These middlemen say they have been left out of the government’s recent clarification and will continue their legal battles in the high courts. The main contention for these companies is that they have been slapped GST on services that make them globally uncompetitive.
The government has said that the services have been outsourced India or done in the country for foreign entities will not be treated as intermediary services, and hence will not face 18% GST. The clarification has come as a major relief to the country’s $180 billion technology sector.
But, according to tax experts, the recent clarification excludes around 100,000 middlemen who were the first to be affected by the decision to implement this GST.
The tax department was also withholding tax refunds to IT companies, and the recent clarification, in essence, only says that this money should be paid – but only to IT companies.
“The circular does not provide any explanation on the substantive issue of the place of provision of intermediary services which has put Indian service exporters in trouble. The dispute can be resolved by making some amendments as recommended by the Rajya Sabha Select Committee report. Alternatively, judicial review can be done to settle the issue,” said Abhishek A Rastogi, partner at law firm Khaitan & Co.
Several middlemen had approached the courts challenging the government’s stand to levy GST on them.
One of the companies that is stating its business as export of service and seeking exemption from GST is a Mumbai-based entity. It imports large machinery worth millions of dollars and sells them to some of the biggest companies in India.
This company claims that it provides “services” to multinational machine manufacturers for a fee. However, the tax department treats it as an intermediary.
As per the existing rules, exports are not subject to GST and exporters can also claim refund of tax paid on inputs from the revenue department.
The objective of this policy is to make Indian goods and services more competitive in international markets.
But, as per the logic of the tax department, if an Indian company is only implementing what is being directed by a foreign entity, then it is an intermediary and is not exporting any services.
The controversy started after the Authority of Advance Rulings’ 2018 directive on GST. The judgment defining intermediaries said that they do not export.
The indirect tax department had issued notices to several IT/ITES companies demanding 18 per cent GST on convertible foreign exchange money.
However, the GST Council said that IT companies should not be considered as middlemen.