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IT to get tax relief from redefined ‘intermediary’

GST Council may stop levying tax on IT/ITeS intermediary service providers’ back office work for foreign clients. The issue had come to the fore following a decision of the Maharashtra Appellate Authority for Advance Ruling (AAAR) that had held in a ruling in February that back-office support services did not qualify as “export of service”

, ET Bureau|
Last Updated: Dec 13, 2019, 07.46 AM IST|Original: Dec 13, 2019, 07.46 AM IST
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The government sought to clarify the issue through a circular in July, but one part of the circular left the key issue of classifying whether a company offered intermediary services or carried out exports to the discretion of the tax authorities.
NEW DELHI: The government may consider redefining ‘intermediary’ service providers to provide tax certaintyGST, BPO, export, Services, to IT/ITenabled services, and stop levying goods and services tax (GST) on back office work they do for foreign clients, an official said.

The issue could figure at the next GST Council meeting and amendments to the law be taken up in the budget, the person said.

Lack of clarity in the definition has led to tax authorities treating ITeS firms’ back office work for foreign clients as a domestic service and not exports. The government clarified through a circular in July, but it only created more turmoil as tax authorities continued to issue notices. The controversial circular was withdrawn last week.

“A more permanent solution would be amending the definition itself,” the official said.

The government is keen that the ITeS sector that includes call centres and business process outsourcing service providers — which often operate on wafer thin margins and provide jobs to millions — should not lose their competitive edge and shift to other countries, the official said.

As of now, the GST law defines an intermediary as “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”.

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Industry bodies have represented to the government several times, seeking a solution to the issue that has posed a huge challenge for the sector. The matter may be placed before the law committee under the GST Council and subsequently the council itself, the official said.

THE CONFUSION
The issue had come to the fore following a decision of the Maharashtra Appellate Authority for Advance Ruling (AAAR) that had held in a ruling in February that back-office support services did not qualify as “export of service” and were in the nature of arranging or facilitating supply of goods or services between overseas companies and customers. Hence these services fell in the category of intermediary services and were liable to GST, it had said.

The government sought to clarify the issue through a circular in July, but one part of the circular left the key issue of classifying whether a company offered intermediary services or carried out exports to the discretion of the tax authorities. This deepened the problem further for the $180-billion-plus sector as tax authorities began to use it as a general principle and issued notices to IT firms. Some companies operating out of SEZs, too, were not spared.

The official quoted earlier said the formulation examined in September needed a relook as a more permanent solution is being sought to be provided. Taxes on exports are neutralised through refunds, as a principle.
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