Are outsourcing units and BPOs merely intermediaries and brokers or are they exporters? About a week after the government released directions that Information Technology (IT) and Information Technology enabled Services (ITES) companies would attract 18 per cent goods and services tax (GST) for several exporters, some intermediaries have challenged the constitutional validity of such a regulation.
Several back offices of BPOs and KPOs, already fighting the margin pressure, will have to pay 18 per cent GST after a government circular on July 18 said certain services shouldn’t be categorised as exports. As per the earlier tax regime, these companies did not attract any tax and up until 2018, even under GST, these companies would even get refunds for the input tax credits.
However, following an authority of advance rulings (AAR) directive last December, indirect tax department had started issuing notices to several IT/ITES companies demanding up 18 per cent GST on money received on convertible foreign exchange.
“The recent circular on intermediaries means that several back end services rendered to foreign service recipients would attract 18 per cent GST due to the place of provision of such services. We have challenged the constitutional validity of the place of provisions for intermediaries on various grounds in Gujarat High Court and the arguments would cover relief for different players including the services mentioned in the circular,” said Abhishek A Rastogi, a partner at Khaitan & Co.
The government circular goes into length in explaining how GST should be levied on certain IT/ITES services supplied outside India as these are not exports but merely broking services. The indirect tax department had started issuing preliminary notices to captive units of multinationals and Indian companies exporting offshore support services.
Industry trackers said the question now was whether BPOs are commission agents and brokers. If so, they would not be considered exporters and their revenues would be subject to taxes as only exports are exempted from domestic taxes and receive certain benefits. So, services provided by Indian entities to foreign companies would not be treated as exports and hence taxable in India.
“Many BPOs and KPOs are already moving to Philippines in last few years and such a hit on the margins is set to push many more there,” said a senior tax official with an Indian IT firm.
India currently boasts of an outsourcing market of about $50 billion a year. The government stand is set to impact the $13 bn outsourcing industry that is already facing pressure on margins, said a person in the know.
“While the circular is not binding on the taxpayer, it’s binding on the tax officials; which means that many companies will stop getting refunds,” said a person advising one of the IT companies on the issue.
Earlier, industry body Assocham and an IT lobby group had raised concerns around the future tax liability due to the government’s stand. Experts said under the earlier indirect tax regime, an intermediary was mainly a broker or a commission agent. However, any company supplying support services to a multinational was not treated as an intermediary.
In the past, companies and tax experts had reached out to the government on the subject. They wanted the government to look at amending the law to treat any service provided by Indian companies as zero-rated or non-taxable if the customers were based overseas
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