Some of the back office service providers in the business process outsourcing (BPO) sector have moved the Gujarat High Court challenging a recent tax department ruling that classified them as intermediaries, making them liable for an 18 per cent goods and services tax (GST) imposition 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 will not only increase the tax burden on the outsourcing industry, but also open the 'pandora's box' in terms of retrospective taxation.
"We have filed a writ petition in the Gujarat HC on behalf of the Material Association of India challenging the constitutional validity of the place of provision of intermediary services," said Abhishek A Rastogi, partner, Khaitan & Co. The firm also represents a number of large BPO companies 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 the Vserv Global case had ruled back office support services qualify as intermediary services, and not exports. This had triggered the fear that IT/ITeS companies and 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 was an established definition of intermediaries under the previous service tax regime, the GST Council is working on specifics to provide a clear distinction between taxable intermediaries, and the back office service providers, which will be exempted.
"It was a fairly settled position and withstood all legal and judicial interpretation that back office operations rendered to a client outside India are export of services. In fact, under the erstwhile Service tax law, and the present GST laws, refunds have been sanctioned by treating the BPO operations as export of services," said Parag Mehta, partner, N A Shah Associates.
If the advance ruling is applied, the tax department can also raise demands, retrospectively. Experts also said India's attractiveness as a hub for back office services could wane if such tax liability is imposed.
“Companies in this space will not be in a position to absorb the demands of an 18% GST. So, this may lead to migration of back office operations from India to other countries like West Asia, Philippines, Australia, among others, added 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, it continues to be the largest player in this space.
The sector in India, which employs close to 1.2 million people, earned a revenue of $28 billion in FY18.