NEW DELHI: The government said select business process outsourcing (BPO) services will qualify as exports and therefore won’t be subject to goods and services tax (GST), marking a substantial relief for the country’s $167 billion IT and ITES (information technology enabled services) sector.

The clarification comes after intense lobbying by the IT industry. The BPO sector was in turmoil since the Appellate Authority for Advance Ruling in Maharashtra held that back-office support services didn’t 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 18% GST.
The circular issued by the Central Board of Indirect taxes and Customs (CBIC) on Friday clarified that unless there is a clear facilitation of services, BPO services will not be considered intermediary in nature as long as the provision of service is on its own account. An intermediary is an entity that facilitates or arranges the supply of goods and services.
“The clarification will help in settling most of the frivolous objections regarding export of services in case of intermediary services,” said Bipin Sapra, partner, EY.

Exports don’t face tax in the country as they are consumed outside. Back-office services enjoyed this benefit even in the erstwhile service tax regime. India has more than 500 global in-house delivery centres, employing over 350,000 people. An 18% levy on these services will derail the cost dynamics of the back-office dynamics of the back-office model that operates on thin margins and faces competition from other low-cost jurisdictions such as the Philippines.

The circular has clarified the applicability of GST in various scenarios related to an ITeS supplier located in India working for and on behalf of a client located abroad. A ITeS company supplying back-end services won’t be categorised as an intermediary if providing the services on its own account, in light of the definition of the term “intermediary” under GST law, the circular said.

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