It is common practice for foreign entities to engage service providers in India at the time of market entry for a host of services that could range from market research, advertising and promotion services, liaising with prospective customers etc. While such services were treated as exports and not subjected to service tax under the earlier service tax regime, these services now potentially face a Goods and Services Tax of 18 percent based on a recent ruling.
The ruling concerned Global Reach Education Services Pvt Ltd. – the applicant – an Indian overseas education consultant that promoted foreign universities’ courses in India and also provided market intelligence about latest educational trends in India. Additionally, it also ensured payment of requisite fees by Indian students enrolling in foreign courses through the applicant. For providing such services, Global Reach was paid based on a formula i.e. as a percentage of the tuition fee for each student recruited/enrolled through it and the payments were made in foreign currency.
Although cross-border services agreements are usually executed between an Indian services entity and a foreign recipient of services, in some cases, the ultimate benefit of services provided may flow to an Indian customer of the foreign recipient as well. For instance, when an e-commerce platform delivers a gift parcel to a consignee based on a customer’s request, the beneficiary is the consignee, not the customer.
The answer to this question appears to be ‘yes’, if one is to go by the reasoning given in a recent tax ruling of the West Bengal Authority for Advance Rulings.
Due to this reasoning, transactions that were previously considered tax-free exports suddenly appear to be taxable as ‘intermediary services’ under the Goods and Services Tax regime. This appears to be incorrect in law, and contrary to previous decisions on the same point under the erstwhile service tax regime.
It is important to note that GST defines an ‘intermediary’ to mean “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 law, therefore, makes a distinction between entities that provide services on their account and entities that arrange or facilitate the provision of services between two or more persons.
It is only the latter category of entities are classified as ‘intermediaries’ for the purposes of GST.