According to the Indian tax department’s understanding, India-based back offices of multinationals are just brokers and commission agents just rendering services while not coming into the definition of exporters.
Many MNCs back offices are now facing 18% GST (Goods and Services Tax) applicability after the tax body said that they are just the mediator. While the Indian companies also join the league and will be paying 18% GST as they extend their support services to the offshore MNCs.
So if Indian provides their services to foreign companies then it would not be treated as exports which will result in tax in India. At present, in most of the cases, taxes are not applicable to exports. The AAR (Authority of Advance Ruling) said that the back office support services are qualified as “intermediary” and not as exports.
Abhishek Jain, Tax Partner, EY India 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.”
According to the AAR, the services which are provided by intermediaries must not be considered as ‘zero-rated supplies.’ Tax experts said that the ruling might lead to legal actions because the authorities might levy the taxes on many companies which exports the services. The ruling might go against the GST law, many experts claimed it.
Pratik Jain, National Leader, Indirect Tax, PwC India said: “the ruling is not in line with the interpretation adopted by industry, as typically an intermediary is someone who, as a broker, helps in concluding the sale or purchase and is not limited to data processing or support post the transaction.” There is a flourishing market of outsourcing in India with revenues of around $50 billion.
Tax experts said that the effect will be mostly on Indian companies which supply services to the foreign companies, which further sells them to another company. “The ruling could lead to disputes in cases where three parties are involved, like vendor payments, follow up for receivables etc.”
Read Also: Revised GST Slab Rates in India FY 2018-19 Finalized by the GST Council
Jain said: “in all such cases, there could be a potential tax demand of 18% from the Indian entity.” EXperts said that under previous indirect tax reign, an intermediary was a commission agent or a broker. However, any company which supplied support services to an MNC was not considered as an intermediary.
