Export benefits to IT and ITES Industries under GST

[Shyam Agarwal]

Sir, IT & ITES Industries operates its business having head office in India and having branches outside india. Now In order to providing services to its foreign clients, part of service provision is done from India and rest part is completed by its foreign branches but Invoice to all foreign clients is done from india (from head office).whether it be export of service a OR Not to be export by contending that part of service is performed from outside india i.e.by foreign branch?

[Mahadev R]

One of the condition for export of service is that the supplier of service is located in India. In this case, to the extent service provided by foreign branch could be considered as non-export. However, here we need to understand if this foreign branch is providing service to foreign customer or head office in India. As the agreement with final customer would be with head office generally, it can be contended that service to foreign customer is fully provided by head office in India.

In terms of schedule I to CGST Act, any service provided by related party even without consideration would be subject to GST which needs to be considered here.

[Shyam Agarwal]

Thanks Sir for your reply, but as per Notification No 15/2018 - Integrated tax - Exemption has been provided for services supplied by an establishment of a person in India to any establishment of that person outside india which are treated as an establishment of distinct person provided Place of supply fall outside india . By virtue of this notification service supplied in given case by head office in India to its foreign branch shall be exempt.

However, as long as Import of service is concerned, the same shall be taxable if any service provided by foreign branch to its head office in India even without Consideration.

Therefore, the transaction between head office in India and foreign branch outside india is clear. However the concerned query is about services provided collectively by foreign branch and Indian head office to the Foreign customer (who are not related persons) whether the same should be qualified as an Export because one may contend that as per one of condition for export is that supplier should be in India and in the said situation location of supplier is technically in India as well as outside india though Agreement with foreign customers are executed by Indian head office, Invoices are issued by Indian head office as well as payment in foreign currency is also received by Indian head office. Further, as per information from some sources it was discussed in 31st GST Council meeting, the same issue was discussed and official said that as long as transaction is permitted by RBI the same should be considered as a an Export. Is it correct? Please suggest.

[Mahadev R]

Sir, As mentioned in my earlier mail, though partial service is being performed by branch outside India, it can be said that India is providing the service. As far as the foreign customer is concerned, service provider is Indian company.

[KASTURI SETHI]

Dear Sh.Agarwal Ji,

 

Second part is not export of service. Now the question arises whether exemption is available or not under Notification No. 15/18-I.T. As you said, foreign branch is a distinct person and hence not related with Indian Company. Thus it can be inferred that that foreign branch is working abroad for and on behalf of Indian Company. Do you agree to this extent ?

[KASTURI SETHI]

If so, foreign branch is playing the role of "Intermediary Services' . Do you agree or not ?

[Shyam Agarwal]

I agree with you Sir. But even the Foreign branch is to be treated as Intermediary. Why services provided to foreign customers will not enjoy the benefits of export as long as Agreement for service is with Indian head office and payment in foreign currency is also received by Indian head office. Please elaborate your suggestions as your guidance is always useful for me.

[KASTURI SETHI]

What does ITES stand for ?

[Shyam Agarwal]

Sir, ITES stands for Information Technology Enabled Services.

[KASTURI SETHI]

Dear Sh.Agarwal Ji,

With reference to second part of the query, it is not taxable. It cannot be termed as export of service.This service is being provided from non-taxable territory(jurisdiction) to non taxable territory(jurisdiction) by foreign branch, a distinct person as intermediary. Place of supply is covered under Section 13 (8) (b) of IGST Act, 2017. Also read the following:-

Extract of FAQ for GST on IT/ITES dated 18.8.2017

Question 11 : I am an Indian Company who makes software and sells it outside the country. I have hired a firm (not a related party) ‘C’ located abroad to facilitate the supply of software in Europe and the USA; would I be liable to pay GST on the payments that I make to this entity abroad?

Answer : No. In this case, ‘C’ is covered by the definition of ‘intermediary’ [section 2(13) of the IGST Act, 2017]. The place of supply of such intermediary service is location of the supplier in terms of section 13(8) of the IGST Act, 2017. As ‘C’ is located outside India, GST is not payable in this case.

Question 12 : What factors determine the location of ‘C’ (in question 11) as being outside India?

Answer : In terms of section 2(15) of the IGST Act, 2017, the location of a service provider is to be determined by applying the following steps sequentially:

(1) where a supply is made from a place of business for which the registration has been obtained, the location

(2) where a supply is made from a place other than the place of business for which registration has been of such place of business;obtained (a fixed establishment elsewhere), the location of such fixed establishment;

(3) where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provision of the supply; and

(4) in absence of such places, the location of the usual place of residence of the supplier.

The location of ‘C’ is to be determined by applying the criterion from (2), or (3), or as the case may be, (4).

I am of the view that Notification No.15/18-IT-(Rate) dated 26.7.18 is not applicable for the purpose of exemption from IGST.

[Mahadev R]

More clarification on this in today's circular no.78

[KASTURI SETHI]

In the situation explained by the querist, today's circular cannot be applied here. The present situation is not import of service. Hence no RCM.

[Shyam Agarwal]

Respected both of Experts, As Mahadev Sir has rightly said. As Circular No.78/50/2018 issued by CBIC on dated 31.12.2018 in which department has clarified the said situation even with the example which is exactly match with the situation. Even 100% consideration is not received in convertible foreign exchange, the said condition shall be treated as a Export provided it is permitted by RBI & supplier of service from India must pay IGST on Import of service received from foreign supplier. When this 2 situation is satisfied then Supplier of service from India can claim export benefits. Thanks to Kasturi Sir and Mahadev Sir for detailed discussion in this regards.

[KASTURI SETHI]

Dear Querist, Keeping in view all the factors discussed so far, Indian Company will be lucky if it gets export benefits.

AI Summary

Export of services: supplier location and intermediary characterisation determine GST treatment for cross border IT/ITES supplies. Whether services jointly provided by an Indian head office and a foreign branch qualify as export of services depends on supplier location, intermediary characterisation of the foreign branch, place-of-supply rules, and applicable exemptions; where the foreign branch is a distinct person performing services from abroad those services are ordinarily non-taxable in India as intermediary supplies, whereas contractual invoicing, payment receipt in India, and RBI permission may support treatment as export for services supplied from India, subject to import-of-service reverse charge consequences.