GST On Intermediaries: Two Rounds At Bombay High Court, No Clarity Yet

In a recent order, the Bombay High Court held that the state cannot levy GST on goods and services provided by intermediaries to its overseas customers.

However, there is still no clarity as to whether Integrated Goods and Services Tax can be applied on these transactions, since the provisions of the Integrated GST Act have been upheld, experts said.

An intermediary is an agent or broker who facilitates the supply of goods or services between two people; an entity who is acting on behalf of another person in the supply of goods or services.

The issue at hand pertains to the taxability of services provided by an intermediary to a foreign customer. The dispute revolved around the treatment of intermediary services provided to foreign customers, as compared with export of services. It initially came before the high court in 2021 and was eventually transferred to a single bench, since the division bench couldn’t reach an agreement.

The challenge primarily related to a provision in the IGST Act that deems all supplies made by an intermediary as "local supply". This means that despite the recipient of services being in a foreign country, central and state GST were being levied on such transactions. This is in violation of the constitution, as states do not have the power to tax the export of services, the taxpayer had claimed.

The single bench of the high court has now clarified that CGST and SGST cannot be levied on these transactions, since exports are clearly outside the purview of the state's power of taxation.

But, it's unclear from the high court's decision whether IGST of 18% can be levied on such transactions. Here's why.

Take for instance, a transaction where an Indian intermediary is servicing an overseas customer on behalf of a foreign company. The supply takes place outside the country and the commission is received in foreign exchange.

So far, such transactions would attract 9% CGST along with a 9% SGST. But, since the constitutionality of the IGST provision for intermediaries has been upheld, experts are divided on its applicability.

According to Advocate Abhishek Rastogi, who represented the petitioner in the case, taxpayers will have no liability under IGST.

Ajinkya Gunjan Mishra, partner at S&R Associates, also holds a similar view. The existing provisions do not support the levy of IGST on intermediary services, according to him. "The net effect is that unless the provisions are amended, no GST can be levied on intermediary services."

But, Asish Philip Abraham of Lakshmikumaran and Sridharan Attorneys has a different take.

Currently, the GST laws recognise any transaction with a non-resident person (an overseas customer) as an interstate transaction, Abraham said. It has specifically excluded a transaction undertaken by an intermediary to a non-resident from the scope of an intrastate transaction.

This means that CGST or SGST were never leviable on these transactions. However, if anyone did pay, that was on account of the deficiencies in the GST portals, he highlighted.

The situation gets even more complex for transactions where an Indian intermediary is servicing a domestic customer, on behalf of a foreign company.

The first part of the transaction involves an Indian intermediary exporting services to its foreign principal. In the second leg of the transaction, an Indian customer imports the service from this foreign principal. The single bench of the high court has held that these two independent transactions cannot be clubbed together for the purpose of levying GST.

Such transactions may be liable to pay tax under the IGST Act, since the final consumption takes place within India, experts opine.

But, that might lead to double taxation, as import duty and other countervailing duties are already levied on such transactions, according to the court.

Rajat Bose, partner at Shardul Amarchand Mangaldas, says this adds to the woe.

Taxpayers, who have already paid tax under the CGST or SGST Acts, may seek readjustment of any amount they paid towards IGST, he explained.