AAR on back-office services has led to panic in IT, ITes industry: Nasscom

The ruling can result in substantial tax demand against all the big IT and ITes players

A recent advance ruling by tax authorities, making back-office services provided by a company to global firms taxable under the goods and services tax (GST), has created a certain unwarranted panic in information technology (IT) and business process outsourcing industry, said a senior NASSCOM official. 

The Authority of Advance rulings (AAR) ruled last month that back-office support services qualify as intermediary services and not exports in response to a specific case. This means, all the IT services players and business process management firms, along with global in-house centres (GICs) of multinational firms, might be liable to pay 18 per cent GST on their services, subject to interpretation.

“The AAR ruling was a response to one company seeking clarity in its own services. But the ruling and its varied interpretations have created a wide level of confusion and panic among tax officials and companies alike, ”said Ashish Agarwal, Senior Director and head Policy and Advocacy, NASSCOM.

According to some reports, the Income Tax (I-T) Department has issued notices to captive units of multinationals and Indian business process outsourcing (BPOs) for exporting offshore support services. Agarwal cautioned that this might be largely to understand what services the companies are providing but due to the existing panic situation concerned stakeholders on both sides might be reading somewhat “aggressively” into the queries. 

He added that there was already a guidance note issued in 2012 that clearly said that call centre services do not qualify as intermediary services and NASSCOM has highlighted the same to the concerned authorities. “Authorities are working towards resolving the confusion but it is not possible to say when the clarity will be available. Our concern is that in the absence of clarity, companies will witness a slowdown in their tax processing.”

Though an advance ruling is only applicable to the applicant party and cannot be considered a precedent for future rulings, the IT/IT enabled services (ITeS) industry is worried the interpretation of the ruling may result in losing tax benefits that the sector is currently enjoying, as its services have been categorised as exports.

Since India is a large hub for exports of an array of ITeS with exports of over $126 billion in 2017-18, the ruling can result in substantial tax demand against all the big players. Apart from IT and ITeS players, this will also have a direct impact on more than 500 GICs in the country, which cumulatively employ more than 350,000 people.