Taxes are not exported; GST on intermediaries’ foreign earnings should go
The bedrock of a robust GST regime is that taxes are not exported with goods or services. In the Indian GST context, some outliers exist. One such outlier is the “intermediary.” Intermediaries are typically agents or brokers who help identify customers or sources of supply for their principal.
India-based intermediaries bear the brunt of a GST levy on commissions earned from overseas. For example, a marketing firm in Bengaluru that arranges a deal between a US-based client and an Indian supplier qualifies as an intermediary, and their commission income earned in foreign exchange is subject to GST in India. This taxation effectively adds a tax burden to Indian exports, albeit indirectly.
The idea of taxing intermediaries is not new. It began over a decade ago, in the service tax regime of 2012, when the government started taxing sales support services provided by Indian selling agents. The rationale for this tax levy was that these are consumed in the location of the supplier of services who helps identify sources of supply in and from India, in other words, 'the service is typically used and enjoyed in the location of the intermediary.'
As a result, while Indian intermediaries providing services to foreign exporters paid service tax in India, payments to foreign intermediaries were not taxed, as their location was outside India. This was also seen as a means of supporting the 'Make in India' agenda by keeping a check on the prices of imported goods for India-based manufacturers.
Expanding ambit of the tax net
While this concept continued under GST, we increasingly witness it being extended to tax businesses that are not actually intermediaries including IT or back-office service providers who play a role in transaction document processing or shipping and logistics scheduling.
The fundamental distinction is that the role of an intermediary is to help identify a customer or source of supply, whereas an IT or back-office service provider usually processes the transaction or shipment after the source of supply is identified.
Confusion sowed through conflicting rulings
Despite government circulars attempting to clarify what constitutes an intermediary service, conflicting rulings by tax authorities have only added to the confusion. The result is prolonged litigation, blocked working capital, and growing uncertainty for businesses in India’s services sector.
There are two major concerns with how GST is applied to intermediary services:
# First, taxing these services at 18% makes India-based intermediaries more expensive than their global peers. Unlike goods, the tax attaches even when an Indian intermediary operates between an overseas supplier and recipient of services.
# Second, the definition of 'intermediary' is being stretched to cover a wide range of services, including those that are not truly intermediary in nature. This broad application leads to unintended tax burdens on legitimate export services, undermining India’s competitiveness in the global services market.
Fit case for re-evaluation
There is a compelling case for re-evaluating the current rule that taxes intermediary services based on the location of the intermediary. Changing this rule to grant export status to India-based intermediaries servicing clients abroad would be beneficial. Encouragingly, this issue is under active consideration by policymakers, the need for reform is not just a tax policy issue; it’s a strategic economic imperative.
On the economic front:
* Taxing these services makes India an outlier and deters foreign firms from choosing Indian providers. Aligning with global norms would boost India’s credibility as a competitive service hub.
* Intermediary services span high-skill, high-employment sectors like marketing, logistics, and procurement, with strong potential in Tier 2 and Tier 3 cities. Removing the GST burden would enhance the competitiveness of Indian firms globally, leading to job creation.
* Intermediary services provided to overseas clients are a direct source of foreign exchange earnings; hence, a friendly tax policy would provide the necessary impetus to usher in precious foreign exchange.
* Intermediary businesses are not just economic actors they are strategic assets in the global value chain. When Indian firms become essential facilitators of international trade, finance, and digital services, they carry Indian branding, values, and innovation, amplifying India’s influence on the world stage and contributing to India’s soft power diplomacy.
* While providing export status to intermediary services may reduce indirect tax collections in the short term, it can significantly boost direct tax revenues in the long run. Without the GST burden, Indian firms become more competitive, leading to higher revenues and profits, which are taxed under income tax. More employment means higher personal income tax collections and increased consumption, which feeds back into the economy.
In conclusion, while India has positioned itself as a global services powerhouse over the past few decades, a critical segment – intermediaries continues to face the GST hurdle, potentially costing the country billions in lost opportunities. Therefore, there is ample reason for India to amend the existing GST law and grant export status to intermediaries in India.