Tax ruling on back-office services shocks IT, BPO sector

The recent ruling by the Authority of Advance Rulings making back-office services provided by a company to global firms taxable under GST, has sent shockwaves through the information technology and business process outsourcing industry.

A recent advance ruling by tax authorities, making back-office services provided by a company to global firms taxable under the goods and services tax (GST), has sent shockwaves through the information technology and business process outsourcing industry.

While the National Association of Software and Services Companies has come out strongly against the ruling demanding clarity, tax experts are of the opinion that it will open up a Pandora's box, leading to litigation in the coming days.

Though an advance ruling is only applicable to the applicant party and cannot be considered a precedent for future rulings, the IT/IT enabled services (ITeS) industry is worried the interpretation of the ruling may result in losing tax benefits that the sector is currently enjoying, as its services have been categorised as exports.

"The recent ruling by the Authority of Advance Rulings -- in the case of M/s Vservglobal -- has taken the industry by surprise as it seeks to treat services provided on 'own account' basis as 'intermediary' services," Nasscom said in a statement.

"This could lead to unwarranted disputes and uncertainty in case of exports as once a service is treated as 'intermediary' under the GST, these would not qualify as export even if they are rendered to overseas entities," the industry body added.

According to the AAR ruling, back-office support services qualify as intermediary services and not exports.

This means, all the IT services players and business process management firms, along with global in-house centres (GICs) of multinational firms, will now be liable to pay 18 per cent GST on their services.

Since India is a large hub for exports of an array of ITeS with exports of over $126 billion in 2017-18, the ruling can result in substantial tax demand against all the big players.

Apart from IT and ITeS players, this will also have a direct impact on more than 500 GICs in the country, which cumulatively employ more than 350,000 people.

"If the implication of this ruling is not suitably clarified, it will make our companies non-competitive in the global market, potentially resulting in loss of revenue, jobs, and customers," Nasscom said.

According to legal experts, though the verdict is an advance ruling, lack of clarity on the categorisation of services will create confusion in the IT industry.

"In case of an intermediary services contract, usually three parties are involved.

"Now, if the companies working in the IT services space are party to any such tripartite contract, that amount of service can be interpreted as intermediary services and will be liable to taxation," said Gyanendra Tripathi, partner (tax & regulatory services) at global audit firm, EY.

He, however, added there are legal remedies available against the ruling, as they can be challenged before the appellate authority.

Other tax consultants working in the corporate tax domain said companies should not jump the gun fearing tax demand from retrospective period, as interpretation of tax law is very case specific. 

The image is used for representational purpose only. Photograph: Reuters.