Recently, Maharashtra AAR gave a ruling on backend services that created turmoil in $167 billion IT services and BPO sector. In fact as per software industry body Nasscom, the said ruling will jeopardize India’s image as a global service provider. In this article, we discuss the facts of latest case of Vserv Global, AAR’s ruling and its impact on the future of back office support industry.
Godaddy India WebServices, the Indian arm of the US web services entity Godaddy, provided continuous support services to the US entity on a principal basis. Similarly, Vserv Global Private Limited provides back-office support services to overseas companies mostly in the sector of trading chemicals and other products. Now as per section 2(13) of the IGST Act which defines an intermediary to be “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 to GST”. Both Godaddy and Vserv Global approached the Authority of Advance Ruling with one question – would they meet the definition of an intermediary? The Delhi AAR said ‘No’ to Godaddy whereas the Mumbai AAR said ‘Yes’ in case of Vserv Global. India being a hub for export of an array of information technology enabled services, this contrary ruling has created a panic in the market.
Facts of the Case:
Applicant’s Arguments:
Ruling of the AAR:
Impact:
In the erstwhile service tax regime, an intermediary was seen in the context of broker services and the concept was not extended to support services. Hence, it can be noted that the said ruling by the AAR is contrary to the earlier position of the government in the previous service tax regime. This ruling is deemed to have direct impact on the 500+ GICs (Global In-house Centres) with over 3.5 lakh employees currently operating out of India, and supporting their global counterparts.
National Association of Software and Services Companies (Nasscom) has been highly critical of the ruling and stated that it would result in potential job losses and depress India’s image as a global service provider. Expressing its surprise the software body stated that "At a time when, when India's image is bullish on ease of doing business parameters, it is advisable that we ensure a transparent and clear tax regime to maintain our global leadership position”.
Further, the ruling may result in a substantial tax demand from some of industries biggest players since India is amongst the largest exporter of ITeS. Generally AAR rulings are not binding and have no precedent value, this particular ruling will cause serious confusion and may lead to unwarranted disputes.
The said ruling covered the activities undertaken by outsourcing company registered in India on behalf of their foreign client. The scope of the agreement is wide enough to cover under the definition of “Intermediary services”. The benefit of export of services may be rejected to Outsourcing companies registered in India on the basis of said ruling. It is advisable to review the agreement executed between Indian Outsourcing Company with their foreign clients.
The ruling has caused a considerable uproar in the Indian markets and can possibly stunt an environment for healthy competition. Hopefully, the government will step in soon to provide a resolution on industry’s concerns and thus end this confusion for good.