GST Council meet: Export definition tweak to ease IT firms' concerns

The GST Council's changes to export definitions and refund rules are expected to benefit IT firms, consulting companies and GCCs by reducing tax disputes and working capital costs

The GST Council on Thursday cleared a move that will enable an Indian company serving a foreign client through its own branch abroad to claim export benefits. Similarly, work done in India on goods belonging to a foreign client, such as testing, repair, certification, research or processing, will be treated as an export of services even if the goods do not leave the country.

 

The moves to widen the definition of export of services and ease refund rules are expected to benefit Indian information technology (IT), consulting, engineering and other service exporters by making it easier to claim refunds of goods and services tax (GST) paid on business inputs.

 

The Council had earlier proposed removing a condition for exports that the supplier and recipient should not be establishments of the same person. A supply routed through the exporter’s own overseas office fell within this description. “That condition has now been removed. What decides the question now is whether the customer is abroad,” the Council said. The decision directly affects software services companies such as Tata Consultancy Services (TCS), Infosys, and Wipro.

 

IT industry body Nasscom said the move would have a positive impact on the sector.

 

“The Council’s recommendation to remove this restriction addresses a longstanding concern that Nasscom has raised with the government. Subject to the other export conditions, it should reduce tax uncertainty, litigation, and unnecessary working capital costs,” Nasscom said. 

 

The second decision is expected to benefit global capability centres (GCCs), which have a significant presence in India and are involved in cutting-edge research and development (R&D) work. It could also help India attract more global research and engineering mandates.

 

“Allowing export benefits for services delivered through foreign branches is a big relief for the IT and ITeS sector, where refunds were often denied and disputes arose even when contracts were signed by the foreign branch, despite favourable rulings under the earlier law,” Abhishek Jain, indirect tax national head and partner, KPMG India, said.

 

On payments and refunds, the government said the timing of when an export payment is counted as received would follow Reserve Bank of India (RBI) rules, ensuring that one standard applies instead of two.

 

Jain said aligning export receipts with the RBI rules should also help more payment routes qualify for refunds. “With 90 per cent of refunds now processed automatically for low-risk taxpayers, this will significantly support one of India's largest foreign exchange earning sectors,” he added.

 

The Council also clarified that, for contract manufacturing and processing, India would be placed on the same tax footing as competing locations. It has also facilitated tax refunds for service exporters to enable them to recover the tax quickly, as their costs are mainly related to services and equipment.

 

Ritika Loganey Gupta, partner and GCC tax leader at EY India, said the GST Council’s measures were a positive development for GCCs.

 

“In particular, allowing input tax credit on employee health and life insurance is important for a sector where talent is the largest investment and employee benefits are an integral part of the operating model. Removing this embedded tax cost is therefore meaningful for GCCs operating at scale. Together with faster refunds and simpler compliance, these measures should help create a more efficient and predictable tax environment as GCCs continue to expand their mandates and operations in India.”