Proposed GST changes aim to make India's services exports more competitive

The Goods and Services Tax (GST) Council has proposed widening the definition of export of services and easing refund rules. This move could benefit Indian information technology (IT), consulting, engineering and other service exporters by making it easier to claim back GST paid on business inputs.

 

The proposal seeks to remove some existing restrictions around overseas branches and services performed in India for foreign customers, while allowing faster refunds of GST paid on inputs. This is likely to make services exports more competitive.

 

Under the proposed mechanism, 90 per cent of eligible refund claims could be released upfront after a risk-based check, with the balance settled subsequently.

 

The first change the GST Council proposed concerns the requirement and role of branch offices.

 

“The definition of an export required that the supplier and the recipient not be establishments of the same person, and a supply routed through the exporter's own office fell within that description. That condition has been removed. What decides the question now is whether the customer is abroad, and how the exporter has arranged his overseas presence no longer matters. This is of direct value to information technology and business services, professional and consulting firms, research organisations and engineering companies,” said the document seen by Business Standard.

 

The GST Council is also proposing changes to work done in India on goods belonging to a foreign client.

 

It will also look into payments. It said, “A clarification will be issued on when export payment counts as received, and by when it must arrive. It will follow the Reserve Bank of India’s (RBI’s) own rules so that one standard applies rather than two.”

 

Importantly, the document also says that these changes will not be restricted to the IT services segment but to a wider export segment like design studios, testing laboratories and medical transcription, among others.

 

According to industry players, if the changes are approved, they would give an impetus to IT services players and reduce the tax litigation.

 

“At present thousands of crores are stuck in refund claims,” said an industry executive. One instance of such demand was when India’s second largest IT services player Infosys was served a notice by the Directorate General of GST Intelligence for ~32,403 crore. There are several such examples.

 

Meanwhile, industry body Nasscom has been working with the government to reduce complexities in the GST treatment of cross-border services.

 

The government has issued a series of clarifications over the past few years, including Circular 210, which addressed a related issue concerning services received from overseas-related entities.

 

Nasscom continues to engage with the government on the remaining issues, including the treatment of service exports through overseas branches.

 

Ashish Aggarwal, vice-president and head of public policy at Nasscom, said, “We have been engaging with the government on the need to recognise that service exporters often serve overseas customers through branches abroad. The way a business organises its overseas presence should not, by itself, prevent an otherwise qualifying service supplied from India from receiving export treatment. This is important for competitiveness and to avoid working-capital blockage and litigation, which the industry has seen over the years.”

 

“Second, the issue is wider than companies that have already faced litigation. India has enormous potential in technology-enabled services, research and development (R&D) and engineering, including R&D and engineering mandates undertaken by global capability centres (GCCs) in India. For example, R&D or testing undertaken in India for an overseas customer should not lose export treatment merely because a prototype or sample is made available here. As artificial intelligence (AI) and other technologies expand the range of services delivered from India, clarity on such issues can help prevent future disputes rather than wait for them to arise,” Aggarwal added.