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GST Update | Circular on treatment of ITeS services withdrawn ab-initio

The GST Policy Wing, Central Board of Indirect Taxes & Customs (CBIC), recently issued Circular No. 127/46/2019 – GST dated December 4, 2019 withdrawing the issued in July 2019 2019 on taxability of “intermediary services” in the case of Information Technology Enabled Services (“ITeS”).

To recap, Authority for Advance Ruling (AAR), Maharashtra held in the case of Vserv Global that specific back office support services rendered by the applicant qualify as ‘intermediary services’, as the activities performed were in the nature of ‘arranging / facilitating’ supply of goods or services between overseas company and its customers in India. This decision was upheld by the Maharashtra Appellate Authority for Advance Rulings (AAAR). This ruling opened up a pandora box of disputes for the ITeS sector. It resulted in denying export status to back-office operations set-up in India, making them uncompetitive as a result of additional GST cost of 18% of the value of services. Further, there has been a spur in issuance of show cause notices to back office support providers as tax authorities had started interpreted all ITeS activities in the nature of support operations as “intermediary services”.

NASSCOM has been actively advocating the issue with the government officials. We have made several representations to the officials highlighting the issues created by the erstwhile circular for IT-ITeS industry.

As a relief, GST Council, in its 37th meeting held in September 2019, decided to issue a new clarification on taxability of ITeS in supersession of July circular. Copy of the latest circular is attached for your reference.

In this regard, CBIC issued an official circular to withdraw the July circular ab-initio. This will definitely provide respite to the industry to the extent authorities were placing reliance on the erstwhile Circular to issue Show Cause Notices to back-office support providers.While withdrawal of the circular is a positive move, we are working with the GST officials to ensure that a revised circular on the subject is issued at the earliest to avoid unwarranted litigation and possible financial repercussions.

We will keep you posted on any developments in this regard.


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