Introduction and background:
Indirect taxes, particularly Service Tax and GST, are based on the principle of destination cum consumption-based taxation. This implies that tax is levied where the goods or services are consumed. Naturally, services rendered to foreign entities are treated as exports, exempt from domestic taxation, as India aims to promote foreign exchange inflows and avoid the counterproductive “export of taxes.”
However, this principle was distorted through the introduction of the concept of ‘intermediary services’, which misapplied the idea of “end beneficiary” as the consumer. Consequently, several genuine export transactions were denied the benefit of zero-rating.
It all started with an attempt of taxing exporting entities on the premise that service beneficiary is in India though such entities are being contracted and paid from the foreign entities, who may in turn render service or sell their products to Indian customers. For example, the services given by Indian entity to Microsoft, USA cannot be said to be given to the Indian user/consumer of Microsoft. The courts/tribunal in catena of decisions consistently held that contracting parties are to be seen for determining the text of consumption not the ultimate beneficiary or consumer[1].
To overcome this hurdle, tax authorities have brought the concept of ‘intermediary’ in the Place of Provision of Services Rules, 2012 and later carried forward into GST through the IGST Act, which deemed the supplier’s location as the place of supply. This effectively nullified the export status of many services and subjected them to GST, contrary to the fundamental principle of destination-based taxation.
Definition and its ‘confusing’ story:
The general meaning of the ‘Intermediary’ is the person who mediates between 2 persons and the conventionally described as ‘agents’ or ‘brokers’. Section 2(13) of the IGST Act, 2017 defined an ‘intermediary’ as any broker, agent, or any person who arranges or facilitates the supply of goods, services, or securities between two or more people but does not include one who supplies such goods or services on his own account. One can carve out certain basic pre-requisites like:
- The presence of a minimum of three parties.
- Two distinct supplies – Main supply between two principles and ancillary supply by intermediary between those 2 principles
- The intermediary arranges or facilitates and does not supply goods/services themselves.
- Supplies on own account viz., service is performed on principal-to-principal basis, is explicitly excluded from the intermediary definition. For example, sub-contracting is not intermediary.
CBIC’s Circular No. 159/15/2021-GST dated 20.09.2021 attempted to clarify aforesaid issues and stated specific criteria to distinguish intermediary services However, ambiguous terms like – own account, facilitated or arranged created lot of confusion and reality remains that it is largely misapplied and troublesome provision for exporting entities as many agreements are misread by the GST department to somehow fit under the scope of ‘intermediary’ and deny the export benefits. It has become habit for the department to categorize as ‘intermediary’ wherever payments are linked to results or some representation activities are mentioned as part of main services like marketing, advisory etc. Many times, it is natural that some kind of representation will be made (albeit not in strict sense of ‘agency’).
Main trouble – The Fallout of Being Classified as an ‘Intermediary’:
Classification as an “intermediary” has severe implications:
- Services are not treated as ‘exports’.
- Subjected to GST@18%
- Refund of unutilized ITC denied
- Trouble of not being reimbursed from the foreign customer which forces them to pay from the service price.
- Increased compliance costs and risk of loss of competitiveness in global market
Consequently, entities falling under ‘intermediary’ ended up losing out large chunk of their revenue in the form of taxes (18% indirect taxes and approx. 30% income tax totaling almost 50%). Some entities made alternative plans of shifting operations to Outside India while several entities are pursuing for removal of this ‘intermediary’ concept in its ‘toto’.
Industries Affected and Judicial Precedents:
Besides being excessively taxing, due to its vagueness in scope and extent of ‘intermediary’ definition, it created lot of chaos in several industries (mainly contributed from AAR’s/AAAR’s) and troubled long standing exporting entities/industries with denial of the exports benefits viz., refunds rejections, output demands @18%. Some of the reported decisions are tabulated below:
This list is only illustrative, underscoring the magnitude of disruption across industries.
Recent Developments – A Step Towards Resolution:
In its 56th Meeting, the GST Council addressed this long-standing grievance and recommended removal of the specific provisions relating to ‘intermediary services’. Instead, the general place-of-supply provisions would apply.
This change effectively restores parity with global best practices by ensuring that services supplied to foreign recipients, with payment in convertible foreign exchange, are treated as exports and zero-rated. Unlike GST rate changes, this change will not be implemented immediately as it requires legislative change in the IGST Act therefore, expected to take some time to pass the amendment and make it effective.
Prospective v. retrospective?
A crucial question remains: Will the amendment operate prospectively or retrospectively?
- If prospective, it prevents future disputes but leaves exporters to battle past litigation.
- If retrospective, it could wipe out over a decade of disputes (2012–2025), providing long-overdue relief to exporters and unclogging judicial forums
Conclusion:
The proposed removal of the “intermediary” provision marks a potential turning point for Indian exporters. While the actual legislative enactment and its effective date remain to be seen, this move promises to align GST with its foundational principle of destination-based taxation.
If applied retrospectively, it would not only resolve pending disputes but also send a strong positive signal to global investors and service exporters. Either way, this reform represents a long-awaited step towards easing the tax burden on Indian service providers and enhancing India’s competitiveness in the global market.
(For any feedback /queries mail to venkataprasad@hnaindia.com)
[1] C..S.T, Mumbai vs. Vodafone India Ltd. (2025) 33 Centax 152 (S.C.); Paul Merchants Ltd. v. Commissioner — 2013 (29) S.T.R. 257 (Tribunal) and many others
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