Taxman starts questioning & issuing notices to BPOs
One month after the Authority of Advance Ruling (AAR) ruled that back office support services qualify as “intermediary” support services and not exports, officers of the indirect tax department have started issuing preliminary notices to captive units of multinationals and Indian companies exporting offshore support services.
AAR’s directive meant several back offices of multinationals and Indian companies providing offshore support services to foreign companies now face 18% GST liability. The AAR held that some services provided by BPO may qualify as intermediary service and therefore, may not qualify as export service.
According to the people in the know, most companies being questioned or issued notices are mid-scale and small units. However, tax experts point out that even the larger companies could be under scrutiny.
“Many BPOs have now started receiving preliminary notices from jurisdictional authorities and the AAR ruling is only likely to trigger uncertainty. Denial of export status on BPO services was never intended and an 18% tax imposed on these BPO services will impact exports from the country,” said Uday Pimprikar, partner-tax and regulatory services, at EY India.
ET had first reported on November 19 that the AAR ruling would open a Pandora’s Box for India’s back offices.
Industry trackers said the question now was whether BPOs are commission agents and brokers. If so, they would not be considered exporters and their revenues would be subject to taxes as only exports are exempted from domestic taxes and receive certain benefits. So, services provided by Indian entities to foreign companies would not be treated as exports and hence taxable in India.
In some cases, say insiders, tax officials have questioned the BPOs and sought explanation on the matter.
“The tax department raised queries to some of the BPOs and asked if the AAR ruling has any impact on their operations or future tax liabilities. Most companies are taking a stand that they are exporters and that GST is not applicable to them. ITeS companies need to be very cautious in responding to such enquires as their responses would determine the future course of action by the tax authorities,” said MS Mani, partner, Deloitte India.
Experts say that under the earlier indirect tax regime, an intermediary was mainly a broker or a commission agent. However, any company supplying support services to a multinational was not treated like an intermediary.
Experts said the notices would lead to increase in litigation going ahead. The constitutional validity of BPOs being classified as intermediaries and thereby subject to pay 18% GST in India can be challenged. Even for those who are really intermediaries, we have filed a writ petition in the Gujarat High Court that services supplied to recipients outside India should not be subjected to tax,” said Abhishek A Rastogi, partner at Khaitan & Co, who is arguing writs on intermediary services.
After the AAR ruling, industry body Assocham and an IT body too raised concerns around the future tax liability.
“Our preliminary analysis suggests that the concept of exclusion of ‘main service’ from intermediary service has been ignored in the ruling. 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,” Assocham said in a statement.
Industry trackers fear that going forward more companies, including some of the biggest players, may be issued notices and questioned.
“It would be appropriate that clarifications are issued outlining the ambit of ‘intermediary services’ in the context of BPO services – so that the uncertainty abates and these units are not burdened by unnecessary litigation,” said Pimprikar.
