Indenting agents of foreign clients have filed a slew of writ petitions in the Gujarat High Court challenging the applicability of 18 per cent IGST on export services. Thousands of middlemen play an important role in the export and import of goods, especially raw materials in key industries.
Due to certain provisions in the current GST law indenting agents have to pay tax on services rendered in India but if they open an office in Dubai, Hong Kong or Sri Lanka, they are exempted. The agents exporting services and earning foreign exchange feel they are being penalised for qualifying as “intermediary” under Section 2(13) of the CGST Act.
The petitioners have challenged the Constitutional validity of Section 13(8) (b) of the IGST Act which deems the place of supply for “intermediary” services to be in India.
The indenting agents also stand to lose against other services providers who export services outside India without paying taxes and claiming benefit of ITC refunds at the same time.
“There were people who have opened dummy companies in Dubai even when all their services were being rendered out of India. They just had someone in Dubai who would collect the money,” said an ex-customs officer on the condition of anonymity.
Indenting agents in other countries are not taxed. An 18 percent cut on an Indian player's margin not only destroys competitiveness in the international market but also makes it impossible for them to do business in India. As a result, many such agents are shifting base to more favourable jurisdictions.
Multiple representations have been filed by intermediaries to remove the said provisions from the GST but the government and the GST Council seem to have ignored these recommendations.
Finally, these agents have approached Gujarat High Court.
“The intermediary provisions have been handed over as legacy provisions from the service tax regime. But this doesn't change the fact that the provisions are inherently arbitrary and violative of Article 14 and Article 19 of the Constitution. We have challenged the provisions based on arbitrariness and absence of intelligible differentia with a hope that GST Council will come out with a pragmatic solution to the problem. Clearly, India is not following international best practices as far as taxes,” said Abhishek A Rastogi, partner, Khaitan & Co.
“This, per se, is an old issue having originated in the negative list regime of service tax. There was a glimmer of hope, in the model GST law, of a likely beneficial provision which did not materialize. The same was tweaked to realign with the position under service tax. Another challenge is whether or not a particular activity would qualify as “intermediary”, which could have potential for litigation, Suresh Nair, Partner EY.