From Tax Trap to Global Hub: Redefining Place of Supply for Indian Intermediary services

From Tax Trap to Global Hub: Redefining Place of Supply for Indian Intermediary services

Executive Summary

The “Intermediary” classification under Section 13(8)(b) of the IGST Act as well as erstwhile service tax regime, has been a focal point of litigation, often denying export status to services provided to overseas clients. Section 157 of the Finance Act, 2026, marks a watershed moment by omitting this provision, thereby aligning the Place of Supply for intermediaries with the location of the recipient. This article examines the transition of these services to “Export of Services” (Zero-Rated), evaluates the effective date of March 30, 2026, and analyses the prospective nature of the amendment through the lens of recent judicial precedents such as VKC Footsteps, Ascent Meditech and Addwrap Packaging. The Article also analyses the impact on inbound intermediary services i.e. imports.

 Introduction

For nearly two and a half decades, the concept of “intermediary services” has remained one of the most litigated and controversial aspects of India’s indirect tax framework, spanning both the service tax and GST regimes. What was originally conceived as a narrowly tailored provision gradually evolved into a broad and often misapplied classification, giving rise to widespread disputes.

At the heart of the controversy lay the Place of Supply (PoS) framework under the Integrated Goods and Services Tax Act, 2017 (IGST Act), which deviated from the fundamental principle of destination-based taxation. The classification of a service as “intermediary” frequently resulted in denial of export benefits, thereby increasing the tax cost for the foreign clients availing services from the Indian intermediaries. This distortion impacted not only tax neutrality but also India’s competitiveness in global markets.

The Finance Act, 2026 has now introduced a structural correction by omitting Section 13(8)(b) of the IGST Act, signalling a paradigm shift. This amendment has the potential to transform India from a jurisdiction burdened by interpretational ambiguity into a competitive global service hub.

Background: The evolution of intermediary services as a maligned concept

Under the IGST Act, an “intermediary” is defined as a broker, an agent, or any person who arranges or facilitates the supply of goods or services between two or more persons.

While the definition appears straightforward, its application has been anything but. The primary issue stemmed from Section 13(8)(b), which stipulated that the place of supply for intermediary services would be the location of the supplier. This provision effectively overrode the general rule under Section 13(2), which determines the place of supply based on the location of the recipient.

The consequence of this deviation was significant. Even where services were provided by an Indian entity to an overseas client, such services failed to qualify as “export of services” due to the place of supply being deemed within India. As a result, such transactions attracted GST at 18%, despite being cross-border in nature.

This anomaly adversely affected several sectors, including:

• Sales and marketing support services
• Procurement and sourcing services
• Educational consultancy and counselling
• Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO)

Compounding the issue was the expansive and often inconsistent interpretation of the term “intermediary” by tax authorities. In practice, any transaction involving three parties was frequently classified as intermediary services, irrespective of contractual terms, scope of work, or the nature of services rendered. Critical factors such as privity of contract, assumption of risk, and independent service provision were often overlooked. This led to:

• Rejection of export refund claims
• Issuance of substantial tax demands
• Prolonged litigation for multinational corporations

Over time, the provision came to be viewed not merely as a technical inconsistency but as a structural impediment to India’s service export ecosystem.

The Amendment: A breath of fresh air

Section 157 of the Finance Act, 2026 (Finance Act) has introduced a landmark amendment to the IGST Act, specifically targeting the “Intermediary” bottleneck by omitting clause (b) of Section 13(8)(b). The long awaited omission has finally aligned intermediary services with the general principle of Place of Supply—the location of the recipient vis-à-vis the place of the supplier earlier. Key impact of the said omission are as under:

• Zero-Rating: the intermediary services provided to overseas clients will now qualify as “Export of services”, subject to other conditions of Section 2(6) of the IGST Act being fulfilled, thereby allowing companies to claim refunds on input tax credits (ITC).
• Global Competitiveness: Indian service providers will no longer need to bake an 18% tax cost into their quotes, making them significantly cheaper in the international market.
• Tax certainty and ease of doing business: With the intermediary services being at par with other services, the issue on classification has come to a stand still resulting in tax certainty for the MNCs.

The “Effective Date” Mystery: Silence of the Finance Act

While the omission is a welcome move, a common point of confusion with the Finance Act is that it remains silent on the specific date this amendment comes into force. Typically, Section 1 of the Finance Act provides for effective dates for the amendment carried out by the said Act. However, the said Section is completely silent on the effective date for Section 157 of the Finance Act deals with the omission.

Given the above, the General Clauses Act, 1897 plays an important role. Section 5 of the General Clauses Act deals with the effective date of provisions where the act is silent. The extract is hereunder:

Coming into operation of enactments.

5. (1) Where any Central Act is not expressed to come into operation on particular day, then it shall come into operation on the day on which it receives the assent, —

(a)  in the case of a Central Act made before the commencement of the Constitution, of the Governor-General, and

(b)  in the case of an Act of Parliament, of the President.

(emphasis supplied)

Basis the General Clauses Act, it is clear that the said amendment will be effective from the date when the Finance Act received the Hon’ble President’s assent. The Finance Act has received the assent on 30 March 2026 and the Act has also been published in the Official Gazette. Hence, it is clear that the omission is effective from 30 March 2026.

Retrospective vs. Prospective: The Critical Fiscal Determination

While the amendment / omission is now effective, a crucial consideration is: What happens to the taxes paid and demands raised for the last few years or for that matter the refunds rejected? Generally, tax laws are prospective. The only way it can be interpreted to be retrospective is that the amendment should be curative or clarificatory.

The “Curative” Precedents: amendments in Rule 89(5) – formula for Inverted Duty refunds and Rule 96(10) – restriction on rebate option for certain taxpayers

Rule 89(5) of the Central Goods and Services Tax Rules, 2017 which provides for formula for inverted duty structure refunds was amended vide NN 14/2022-CT dated 05 July 2022, wherein the anomaly (the formula assumed that output tax is discharged from ITC on inputs and thereby reduce refund by not accounting for utilisation of ITC on input services) in the formula was rectified. This was undertaken GST Council based on the Hon’ble Supreme Court’s urge through the case of Union of India & Ors. Versus VKC Footsteps India Pvt Ltd. [2021 (9) TMI 626 – Supreme Court]. In the said case, the vires of the said formula was challenged on the ground that the formula prescribed in the Rule was inconsistent or ultra vires the provisions of the Act along with other grounds. While the Hon’ble SC did not strike down the formula but it held that there existed the anomaly in the formula and urged the GST Council to reconsider the same. Based on the SC’s urge, the Council had recommended to rectify the anomaly and the formula was amended.

While the amendment did not specifically provide for its retrospective applicability, taxpayers had applied for differential refund claims and the matter travelled till the Hon’ble Gujarat High Court in the case of Ascent Meditech Ltd [2024 (12) TMI 511 – GUJARAT HIGH COURT]. In the said case, the Hon’ble Gujarat HC has held that the amendment carried out in the said formula which is curative / clarificatory, is applicable retrospectively to refund or rectification applications filed within two years under section 54(1). Special Leave Petition against the said judgement was also dismissed by the Hon’ble Apex Court – 2025(5) TMI 149 – SC Order.

 Another important issue wherein the curative nature of amendment and retrospective applicability was dealt in was the omission of Rule 96(10) of the CGST Rules which was introduced. As per the said Rule, for certain taxpayers availing duty exemptions schemes (Advance authorisation, EOU / STP, etc), the option of paying IGST on export and claiming refunds (rebate option) was restricted. However, the restriction was done away with by omission of Rule 96(10) vide NN 20/2024-CT dated 08 October 2024. One of the taxpayers – M/s Addwrap Packaging Pvt. Ltd. challenged the vires of the said restriction as well contended that the omission of the said Rule should be effective retrospectively. The Hon’ble Gujarat HC [2025 (6) TMI 1156 – GUJARAT HIGH COURT] in its judgement held that the omission of Rule 96(10) is not curative or remedial, as it impacts the taxpayer’s substantive right to claim refund of IGST paid. Hence, such omission cannot be said to apply retrospectively. If the omission of Rule 96(10) were intended to have retrospective effect, the Rules would have expressly stated so and moreover, the GST Council has recommended the omission with prospective effect.

Given the nature of amendment in the intermediary provisions, it appears that the same is similar to the omission of Rule 96(10) as the said amendment will give result in substantive claim to the taxpayers by way of export status and refunds. Neither the Rules or the GST Council recommendation provide for retrospective applicability. Hence, it can be concluded that the said omission is prospective to be applicable from 30 march 2026 and not retrospectively.

 Impact on Inbound intermediary services

While the amendment provides a sigh of relief for the exporters of intermediary services. It is also important to understand the impact of the amendment on the inbound part of intermediary services i.e. commissions paid by the Indian Company to an overseas commission agent. Given the suppliers (commission agents) are located outside India, important consideration is whether the same can be considered to be import of services and if the Indian Company is liable to pay GST under RCM.

The term ‘Import of services’ has been defined under Section 2(11) of the IGST Act. Relevant extract is reproduced hereunder:

(11) “import of services” means the supply of any service, where-

(i)  the supplier of service is located outside India;

(ii) the recipient of service is located in India; and 

(iii)  the place of supply of service is in India;

 The third clause of the above definition provides that, for a service to fall under import of services, the place of supply of services should be in India. Pre-amendment, for commission agent located overseas, the place of supply in terms of Section 13(8)(b) of the IGST was the ‘location of the supplier’ i.e., outside India. Given that the place of supply was outside, the services was considered to be outside the ambit of Indian GST Law and neither the recipient nor the supplier were liable to GST in India.

However, post amendment, given that clause (b) of Section 13(8) of the IGST Act has been omitted, the place of supply is required to be determined as per the general clause i.e. 13(2) which is the ‘location of recipient of services’. Hence, the place of supply will be the location of the Indian Company i.e. in India. Given the same, the services shall fall under the umbrella of import of services, liable to GST under RCM by the Indian Company.

The Indian Company will be allowed to avail Input Tax Credit (ITC) of the GST paid, subject to fulfilment of  other conditions. While the same will not have impact on cost for the Indian Company, it will add to its compliance burden and working capital requirements.

Tabular presentation of the pre-amendment and post-amendment implications

Conclusion

The omission of Section 13(8)(b) represents more than just a legislative tweak; it is a strategic move to bolster India’s competitiveness in the global service economy and ease of doing business in India through Tax certainty. By removing the 18% “tax cost” and providing much-needed classification certainty, the amendment significantly eases the burden on MNCs and BPOs. However, while the path forward is clear, the “billion-dollar question” of past litigations remains anchored in the prospective nature of the change. As the industry transitions, taxpayers must ensure meticulous compliance with the remaining conditions of Section 2(6) of the IGST Act to fully realize the benefits of zero-rating. This amendment finally allows the Indian middleman to trade the “tax trap” for a seat on the global stage. On the other hand, the importers should also analyse their implications and be prepared with the compliances.