By Atul Gupta
IMPLEMENTATION of GST has not been easy for the policy maker, much less for the taxpayer. This fact is best illustrated by the painful saga of attempting to levy GST on services by terming them as intermediary services, beginning from the advance ruling of V serv Global – 2018-TIOL-263-AAR-GST, 2019-TIOL-37-AAAR-GST and culminating in the confounding circular 107/26/2019-GST issued by CBIC on 18 July to clarify the scope of intermediary services.
The concept of intermediary services was originally introduced in the service tax law when the negative list scheme was introduced in July 2012 and despite umpteen protests by trade and industry, it was carried forward in the GST legislation by the law makers. Ever since then both trade and North Block tax mandarins have been struggling to appreciate it and worse, to implement it correctly. Reasons are not far to seek. It is no surprise that nowhere in the world of indirect tax has any such ambiguous concept, such as that of ‘intermediary service’, exist or ever existed, at least not in the manner as has been understood and implemented by the taxman under the Indian GST law.
Let us try and understand this very taxing concept of intermediary service. As per Section 2(13) of the IGST Act, 2017, intermediary means ”a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both, or securities on his own account”. The point to note here is that services of intermediary are those which are in the nature of what are provided by a broker or an agent. Essentially, someone who makes money by intermediating between two people trying to transact a supply of goods or services, typically a person who earns a commission in this process of intermediation. Easy examples are a real estate agent, stock broker etc. Simply stated, he helps to get the deal done or a contract of supply sealed and crystallized between two parties. In the process he earns a commission which could be a percentage of the supply consideration or some fixed sum from either or even both, the supplier and the recipient of the supply of service or goods. But what is important to note is that this intermediary service does not include any services provided by him which are independent of such intermediation services. To illustrate, if the broker or for that matter any other person, separately agrees with the supplier or with the recipient of supply, to carry out any inspection or quality control of the supply of goods or services which are subject matter of the transaction between the supplier and the recipient of the supply of goods or services, or to provide transport services or any other service for a separate charge or consideration, then such services are conducted/transacted on a principal-to-principal basis and cannot be termed as intermediary services, as per the stated scope of intermediary services. Thus all outsourced services whether ITeS or any other cannot be termed as intermediary services.
It is likely that the GST policy maker has misunderstood this difference in scope. The intermediary services stop once a deal has been struck between the supplier and recipient of supply, and the so called broker or intermediary gets his commission earned and crystallized for the same. Whatever he does subsequently, either for the supplier or recipient of supply is distinguishable and is done on his own account and hence cannot possibly be termed as intermediary service.
Circular 107/16/2019-GST dated 18 July 2019 issued by CBIC’s GST policy wing misses this point. In illustrated examples the circular seeks to explain. In scenario 1 the circular is at pains to explain why ITeS services are not covered by intermediary services as these are services provided on own account. But in scenario 2 and 3, it refuses to acknowledge that backend services are also provided on own account, i.e. to say on principal-to-principal basis and are outside the purview of intermediary services. Thus, backend services, such as pre-delivery services that could include inspection/quality control services, delivery services such as transportation and post delivery services such as trouble shooting or maintenance services provided by, say X, in respect of a supply of goods or services between Y and Z, are provided on their own account and outside the purview of intermediary services.
The policy maker in a bid to maximize revenue collection seeks to go beyond the concept of intermediation or agency by stretching the meaning of the words ‘arranges or facilitates the supply of goods or services’ in the definition of intermediary services, to even include services which may be provided independently and on own account. These backend services may be taxable services but are not covered or classifiable as intermediary services.
This classification is important as under the place of supply rules in case of intermediary services, the location of the supplier/provider of service is the place of supply (unlike the default rule wherein location of the recipient of service is the place of supply). Thus even typical backend services, such as inspection or quality control services, transportation or logistics support services or trouble shooting services provided to an overseas recipient by a service provider in India, if termed as intermediary services, become taxable and subjected to GST as the place of supply of such services is the location of the supplier of service. While, these backend services would be considered as exports and not subject to GST or VAT in all mature VAT/GST countries, including the European Union, Canada and Australia, yet under Indian GST law, these services are not export services due to the fact that they are classified as intermediary services and then subjected to an exceptional place of supply rule, as explained above.
Little do the policy makers realize the grave harm this policy does by imposing GST on intermediary services as it results in taxing exports thus making Indian exports uncompetitive, as the foreign buyer cannot take input tax credit of GST imposed on such backend services.
It is high time this unfair policy of taxing peripheral services under the garb of intermediary services is remedied by either entirely doing away with the concept of intermediary services or by changing the place of supply rule in respect of such intermediary services as has been recommended by the 139th Report of Parliamentary Standing Committee on Commerce.
[Atul Gupta is a Senior Director with Deloitte India. The views expressed are strictly personal.]