Tax ruling announces India’s back offices qualifies as ‘intermediaries’, offshores will face 18% GST

Income tax department

After a tax body declared that back office support services qualifies as “intermediaries”, several multinational’s back offices now deal with 18% Goods and Services Tax (GST) liabilities. Offshore multinational companies, to whom Indian companies were providing support services, are too now liable to pay 18% GST levy on exports.

So, all the services provided by Indian companies to foreign companies are now taxable in India and not to be treated as exports. Currently, still in most situations the taxations are not applied.

The current ruling, Authority of Advance Ruling (AAR) said the back office support services now qualifies as “intermediate” and are not “exports” anymore.

EY India Tax Partner Abhishek Jain said, “This ruling could open the Pandora’s box for various India setups that are assisting foreign companies with back-office support functions such as accounting and legal. As these services do not qualify as exports, 18% costs on these services could make them non-competitive.” Experts said tax demands could be made retrospectively.

According to AAR ruling, no services should be treated as “zero rated supplies”, which are supplied by intermediaries. Many experts claimed that the ruling might be going against the GST law suits.

Indirect Tax, national leader Pratik Jain said, “The ruling is not in line with the interpretation adopted by industry, as typically an intermediary is someone who, like a broker, helps in concluding the sale or purchase and is not limited to data processing or support post the transaction.”

Tax experts claimed that the impact of the ruling will be seen largely on Indian companies that provides services to foreign companies.  Jain said, “The ruling could lead to disputes in cases where three parties are involved, like vendor payments, follow up for receivables … In all such cases, there could be a potential tax demand of 18% from the Indian entity.”

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