How scrapping GST’s Intermediary Clause could boost India’s ITeS and BPO firms

The recent recommendation of the Goods and Services Tax (GST) Council has brought relief for IT and technology services companies in India. The GST Council has recommended omitting Section 13(8)(b) of the Integrated GST (IGST) Act.

Section 13(8)(b) of the IGST Act was a long-disputed rule that hit India’s service exporters, including IT service providers, hard. It said that if a company in India acted as an intermediary, the place of supply would still be considered India, even if the customer was overseas.

This meant such services could not qualify as exports and were taxed domestically, leading to higher costs and disputes. By recommending its removal, the GST Council is clearing the way for these transactions to be treated as exports, exempting them from GST and making Indian firms more competitive globally. When put into practice, the intermediaries would no longer be paying the 18% GST.

A brief history

Back in 2012-2013, a concept called intermediary services was introduced under service tax, which was later carried forward into GST as well. The rule said that if your services qualified as intermediary, then irrespective of where the recipient was located, if the services were provided from India, they would not be treated as export of services and would instead be taxable in India.

However, over time, the rule had started to be interpreted broadly. For example, if a foreign software company had customers in India and a back office here that provided implementation or support services, authorities argued that the Indian back office was acting as an intermediary and taxed those services. This carried over into GST in 2017, but with more teeth. The IGST Act gave the intermediary definition statutory backing.

Unsurprisingly, over the years, the contentious rule has been a subject of several disputes and litigations. One of the most significant examples is that of Genpact. In 2022, the Punjab & Haryana High Court ruled that Genpact India’s supply of BPO services cannot be classified as intermediary services under GST. Instead, it qualifies as an export of services, entitling the company to a refund of ₹26 crore.

“Watershed moment”

Industry experts opine that the amendment now recognises that Indian IT and services firms to global clients are genuine exporters of talent and expertise, not middlemen.

“This shift could release long-awaited relief for IT, consulting, back-office, and digital service providers, enhancing India’s competitiveness in the global market,” said Manoj Mishra, Partner and Tax Controversy Management Leader, Grant Thornton Bharat LLP.

Nasscom, the IT/ITeS industrial body, has noted that the revision restores export status and refund eligibility for services delivered from India and aligns the regime with international practice, removing the misclassification risk. “This has been a major issue for disputes, litigation, and denial of refund of input credit for our industry, especially IT-enabled services,” it added.

“The earlier rule had created significant uncertainty for companies setting up offices in India. Many international firms were unsure whether their services would qualify as exports or whether they would get stuck in disputes with the authorities,” Kunal Chaudhary, Partner, Indirect Tax, EY India, elaborated further.

“In reality, the government’s revenue collection from taxing such services was not very substantial, but the compliance burden and litigation risk for businesses was very high. Removing this ambiguity will boost investor confidence and make it easier for global companies to operate out of India.”

He also added that the change is prospective, since the government has only issued a statement of intent and has not yet released the actual amendment. For the past period, the legal position has remained uncertain. For now, it will be a wait to see how it is framed and implemented.

A push for GCCs

Beyond the traditional tech service providers, this move is also set to impact the global capability centres in India. According to market research firm UnearthInsight, it will help GCCs save money, improve cash flow, and make operating in India more attractive as a GCC destination, and improve their financial viability.

“This change is an extremely positive development for Global Capability Centres in India, particularly those engaged in intermediary services for their international group companies,” said Gaurav Vasu, Founder & CEO, UnearthInsight.

To be sure, over the years, India has emerged as the hub for GCCS, with more than 1,700 centers currently operating across the country. These centers, set up by multinational corporations to handle technology, R&D, analytics, finance, and customer experience, employ over 1.6 million professionals and contribute significantly to India’s knowledge economy.