CBIC Clarifications on Scope of ‘Intermediary’ Services under GST
The Central Board of Indirect Taxes and Customs (CBIC) has issued a detailed Circular No. 159/15/2021-GST dated 20th September 2021 to clarify the scope of intermediary services under GST. This circular is the first step to address the difficulties being faced by trade and industry due to varied interpretations by tax officers on the issue. According to the circular, there are certain pre-requisite conditions to be tested before treating the supply of any service as ‘intermediary services’. These conditions are explained in the current article.
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Synopsis of CBIC Circular
As mentioned above, CBIC listed six primary requirements for classifying a supply as an intermediary service with clarifications with this circular:
- Clarification on Definition of Intermediary Services under GST
- Clarification on Primary Requirements for intermediary services
- CBIC clarified that Intermediary service providers to have the character of an agent, broker, or any other similar person
- Intermediary Services does not include a person who supplies such goods or services or both or securities on his account
- CBIC also clarified that Sub-contracting for a service is not an intermediary service
- Clarification on Place of supply of intermediary services
Clarification on Definition of Intermediary Services under GST
The Central Board of Indirect Taxes and Customs (CBIC) have clarified the definition of Intermediary Services under GST as follows:
Definition of Intermediary as Provided Under GST Law
Intermediary’ has been defined in the sub-section (13) of section 2 of the Integrated Goods and Services Tax Act, 2017, and the same is reproduced hereunder for ready reference;
“Intermediary means a broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his account.”
An important feature that can be derived from the above definition of ‘intermediary’ is summarized as follows:
- An intermediary can be a broker, an agent, or any other person;
- An intermediary is a person, who arranges or facilitates the supply of goods or services or both between two or more persons
- An intermediary cannot change the nature of supply as provided by his principal.
Definition of Intermediary as Provided Under Service Tax law
The concept of ‘intermediary’ was borrowed in GST from the Service Tax Regime. The definition of ‘intermediary’ is contained in Rule 2(f) of Place of Provision of Services Rules, 2012. The definition was issued vide notification No. 28/2012-ST, dated 20-6-2012, and the same is reproduced hereunder for ready reference.
“Intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the ‘main’ service) or a supply of goods, between two or more persons, but does not include a person who provides the main service or supplies the goods on his account
Definition of Intermediary – GST Law Vs Service Tax law
From the perusal of the definition of “intermediary” under IGST Act as well as under Service Tax law, it is evident that there is broadly no change in the scope of intermediary services in the GST regime vis-à-vis the Service Tax regime, except the addition of supply of securities in the definition of intermediary in the GST Law.
Intermediary Services Definition in Simple Terms
In simple terms ‘intermediary’ means someone who acts to arrange an agreement between people who are unwilling/unable to communicate directly. Simplifying further, an Intermediary can be explained as a firm or a person (such as a broker or a consultant) who acts as a moderator or a link between the parties to a business deal, investment decision, etc
Primary Requirements for Intermediary Services
The concept of intermediary services requires some basic prerequisites, which are discussed below:
Minimum of Three Parties
By definition, an intermediary is someone who arranges or facilitates the supplies of goods or services, or securities between two or more persons. Thus, there must be at least three parties involved in the transaction.
- Main supply – Two of them transacting in the supply of goods or services or securities
- Ancillary supply – One arranging or facilitating the main supply
Two distinct supplies
As mentioned above, there are two distinct supplies in the case of provision of intermediary services;
- Main supply, between the two principals, which can be a supply of goods or services or securities;
- Ancillary supply, which is the service of facilitating or arranging the main supply between the two principals. This ancillary supply is the supply of intermediary service and is identifiable and distinguished from the main supply.
CBIC clarification on Intermediary Service
The CBIC clarifies that activity between only two parties cannot be considered as intermediary service. An intermediary essentially “arranges or facilitates” another supply (the “main supply”) between two or more other persons and, does not himself provide the main supply. Therefore, intermediary service is also referred to as the ancillary supply.
A person involved in the supply of main supply on a principal to principal basis to another person cannot be considered as a supplier of intermediary service.
CBIC clarified that the Service of Intermediary is only supportive
The intermediary must take the character of an agent or broker. The IGST law defines an intermediary as an agent, broker, or other person arranging or facilitating the supply of products or services between two parties or more. It does not include goods or services, or securities that the person sells on his account. It was clarified that the word ‘mean’ does not expand the scope of the intermediary definition to include any other persons. The phrase ‘arranges or facilitates’ implies that the service of intermediary is only supportive.
Sub-contracting is not an intermediary service
CBIC clarified that the Sub-contracting is not an intermediary service.
- The main supplier can outsource the main service, wholly or partially, to the sub-contractor. Such sub-contractors are facilitating the supply and carrying out the main supply of goods or services.
- The sub-contractor provides the main service on his account to the buyer on behalf of the main supplier.
Clarification on Place of supply of intermediary services
Section 13 of the IGST Act gets attracted if either the intermediary or his recipient is located outside Indi
Other Clarification on Intermediary Services
- The next clarification was on the exclusion of supplier of goods, services, or securities on own account. The definition uses the word ‘such’ goods or services or securities. CBIC clarified that this refers to the main supply only.
- Intermediary Services do not include a person who supplies such goods or services or both or securities on his account.
- The CBIC has clarified that services outsourced to India or carried out in the country for foreign entities will not be treated as intermediary services, and hence not face 18% of goods and services tax. The same was also recommended and clarified at the recently held 45th GST Council
Apart from the clarifications, CBIC also presented four illustrations in the Circular as well. The official CBIC circular is enclosed here for ready reference:Circular No. 159_14_2021_GST