(6) of the IGST Act, even when the recipient was located outside India and consideration was received in convertible foreign exchange.
With the omission of clause (b), the place of supply for intermediary services will now be governed by the default provision under Section 13(2), i.e., the location of the recipient of services. This is a fundamental shift aligning intermediary services with the destination-based principle that underpins the entire GST framework.
3. Date of Applicability – Effective from 30th March, 2026
A critical question that arises is: from what date does this amendment take effect?
Section 1(2) of the Finance Act, 2026 prescribes the commencement dates for various provisions of the Act. It reads:
“(2) Save as otherwise provided in this Act,—
(a) sections 2 to 129, clause (b) of section 152 and section 156 shall come into force on the 1st day of April, 2026;
(b) sections 153 to 155 shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint.”
A careful reading of Section 1(2) reveals that:
Sections 2 to 129, clause (b) of section 152, and section 156 are expressly stated to come into force on 1st April, 2026. Sections 153 to 155, which relate to amendments to Sections 15, 34, and 54 of the CGST Act, are to come into force on a date to be notified by the Central Government. However, Section 157 – which omits clause (b) of Section 13(8) of the IGST Act – is conspicuously absent from both clauses (a) and (b) of Section 1(2).
Since Section 157 is not covered by any specific commencement provision, it falls within the residuary principle that the provision takes effect from the date on which the Act itself comes into force, i.e., the date of Presidential assent. The Finance Act, 2026 received the assent of the President on 30th March, 2026, and was published in the Gazette of India on the same date. Therefore, Section 157 – and consequently the omission of Section 13(8)(b) – is effective from 30th March, 2026 itself.
This is a significant point, as it means that intermediary services supplied on or after 30th March, 2026 are governed by the new regime, and the place of supply for such services shall be determined under Section 13(2), i.e., the location of the recipient.
4. Who is an “Intermediary”? – Section 2(13) of the IGST Act
Before appreciating the impact of the omission, it is essential to understand who qualifies as an “intermediary” under the IGST Act.
Section 2(13) of the IGST Act, 2017 defines “intermediary” as follows:
“‘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;”
The essential ingredients of the definition are:
First, an intermediary is a broker, agent, or any other person who arranges or facilitates a supply. Second, the arrangement or facilitation must be in respect of supply of goods, services, or securities. Third, the arrangement must involve at least three parties – a minimum of two persons between whom the supply takes place, and the intermediary who facilitates the transaction. Fourth, the intermediary does not supply the goods, services, or securities on his own account. A person who provides the main supply on a principal-to-principal basis on his own account is expressly excluded from the definition.
The Central Board of Indirect Taxes and Customs (“CBIC”) further clarified the scope of intermediary services through Circular No. 159/15/2021-GST dated 20th September, 2021, which elaborated on the guiding principles, provided illustrative examples, and clarified that outsourced services and sub-contracted services do not fall within the ambit of intermediary services.
It is pertinent to note that the definition of “intermediary” under Section 2(13) remains unchanged even after the Finance Act, 2026. What has changed is only the place of supply rule applicable to intermediary services – from supplier-location-based to recipient-location-based.
5. Historical Background: The Intermediary Controversy Under Service Tax
The concept of “intermediary” was first introduced in the indirect tax landscape through the Place of Provision of Services Rules, 2012, which came into effect on 1st July, 2012, coinciding with the introduction of the negative list-based taxation regime under the Finance Act, 1994. Rule 2(f) of the said Rules defined an intermediary as a broker, agent, or any other person who arranges or facilitates a provision of a service or a supply of goods between two or more persons, but does not include a person who provides the main service or supplies the goods on his own account.
Rule 9(c) of the Place of Provision of Services Rules, 2012 stipulated that the place of provision of intermediary services shall be the location of the service provider. This was a departure from the general rule under Rule 3, which provided the location of the recipient as the place of provision. The consequence was that even when an Indian service provider was facilitating a supply for a foreign principal and receiving consideration in convertible foreign exchange, the service was deemed to be provided in India and was subjected to Service Tax, thereby denying the exporter the benefit of treating such services as “export of services”.
Initially, the definition of intermediary under the Service Tax regime extended only to intermediaries in relation to services. However, with effect from 1st October, 2014, the definition was amended to also cover intermediaries facilitating the supply of goods, thereby bringing commission agents for goods within the ambit of intermediary services. This widened the scope significantly and brought within the tax net Indian buying or selling agents earning commission from foreign principals.
The ITeS sector, BPO/KPO sector, marketing agents, commission agents, and multinational corporations with Indian subsidiaries providing support services to overseas group entities were frequently subjected to litigation, as the Revenue sought to characterize their “principal-to-principal” arrangements as intermediary services.
6. Carrying Forward of the Controversy into the GST Regime
When the GST law was introduced with effect from 1st July, 2017, the definition of “intermediary” was substantially retained under Section 2(13) of the IGST Act, with the addition of “securities” to the scope of the definition. Correspondingly, Section 13(8)(b) of the IGST Act adopted the same approach as Rule 9(c) of the erstwhile Place of Provision of Services Rules, 2012 – deeming the place of supply of intermediary services to be the location of the supplier.
The effect of Section 13(8)(b) was twofold:
First, for outward supplies: Indian service providers acting as intermediaries for foreign principals were denied “export of services” status under Section 2(6) of the IGST Act, because one of the conditions for export – that the place of supply must be outside India – was not satisfied. Despite the recipient being outside India and consideration being received in convertible foreign exchange, the deeming fiction placed the supply within India. This resulted in the intermediary being required to pay GST (either IGST or CGST + SGST, depending on the interpretation), making Indian intermediary services uncompetitive in the global market.
Second, for inward supplies: foreign intermediaries providing facilitation services to Indian businesses were not considered to be supplying services in India, since the place of supply was the location of the foreign supplier. Consequently, no GST liability under the reverse charge mechanism arose in India on such transactions.
7. The Litigation Landscape: Key Judicial Pronouncements
The intermediary services classification has been one of the most litigated issues in GST, with several High Courts and Tribunals examining the constitutional validity and interpretation of Section 13(8)(b). A brief survey of the key judicial pronouncements is set out below:
7.1 Material Recycling Association of India v. Union of India (Gujarat High Court)
The Gujarat High Court upheld the constitutional validity of Section 13(8)(b) of the IGST Act. The Court observed that Article 246A of the Constitution confers upon Parliament the exclusive power to make laws on inter-State trade and commerce, and held that merely because invoices are raised on recipients located outside India and foreign exchange is earned, the transaction does not automatically qualify as an export of services. The Court declined to strike down the provision as ultra vires.
7.2 Dharmendra M. Jani v. Union of India (Bombay High Court)
This was perhaps the most significant case on the constitutional validity of Section 13(8)(b). The Bombay High Court delivered a split verdict: Justice Ujjal Bhuyan held that Section 13(8)(b) was unconstitutional and violative of Article 14 of the Constitution, as it discriminated against intermediary service providers by denying them export benefits. Justice Abhay Ahuja, on the other hand, upheld the validity of the provision. The matter was referred to a third judge, Justice G.S. Kulkarni, who upheld the constitutional validity of the provision but with a significant qualification – he held that the operation of Section 13(8)(b) was confined to the IGST Act and could not be extended to levy CGST or SGST on intermediary services. This interpretation created a unique situation where intermediary services to foreign recipients attracted IGST (as an inter-State supply under Section 7(5)(c)), but not CGST + SGST, adding further complexity to the already muddled position.
8. The GST Council’s Recommendation and Legislative Action
In its 56th Meeting held on 3rd September, 2025, under the chairpersonship of the Union Finance Minister, the GST Council recommended the omission of clause (b) of Section 13(8) of the IGST Act. The Press Release issued after the meeting stated that the place of supply for intermediary services would, post-amendment, be determined as per the default provision under Section 13(2), i.e., the location of the recipient of services, and that this change would help Indian exporters of such services to claim export benefits.
Pursuant to the Council’s recommendation, the Finance Bill, 2026 was introduced in Parliament, and the amendment was enacted as Section 157 of the Finance Act, 2026, which received the President’s assent on 30th March, 2026.
9. Impact of the Amendment
9.1 Impact on Indian Intermediary Service Providers (Outward Supplies)
Indian intermediary service providers – including commission agents, marketing agents, buying/selling agents, and other facilitators providing services to foreign principals – can now qualify their services as “export of services” under Section 2(6) of the IGST Act, provided all the conditions thereunder are satisfied (including receipt of consideration in convertible foreign exchange, and the supplier and recipient not being merely establishments of a distinct person). This means such suppliers can supply services under a Letter of Undertaking (LUT) without payment of IGST, or claim refund of IGST paid, significantly improving their cost competitiveness in the global market.
9.2 Impact on Import of Intermediary Services (Inward Supplies)
The flip side of the amendment is that Indian businesses that engage foreign agents or intermediaries will now find that the place of supply for such services shifts to India (being the location of the recipient). This brings such transactions within the ambit of “import of services” under Section 2(11) of the IGST Act, making the Indian recipient liable to pay IGST under the reverse charge mechanism. While such IGST can be claimed as input tax credit (subject to eligibility conditions), this represents a new compliance obligation for Indian importers of intermediary services who were hitherto not liable to GST on such transactions.
9.3 Pending Litigation and Refund Claims
While the amendment resolves the position prospectively, the question of pending litigation and past refund claims remains. Taxpayers who have been denied export benefits on intermediary services for past periods will need to rely on the judicial precedents and their specific facts. The amendment is not retrospective in nature and applies only from 30th March, 2026.
10. Conclusion
The omission of Section 13(8)(b) of the IGST Act by Section 157 of the Finance Act, 2026 is a landmark reform in the GST landscape. It corrects a long-standing anomaly that was at odds with the fundamental character of GST as a destination-based consumption tax. It aligns the Indian GST framework with international best practices followed in several jurisdictions, including the European Union, where intermediary services are taxed based on the recipient’s location.
The amendment puts an end to what was arguably the most litigated classification issue in indirect tax law since 2012. Indian intermediary service providers can now compete on a level playing field in the global services market, free from the burden of non-creditable GST that was effectively rendering their services uncompetitive.
However, businesses – both exporters and importers of intermediary services – must promptly review their contractual arrangements, update their billing systems, and ensure compliance with the new regime, particularly in relation to reverse charge obligations that arise on the import side. The definition of “intermediary” under Section 2(13) remains unchanged, and hence, the classification of services as intermediary or otherwise will continue to require careful analysis of facts and contractual terms.
The road ahead is clearer, but the journey of compliance must be navigated with care and diligence.
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