Fearing 18% GST, back office firms challenge intermediary tag in Gujarat HC

In November, it was ruled that back office support services qualify as intermediary services and not as exports

Some back office service providers have have moved the Gujarat High Court challenging a recent tax department ruling that had classified them as intermediaries, thus making them liable to imposition of 18 per cent goods and services tax (GST) on their services. 

In their appeal, these companies have pleaded that the definition of ‘intermediary’ is already established under the previous service tax regime and any alteration in this regard will not only increase the tax burden of the outsourcing industry but will also open the Pandora’s box in terms of retrospective taxation.

"We have filed a writ petition in the Gujarat High Court on behalf of Material Association of India challenging the constitutional validity of the place of provision of intermediary services,” said Abhishek A Rastogi, Partner at law firm, Khaitan & Co.  The firm also represents a number of large BPO firms in India on similar cases. The Material Association of India is an association of indenting agents across sectors who provide services to foreign clients. 

In November, the Maharashtra Authority for Advance Ruling in Vserv Global case had ruled that back office support services qualify as intermediary services and not as exports. This had triggered the fear that IT/ITeS companies as well as the global in-house centres (GICs) of multinational firms whose services qualify as exports might be liable to pay 18 per cent GST, subject to interpretation.

While there were established definition of intermediaries under the previous service tax regime, the GST Council is working on specifics to provide a clear distinction between intermediaries that are taxable and the back office service providers, which will be exempted.

“It was a very fairly settled position, which has withstood all legal and judicial interpretation that back office operations rendered to a client outside India is export of services. In fact, under erstwhile service tax law and present GST laws, refunds have been sanctioned all over India by treating the BPO operations as export of services,” said Parag Mehta, partner at N A Shah Associates LLP.

If the advance ruling is applied, then tax department can also raise demands retrospectively.

Experts said India’s attractiveness as a hub for back office services could wane if such tax liability is imposed. Companies working in this space will not be in a position to absorb the demands of 18% GST. So, this may lead to migration of back office operations from India to other countries such as West Asia, Philippines, and Australia, said Mehta. 

According to an Edelweiss report, India’s share in the global outsourcing market stood at 52 per cent in FY17, and despite a declining growth rate, the country continues to be the largest player in this space. The BPM sector in India, which employs close to 1.2 million people, had earned revenue of $28 billion in FY18.