Proposed change to term intermediary services as export of services

Who is an intermediary?

In the terms of section 2(13) of IGST Act, ‘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;

In short, “intermediary” essentially involves 3 or more persons

• Supplier of service/goods,
• Principal on whose behalf service is rendered/goods supplied and
• Persons who actually receives the service/goods (i.e., customers of the principal).

However, where a person is providing services or supplies goods on his own account to his customers, it cannot be termed as an intermediary in accordance with section 2(13) of IGST Act.

Hence it is clear from the above definition, that there is required to be an arrangement or facilitation of the supply of goods, services or securities. In addition to the definition, in order to qualify as an intermediary; there should be two supplies at any one time:

• The supply between the principal and the third party; and
• The supply of his own service (agency service) to his principal, for which a fee or commission is usually charged.

However, it may be noted that a person acting as an intermediary cannot change the nature of supply provided by person on whose behalf he is acting as an intermediary.

In many countries, including in the EU, the intermediary service whether for goods or services has been based on the place of the recipient.

Many representations were done by industry/consultants that in line with international best practices all services. There was no relief given and the only option for intermediary service provider would have to include the cost of indirect taxes to him to be borne and being the less competitive in the international markets to overcome such competition such Indian intermediaries have to compromise on their profits to be more competitive without having an support from the Governments which they have ignored from years and more to go until the policies have been changed to benefit them to consider intermediary as exports.

The proposed change to term intermediary services as export of services

Rajya Sabha – In the 139th report laid by Department Related Parliamentary Standing Committee on Commerce – Impact of Goods and Services Tax (GST) On Exports on 19^th December 2017

In para 15 proposed the following amendments for the benefits of intermediaries

Para 15.1

The Committee noted that service providers providing services to overseas suppliers of goods earn commission in convertible foreign exchange. IGST @ 18% is leviable on such commission because the Government does not recognize their services as “Export of Services”.

Para 15.2

In view of the fact that GST is a destination-based consumption tax, the Committee is of the view that following steps may be taken:

• Provide that Place of Supply of Indian Intermediaries of Goods will be the location of service recipient so that Intermediary Services will be treated as ‘Exports’; or
• Providing an exemption to Indian Intermediaries of Goods from levy of IGST; or
• Notify such services under Section 13(13) of the IGST Act to prevent double taxation (tax in India as well as in the importing country) by treating place of effective use (foreign country) as place of supply.

Para 15.3

The Government may also cause amendment to section 13(8) of the IGST Act to exclude ‘intermediary’ services and make it subject to the default section 13(2) so that the benefit of export of services would be available.

However, all the three recommendation by the committee are still on the papers and no interests have been taken it taken in the favors of intermediaries. However, there is a hope maybe in 2-3 years such proposed amendments would be effective thereafter intermediary services could be termed as exports as place of supply would be recipient place i.e. outside India.

Why GST should not be levied on Intermediary services?

• Representation made in ST & GST era have landed on deaf ears for intermediary to be considered as exports from India This is not in line with the EU best practice which seeks to avoid double taxation.
• Unfortunately, concept c/f in GST. Joint Parliamentary suggestion ignored by GST Council
• The entire intermediary industry has been suffered into factor of tax net even when the consideration is received in CFE and services are rendered to foreign countries
• Discussion in 37th GST Council Meeting held in September 2019 and reliance was placed on the following minutes of the meeting with regard to definition of ‘intermediary’ however there was no favorable outcome and it again landed into benefits leaving the entire intermediary services to suffer for tax net and either be less competitive or reduce the profit margins in order to be competitive in the international markets
• Intermediary are taxed under a deeming fiction and migration of Indian exporters because of unfair provisions is concerned, the place of provision of service of an intermediary being the location of the service provider is a purposeful and considered as policy decision of the Government of India
• However, the government need to re-consider policy and the fact that there is CFE earned and due to levy of GST on intermediary various FDI investors in India have shifted their bases to other countries in EU, Middle east, Hong Kong, Singapore etc. which resulted in huge loss of income tax, exports from India and CFE
• Budget speech of Hon’ble Finance Minister of India Smt. Nirmala Sitharaman, “Our government would like to reassure taxpayers that we remain committed to taking measures so that our citizens are free from harassment of any kind.” The levy of GST on intermediary when receipts are in CFE is also a kind of harassment faced by such service provider and they had to shift their bases from India be more cost competitive in the international markets as in other countries like EU, Middle east, Singapore etc. as there is no such treatment of burden taxes.
• The 139^th report of Rajya Sabha which proposes for intermediary services to be exports, however such proposal was made in December 2017 and its still on papers and GST council have ignored till date and only worried about tax collections without being concerned about other factors if treated as exports there could be investments in India, CFE earnings, increase in income tax collections etc. 

Current scenario

When the essential character of services provided by service provider to foreign principal/foreign customer is that of commission agent for enabling sourcing or sale of goods such as machine/garments to outside India along with support services. As per the composite supply concept, the principal supply is that of intermediary service.

Therefore, such service to be treated as intermediary services, being services of commission agent for goods covered in section 13(8)(b), and the place of supply of service is location of supplier in India and liable to GST