The introduction of the Goods and Services Tax (GST) in 2017 brought about a new era in the history of the indirect taxation system in India. The GST was designed as a destination-based consumption tax, which was intended to standardize the structure of the indirect tax system in India to make it compatible with the international VAT system. The fundamental concept of GST is the concept of ‘place of supply,’ which identifies the taxing authority eligible to tax a particular transaction. Although this concept is seamless for all kinds of supplies, the applicability of this concept in the context of intermediary services has been the subject matter of intense constitutional and policy debates, especially after Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017.
The ‘place of supply’ helps determine whether a transaction is intra-State, inter-State, or an export, and consequently, whether CGST and SGST or IGST is to be paid. As GST is a destination-based tax, it is always preferable that the tax be charged at the point of consumption. This is particularly relevant in the case of exports, which are zero-rated to make exports tax-neutral and competitive in the international market. In the case of cross-border services, the rules regarding the ‘place of supply’ are specified in Section 13 of the IGST Act. Although the general provision in Section 13(2) specifies that the ‘place of supply’ shall be the location of the recipient, the rules for intermediary services are different, as specified in Section 13(8)(b).
An intermediary under GST is a person who arranges or facilitates the supply of goods or services between two parties without supplying such goods or services on their own account. (Circular No. 159/15/2021-GST: defines “on own account” as when service is supplied directly to client, not merely arranged.) Section 13(8)(b) deems the place of supply of intermediary services to be the location of the supplier, even when the recipient is located outside India and the service is consumed abroad. The effect of this deeming fiction is that such services fail to qualify as “export of services” under Section 2(6) of the IGST Act, thereby losing zero-rating benefits. This results in a departure from the destination-based principle and creates what is often described as a reverse nexus, where tax follows the supplier rather than the place of consumption.
One of the themes that has been recurring in the challenges to Section 13(8)(b) is the apparent lack of fairness to Indian service exporters who are liable to tax despite exporting services to foreign customers. However, some courts have upheld the principle of no equity in tax is applicable. This principle states that the liability to pay tax is strictly governed by the statute, and the courts cannot grant relief on the grounds of hardship, fairness, or economic impact unless the statute permits them to do so. In taxation, the doctrine of equity cannot prevail over the will of the law. As long as Parliament remains within the constitutional framework, the degree of harshness in the law ceases to be relevant. This is why the Gujarat High Court in the case of Material Recycling Association of India v. Union of India declared the constitutional validity of Section 13(8)(b) of the IGST to be valid, despite admitting that it has a negative impact on service exporters.
The constitutional validity of Section 13(8)(b) was challenged on the following grounds: absence of territorial nexus under Article 245(1), violation of the destination-based structure of GST, discrimination under Article 14, and unjustified restriction on trade under Article 19(1)(g).
In the matter of Dharmendra M. Jani vs. Union of India, the Bombay High Court delivered a split verdict. Justice Ujjal Bhuyan struck down Section 13(8)(b) as unconstitutional, holding that the taxation of services consumed outside the country exceeds the limitations of the constitution and impacts the GST structure. Justice Abhay Ahuja, however, upheld the provision, holding that the court cannot question the legislative intent on the grounds of apparent discrimination.
The precedent case of Dharmendra M. Jani (2023) attempted to achieve a balance. Although there was no dispute over the fact that the services were actually exports, the Court held that the provision was valid but limited its application to the IGST framework.
Globally, the VAT system follows the principle of taxing services based on the destination of consumption. The OECD VAT/GST Guidelines provide that intermediary services are to be considered exports if the recipient is abroad and the service is utilized outside the taxing authority. The Indian government’s stance on taxing intermediaries on the supplier side, therefore, was clearly at odds with international norms.
A critical juncture has been reached with the Finance Bill, 2026, which seeks the removal of Section 13(8)(b) from the IGST Act. After the removal, the default rule of Section 13(2) will apply, and the recipient’s location will be the place of supply for intermediary services. This policy action is important for two reasons. First, it recognizes that although Section 13(8)(b) was constitutionally sound, it was unwise policy. Secondly, it proves that tax inequities can be effectively addressed by legislative changes rather than judicial measures, which is a perfect example of the fact that there is no equity in tax but there can be equity in tax policy. The judicial recognition of this change was seen in the case of Commissioner of DGST v. Global Opportunities Pvt. Ltd., where the Delhi High Court observed that “in view of the recommendation of the GST Council, it was not consistent with the destination-based structure of GST to treat intermediary services as domestic supplies.”
The controversy surrounding the intermediary services in the GST regime highlights the fine line that needs to be maintained between the legislative authority, constitutional provisions, and economic policies. Section 13(8)(b) has withstood the judicial challenge not on the grounds that it is fair, but because taxation is not based on equitable principles. The Finance Bill, 2026 represents a major course correction, bringing the GST structure in India in line with international best practices and reiterating the destination-based model of GST. The history of this provision reveals that although the courts may sustain the law as it is, it is the legislature that must correct the imbalance.
Author Bio
