GST on middlemen in limbo as Bombay High Court has given a divided opinion

The Bombay High Court is divided on its opinion on whether middlemen, who provide services to foreign customers are constitutionally allowed to be taxed under the Goods and Services Tax Act or not?

A division bench of Justice Ujjwal Bhuyan and Justice Abhay Ahuja is yet to take a unanimous decision on this issue. Justice Ahuja has reserved his decision for this week.

In July 2020, the Gujarat High Court had upheld the constitutionality of these provisions. A review petition has been filed against this order and is pending before the Gujarat High Court.

GST On Intermediaries

The intermediary is - like a broker, agent, middleman, etc. A person who arranges or facilitates the supply of any good or service. Commission agents, stockbrokers, travel agents, etc. fall under this category.

An exception has been made under the GST law for intermediary services. The law prohibits them from being treated as exports of services, even when they provide services to foreign customers. As a result, these services are not able to enjoy zero tax liability given to net export services.

Jain said that a deeming fiction has been created in the GST law that if an intermediary provides services outside India, it will be presumed that the services are being provided within India itself.

“So if a travel agent or a stockbroker provides his services to foreign customers and earns in foreign exchange, he will still have to pay 18% GST. But overseas services provided by market research agencies, advertising consultants, and professional services are all treated as export of service, inviting zero tax liability.”

Jain pointed out that these intermediary services attract an additional tax burden of 18%, making such entities highly uncompetitive in international markets.

Bombay High Court: A Divided View

It was challenged in the writ petition that this differential treatment towards intermediary services is arbitrary and irrational, and it effectively leads to the implementation of GST outside India.

Terming the provision unconstitutional, Justice Bhuyan observed that the Constitution of India does not empower the export of services to be taxed as local supplies. Justice Bhuyan observed that provisions have created a fantasy and converted the export of service into a local supply.

They have also held that indirect taxation on intermediary services is contrary to the basic concept of GST as destination-based tax. Where tax accrues where services are ultimately received or enjoyed, it is called a destination-based taxation system. But by levying tax on such services received by foreign customers within India, the destination tax principle fails as the services are not being taxed at their origin, Justice Bhuyan said.

"This (the provisions) is an artificial device created to overcome a Constitutional embargo.”

By artificially creating a deeming provision where the location of the recipient of the service rendered by an intermediary is outside India, the place of supply has been treated as the location of the supplier, i.e. in India, said Justice Bhuyan. "This runs contrary to the plan of the Central GST Act as well as the Integrated GST Act, besides going beyond the charging section of both the Acts."

Justice Ahuja's dissenting opinion was held on June 16th. How the decision was delivered was rare, as both the judges on the bench do not pronounce their decisions together.

Angad Sandhu, Partner, PSL Advocates & Solicitors said that – It is not in a regular course that judgments and orders are passed piecemeal and in different ways. He said that since the matter was before a division bench, which could not come to a unanimous conclusion, a reference to a larger bench would be mandatory so that the issue could be finally decided.

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