Back office Services to attract 18% GST for services provided to MNC’s

In a recent ruling, the Authority for Advance Rulings (AAR) has held that back offices set up in India for providing services to foreign entities are liable to pay GST at 18% as the services cannot be termed as Exports. Such services, as per AAR, will be in the nature of intermediary services or commission agent services.

As per the above ruling, many back offices of multinationals are now staring at a tax liability of 18% on the invoices raised on back office services provided to Foreign clients. Even the offices providing support functions to multinationals from India will have to cough up 18% GST on the revenue generated during the tax period.

Currently, there is no tax levy on the exports in most situations as per the provisions of GST. However, the Authority of Advance Ruling (AAR) said that back office support services qualify as “intermediary” services and not exports. As per the AAR ruling, services provided by intermediaries should not be treated as ‘zero rated supplies. This ruling has can turnout to be a major setback for expanding business activities and even for new entities trying to setup offices in India.

The industry is of the opinion that this might lead to various litigations since the tax authorities might use this ruling to issue notices to entities exporting services to multinationals. Many experts also feel that this ruling can have retrospective effect and could also have implications on service tax regime. Under the earlier tax regime, the intermediary was defined as some one providing broking or commission agent services and this definition was not applicable to companies supplying support services to multinationals. The tax experts also suggested that such ruling may go against the provisions and interpretations of the GST Law.

The Karnataka Appellate Authority for Advance Rulings has upheld the decision to levy GST on inter-office services. To know more about the decision click here