The Maharashtra Appellate Authority for Advance Ruling (AAAR) 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...

India’s business process outsourcing industry is in a quandary as refunds of taxes paid on inputs remain stalled for want of a clear directive from the government. A directive that sought to clarify what constitutes exports, and hence shouldn’t be subject to goods and services tax at the rate of 18%, received in-principle approval at the GST Council meeting in Goa in September, but it is being examined afresh and may land before the GST Council’s law committee owing to the revenue outgo.

“There is a view that more clarity is needed to define markers that would help identify which entity is an intermediary and which is not,” a government official privy to the deliberations told ET.

The Maharashtra Appellate Authority for Advance Ruling (AAAR) 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. It said these services fell in the category of intermediary services and were liable to GST.

The government sought to clarify the issue via 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 taxman. This accentuated the problem further for the over-$180-billion sector as tax officials began to use it as a general principle and issued notices to IT firms. Some companies operating out of SEZs were also not spared.

Experts for Early Resolution
The issue was again examined by the law committee and taken to the GST Council meeting in September that gave in-principle nod for clarifying the issue further.

There is a thinking within the government that since the circular will lay down criteria for identification of intermediaries and has revenue implications, it should be examined again by the law committee of the GST Council, said the official cited earlier.

As a principle, taxes on exports are neutralised through refunds. Back-office services have traditionally enjoyed this status.

Experts said industry would expect an early resolution of the “intermediary issue” since refunds are getting stuck for many companies on these grounds.

“IT and ITeS service providers are struggling to get their refunds in certain jurisdictions given the issue of intermediary has yet not been clarified even post the approval by the GST Council,” said Bipin Sapra, partner, EY.

Pratik Jain, national leader, indirect taxes, PwC said the authorities “are raising some fundamental issues in a few cases, such as services provided to overseas group company do not qualify as ‘export’ as these are within entity transactions”.

He said these issues not only impact the competitiveness of Indian industry but also lead to cash flow issues and unwarranted disputes dent the confidence of the global investor community.

Given that all exports are under dispute, the sector faces total denial of all export benefits, said Jain, adding that the GST Council should have a mechanism for discussing such issues internally before issuance of notices.

India has more than 500 global in-house delivery centres.