[Opinion] GST on Intermediary Services | Clarity in Waiting

Ankur Goel & Mansi Goel – [2023] 150 taxmann.com 417 (Article)

The Bombay High Court has pronounced its long-awaited decision in the case of Dharmendra M. Jani on the issue of levy of GST on intermediary services. The judgment was expected to provide clarity on GST applicability on intermediary services after more than five years of introduction of GST.

Before analyzing the judgement, let us revisit the history of taxation of intermediary services in brief.

History of intermediary services and issues in the taxability

Intermediary is not a new concept. It was present in the statute book since the service tax regime. The concept was carried forward to GST regime as well. Since then, issues have arisen with the taxability of such services.

The bone of contention is section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (‘IGST Act’) which provides that in case the location of either recipient or supplier is outside India, the place of supply of intermediary services is the location of the supplier.

The issue can be understood with the help of an example. Let us say, ABC Pvt. Ltd., an Indian entity, is an agent of its client located outside India and assisting in supply of goods from the client located outside India, to other Indian entities. In this case, ABC Pvt. Ltd. provides intermediary services to its clients located outside India. In terms of section 13(8)(b) of the IGST Act, place of supply of such service will be in India (location of ABC Pvt. Ltd.). Consequently, ABC Pvt. Ltd. is required to pay GST on such intermediary services.

The IGST Act also prescribes below five conditions for a service to qualify as export of service:

(1) the supplier of service should be located in India;

(2) the recipient of service should be located outside India;

(3) the place of supply of service should be outside India;

(4) the payment for the service should be received in convertible foreign exchange or in Indian rupees, wherever permitted; and

(5) the supplier and the recipient are not merely establishments of distinct persons.

Thus, for determining whether a service qualifies as export or not, place of supply is a crucial criterion, and it should be outside India. In our example, place of supply of intermediary services provided by ABC Pvt. Ltd. is in India. Hence, such service does not qualify as export of service and benefit of export of services cannot be claimed in respect thereof. This is an industry wide issue and assessees have challenged the constitutional validity of section 13(8)(b) of the IGST Act, before multiple fora.

Provisions of section 13(8)(b) of the IGST Act have been held to be constitutional by the Gujarat High Court whereas division bench of Bombay High Court had given split verdict. In view of the split verdict, the matter was placed before the third member for the final opinion. The third member has recently pronounced its judgment which has brought the issue of taxability of intermediary services to the forefront.

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