18% GST likely on back-end IT services as they don't qualify as export

Most facilitation services the IT and ITeS sector offers at the back end, especially with respect to business process outsourcing, may attract an 18 per cent goods and services tax (GST) because the government has said those will not qualify as export.

Clearing the confusion related to exports of IT and ITeS services, the government said the services facilitating the supply of goods or services would not qualify as export and would be recognised as intermediaries, attracting an 18 per cent GST.

The move will have consequences for service providers in back-end services and post-sales support, among others.

Acting as facilitators between overseas parent companies and Indian customers by doing general marketing, answering basic enquiries, or providing post-sales support was, thus far, generally not being intermediaries, said Harpreet Singh, partner in KPMG.

“Unless the scope was substantive and involved concluding contracts, negotiating price, etc., tax was not paid, treating such services as export. This position needs to be re-visited now,” he said.

However, if service is given on one’s own account, it will be considered export.

Export is considered a zero-rated supply under the GST and a refund can be claimed.

The circular, issued by the Central Board of Indirect Taxes and Customs (CBIC), is aimed at putting to rest litigation and disputes related to export-related refunds.

However, experts have other views.
 

Atul Gupta, senior director, Deloitte India, said the CBIC circular mystified the issues and left open scope for litigation.

“It is going to be a detriment for the export of services because exporters no longer can claim input tax refunds on them,” he said.

Gupta said the circular was faulty and needed another look before it resulted in demand notices from GST field formations on outsourcing services.

Bipin Sapra, partner, EY, said certain grey areas continued but this would bring relief to a large section of IT and ITES exporters facing frivolous demands and denial of export benefits. 

“The clarification will help in settling most objections regarding exports of services and the exporters will get refunds.”

The issue is important because strong representations were made by industry bodies such as Nasscom and Amcham for clarity on the subject.

Nasscom said it was studying the impact of the latest development.

The government has examined three broad scenarios, wherein a supplier of ITeS located in India supplies services for and on behalf of a client abroad, to clarify its treatment under the GST. 

The Maharashtra Authority of Advance Ruling (AAR) had upheld back-office operations do not qualify as export. 

Abhishek Jain, tax partner, EY, said though the circular addressed customary back-office operations, matters that involved back-end and facilitation remained a matter of concern.

In situations where a back end services provider uses his own account as well as arranges or facilitates supplying support services related to pre- or post-delivery on behalf of overseas clients, taxability will be ascertained case by case. 

With inputs from Neha Alawadhi