FEBRUARY 06, 2021

By Bhupesh Ajmera, Manager, Indirect tax, PwC

INTERMEDIARY services under Indirect tax law in India has always been a matter of dispute. In this article, we have attempted to discuss why logically and fundamentally intermediary services should not be taxable.

As per sub-section (13) of section 2 of the IGST Act, 2017, Intermediary services have been defined as follows:

Intermediary means a broker, an agent or any other person, by whatever name called, who  arranges or facilitates  the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities  on his own account."

The above definition has various words that are of a very subjective nature while interpreting them. At the same time, there are various case laws and advance rulings which have attempted to provide meaning to these words and phrases but largely the meaning of Intermediary services still demands a lot of clarification.

Simply put, an Intermediary is a person who is a kind of agent who facilitates seller to find a buyer for the seller's goods or services. Under GST law, where the recipient of intermediary services is located outside India, the place of supply provisions provides that the place of supply of such service would be the location of the supplier of the services i.e. the location of agent which would be in India. Thus, the service provided by intermediary to person outside India becomes taxable and the person outside India would not be able to avail input tax credit (ITC) on the tax.

If we look at the transaction of an intermediary service, it has all the elements of a transaction of export of service except that the Government has specifically altered its place of supply as location of the supplier instead of location of the recipient. This brings to an important question - Is it logically correct to specify the place of supply as location of supplier, given the fact that design of GST law was based on the consumption based tax system where tax accrues to the place where service or goods is consumed. The legislators have not clarified the reason or logic for defining the place of supply of intermediary services as India, despite it is contrary to the GST fundamental of destination based tax.

If we try to dissect the entire transaction to which intermediary service transaction is related to, we can see following major transactions:

1. A service is provided to a seller outside India by an agent/broker (intermediary) to find the buyer.

2. The seller located outside India sells the goods to the buyer in India directly.

3. The buyer imports either goods or services and pays GST and/or Customs duty on the procurement.

One school of thought can be that although the service is provided by the agent/broker to the seller outside India but the service ultimately gets consumed by the buyer in India as the value of the intermediary service would be embedded in the value of purchase of goods.

In my view, the above logic should not hold good. Let me discuss this with some figures for the above transactions. Let us assume fees charged by agent is INR 100 to the foreign seller. The goods are sold for INR 1000. These values are excluding taxes. It is an unsaid fact that the selling price of goods by seller would factor the cost of intermediary service. As the goods would be imported by the buyer, the buyer would be discharging IGST and Customs duty. Let us assume the GST rate as 18% for both service and goods.

Now, for the above transaction, Government would earn

1. GST on intermediary service i.e. INR 18 (as this would be non-creditable, the entire amount would be a part of revenue of exchequers)

2. GST on import of goods i.e. 180

The total amount earned by the Government is INR 198 (180+18). If we look this from the macro-economic lens, the country has net import of INR 900 (1000 -100) which is being consumed. As per GST fundamentals i.e. value addition tax system and consumption-based tax, the net tax that should be earned on the entire transaction by Government should be INR 162 (900*18%). (this is based on assumption that the intermediary services were provided on cost to cost basis and no value addition was there)

Let us try to understand this from another angle, assume that no agent was required for obtaining the sales and the foreign seller would sell directly to the Indian buyer. In such case the foreign seller would save on the fees paid to broker/agent of INR 100 and thus should be selling goods at INR 900 (1000-100). In this case the tax revenue that would be earned by country would be INR 162 (900*18%)

Although the above examples do not resonates real-life situation and have not factored various other parameters, but one point can be inferred from the above is that the service provided by the intermediary is consumed by the foreign seller. And even where one has to say that the service is ultimately consumed by the Indian buyer as the value of intermediary service is embedded in the value of goods imported, then levying tax on such service would result into double taxation once on intermediary services and again on value of goods imported which includes the cost of intermediary services.

Intermediary services is not a term invented by Indian legislator. It is present in EU Vat among various other countries Indirect tax law. Similar definition of intermediary services is present in the UK Vat law (Place of supply of services -VAT Notice 741A, Section 11). However, the place of supply of interme diary services in case of B2B is considered as location of the recipient only. (source-https://www.gov.uk/guidance/vat-place-of-supply-of-services-notice-741a#sec11)

I am not discussing various other issues involved in interpretation of the definition of intermediary and various divergent judicial precedents over here, however it is very important for the legislators to clarify clearly the scope of intermediary services and reason for taxing it, without which there will always be assessees knocking the doors of courts as it involves foregoing huge amount of the export benefits. Also disregarding such transactions as export of services ultimately increases the overall cost of the import of the goods or services in India.