As per rules, exports don’t attract GST (goods and services tax) and companies can claim refunds from the revenue department.
The idea is that goods and services exported from India should be as cost efficient as possible to remain competitive against those from other countries.
The tax department has been scrutinising more closely what constitutes an export, and has been rejecting refund claims of several companies. This comes after the department for indirect taxes rejected claims of consultancies, back offices of multinationals, banks and Indian companies providing offshore support services.
“The services rendered by the Indian companies are on a principal to principal basis and rendered on their own account and, hence, there is no question of tax applicability as these services qualify as exports,” said Abhishek A Rastogi, partner at Khaitan & Co.
Industry trackers say that several multinationals in the ITeS space that are based in India tend to work on joint projects with their other group companies in other jurisdictions.
Tax department claims that GST is applicable on at least part of the work.
Some of the largest multinationals in the enterprise resource planning (ERP) space or even companies that are into software and customer relationship management services (CRM) have been impacted.
The tax department is rejecting the claims for GST refunds for these companies.
“Any absurd order or rejection of refund on the basis of distinct entity criteria, wrong classification and denial of natural justice must be taken to the writ court to get early redressal of issue,” said Rastogi. As per the tax framework, an exporter need not pass on the GST paid on raw material or input services to the client or foreign entity.
GST paid to the supplier by the exporter can be claimed back from the tax department as refunds. These refunds are typically set off against future tax liabilities by exporters.
The tax department is now disputing these refunds, claiming that these aren’t for exports. Eventually, this means the cost for companies and firms will go up by 18% and margins will come down.
The controversy around who’s an exporter and who is merely an intermediary started after a 2018 ruling by the Authority of Advance Ruling (AAR).
Soon after the ruling, the indirect tax department started issuing preliminary notices to captive units of multinationals and Indian companies exporting offshore support services on applicability of GST.