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Last Updated : Dec 06, 2018 06:29 PM IST | Source:

I-T Department issues notices to BPOs over offshore support services: Report

The AAR's directive means that these multinationals and Indian companies who are providing offshore support services to foreign companies now face an 18 percent GST liability.

Moneycontrol News @moneycontrolcom

The Income Tax (I-T) Department has issued notices to captive units of multinationals and Indian business process outsourcing (BPOs) for exporting offshore support services, The Economic Times reported.

The move from the I-T Department comes a month after the Authority of Advance Ruling (AAR) ruled that back office support services qualify as "intermediary" support services and not exports, which are exempted from domestic taxes. The back office consists administration and support personnel to carry out functions such as settlements, clearances, record maintenance, regulatory compliance, accounting, and IT services.

The AAR's directive means these multinationals and Indian companies who are providing offshore support services to foreign companies now face an 18 percent GST liability, the report said. The authority had held that some services provided by BPO may qualify as intermediary service and therefore, may not qualify as export service.

According to the report, most companies being questioned or issued notices are mid-scale and small units. Tax experts, however, believe even 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 percent tax imposed on these BPO services will impact exports from the country," Uday Pimprikar, Partner-Tax, and Regulatory Services, at EY India, told the paper.

The directive has raised a question on whether BPOs are commission agents and brokers. If so, they would not be considered exporters and their revenues would be subject to taxes. In the previous indirect tax regime, an intermediary was mainly a broker or a commission agent but it did not include any company supplying support services to a multinational, the report said.

Industry body Assocham and an IT body also 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.

The BPOs have sought an explanation from the respective authority 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," MS Mani, Partner, Deloitte India, told the paper.

Experts told the paper that the notices would lead to an increase in litigation going ahead and the constitutional validity of BPOs being classified as intermediaries in India could 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," Abhishek A Rastogi, Partner at Khaitan & Co, who is arguing writs on intermediary services, told the paper.
First Published on Dec 6, 2018 06:29 pm
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