The implementation of the Goods and Services Tax (GST) in India has streamlined the indirect tax regime, bringing uniformity and simplicity. However, certain areas within GST continue to pose challenges for businesses, one of which is the treatment of intermediary services. This blog aims to delve into the concept of intermediary services under GST, explore the intricacies involved, and analyse significant advance rulings that provide clarity on the subject.
Intermediary services prior to the enactment of GST
In pre-GST India, intermediary services were first introduced in 2012, initially encompassing only the supply of services. In 2014, the scope was broadened to include both goods and services within the taxable territory. This expansion aimed to counteract previous Tribunal decisions that classified certain agency and business promotion services provided to foreign recipients as ‘exports of services.’ The Service Tax Education Guide further elucidated that intermediaries act as facilitators between parties, without providing the main service or supplying the goods themselves. For an intermediary service to be recognized, its value must be identifiable and separate from the main service. The place of provision for intermediary services is determined by the location of the intermediary.
Intermediary services post the enactment of GST
With the advent of GST, the definition of intermediary services and the method for determining the place of supply have been retained from India’s previous Service Tax framework. Section 2(13) of the IGST Act provides the definition of an intermediary: “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 definition of intermediary services under the IGST Act has remained essentially consistent with the earlier service tax provisions. Similarly, the place of supply for intermediary services continues to be identified as the location of the service provider, mirroring the regulations established under the previous Service Tax laws.
The underlying Issue with the intermediary services
The concept of “intermediary services” was well-defined and clarified under the Service Tax regime and has been carried forward into the GST regime, there have been divergent advance rulings regarding what constitutes an ‘intermediary service’ for the purposes of indirect taxation. This divergence arises primarily due to Section 13 of the IGST Act, 2017, which stipulates that the place of supply of services, where either the supplier or the recipient is located outside India, is the location of the intermediary. The primary challenge in taxing ‘intermediary services’ is determining whether such services qualify as exports of service, thus affecting their taxability. Intermediary services provided and received within India are subject to GST. However, in the context of cross-border transactions, if intermediary services are subject to GST, the cost increases by the GST amount, potentially reducing competitiveness in the international market.
It is pertinent to note that Notification No. 9/2017-Integrated Tax (Rate) dated 28th June 2017, as amended. According to serial number 12AA of this notification, intermediary services are exempt from GST when both the supplier and the recipient of the goods are located outside India, provided certain conditions are met. This exemption aims to alleviate the additional cost burden of GST on intermediary services in cross-border transactions, ensuring competitiveness in the international market.
Several noteworthy decisions illustrate the varying interpretations of intermediary services:
1. Vserv Global (P.) Ltd.: In this case, the applicant provided back-office administrative and accounting support services, including payroll processing, to an overseas client. The Authority for Advance Ruling, upheld by the Appellate Authority, determined that these were “intermediary services.” Consequently, the place of supply was deemed to be India, making the services subject to GST.
2. Nes Global Specialist Engineering Services P Ltd.: Contrarily, the Authority for Advance Ruling held that administrative and support services supplied to a foreign client, with payments received in foreign exchange, constituted an export of service.
3. GoDaddy India Web Services P Ltd.: The assessee provided marketing and promotion services, as well as supervision of call centre services and payment processing, to its foreign principal. The ruling was that the place of supply of these services was outside India, and thus, no tax was payable.
Given these conflicting advance rulings, the Central Board of Indirect Taxes & Customs (CBIC) issued a circular on 20th September 2021 to clarify what constitutes ‘intermediary services’ under the GST framework.
There are certain conditions which need to be meet in order to be qualified as intermediary services under the goods and services Act as clarified in the notification Circular no. 159/15/2021-GST published on 20.09.2021.
– An intermediary, by definition, is someone who arranges or facilitates the supply of goods, services, or securities between two or more parties. This necessitates the involvement of at least three parties: two parties involved in the main supply of goods or services, and one who arranges or facilitates this supply. Therefore, an activity involving only two parties cannot be classified as an intermediary service. An intermediary’s role is to “arrange or facilitate” the main supply between other parties, rather than providing the main supply themselves.
– In the provision of intermediary services, there are two distinct supplies:
Main Supply: This is the primary transaction between the two principals, involving the supply of goods, services, or securities.
Ancillary Supply: This refers to the service of facilitating or arranging the main supply between the two principals.
The ancillary supply constitutes the intermediary service, which is clearly identifiable and separate from the main supply. A person involved in the main supply on a principal-to-principal basis with another person cannot be considered an intermediary service provider.
– Intermediary does not include a person who supplies such goods or services or both or securities on his own account. It implies that in cases where in the person supplies the main supply, either fully or partly, on principal-to-principal basis, the said supply cannot be covered under the scope of “intermediary”.
– Sub-contracting for a service is not an intermediary service. The supplier of main service may decide to outsource the supply of the main service, either fully or partly, to one or more sub-contractors. Such sub-contractor provides the main supply, either fully or a part thereof, and does not merely arrange or facilitate the main supply between the principal supplier and his customers and therefore, clearly is not an intermediary
Intermediary services vs export services
Place of supply act as a determinant for the taxability of any service and as per section 13(8)(b) which says that the place of supply for intermediary services will be the place of supply of the service provider, Further the ‘Export of services’ is defined under section 2(6) of IGST Act, 2017 Accordingly, ‘export of services’ means supplies of services that qualifies all the following conditions-
1. The service provider should be located in India;
2. Service receiver should be located outside India;
3. Place of supply of service should be outside India;
4. The payment for the service is received in convertible foreign exchange; and
5. Service provider and service receiver is not merely establishments of distinct persons. (Circular No. 161/17/2021-GST)
The general Principle of the Goods and services act is destination-based tax and when it comes to intermediary services the place of supply is elucidated under section 13(8)(b) that in cases of intermediary services the place of supply shall be the location of the supplier, therefore excluding it from the provisions of export of services and cannot be said as zero-rated supplies of either goods or services.
Conclusion
The treatment of intermediary services under GST in India presents a complex challenge for businesses, especially in cross-border transactions. Despite carrying forward the pre-GST definitions and provisions, varying interpretations by advance ruling authorities have led to inconsistencies. Key rulings, such as those in Vserv Global and Nes Global, illustrate the conflicting views on what constitutes intermediary services and their tax implications. The CBIC’s 2021 circular aimed to clarify these ambiguities by defining intermediary services as distinct from the main supply and setting specific criteria for classification.
The core issue lies in determining whether intermediary services qualify as exports, affecting their taxability. While intermediary services provided within India are subject to GST, those involved in international transactions face complexities due to the place of supply rules. To address the additional tax burden and maintain competitiveness, certain intermediary services in cross-border contexts are exempt from GST under specified conditions.
Author Bio
very well explained !