Destiny of intermediary service in a destination based tax

18 Jun, 2021 Pradeep S
Destiny of intermediary service in a destination based tax

Rarest of rare is an expression that evokes images of capital punishment in the legal world. To put it simply, the death sentence is awarded only in extremely exceptional cases. Having started on an ominous note, the author would like to make it clear that there is no intention to write any macabre stuff and will certainly confine to mundane taxation matters. Recently the Bombay High Court has had occasion to rule on the constitutional validity of the place of supply rule governing intermediary service under the GST Law and the result is a split verdict with one judge terming the provision as ultra vires the Constitution and the other judge dissenting from this view. It is very rare for a taxation provision to be termed as ultra vires and it is even rarer that the test for determination is applied using an economic theory. The theory deployed is that of destination-based tax. To the uninitiated, ultra vires mean that the provision is beyond the legislative competence and therefore requires to be made inoperative. It is relevant to note that the Hon’ble Gujarat High Court had affirmed the same provision when the vires were tested before it and the ruling is now set to be reviewed as per some newspaper reports. 

The last word is yet to be spoken on this subject as both parties are yet to exhaust all the remedies. Getting into the merits of the dispute is not the object of this piece. This essay aims to touch upon the concept of destination-based tax and intermediary as used in the Goods and Services tax law.


  • Destination based tax:-


When a direct or indirect tax is newly brought in, the key question is to demarcate the tax base. The tax base merely denotes as to who will be taxed. There are two well-established concepts namely source-based and residence-based that underlie the tax base for Income Tax. Indirect taxes are either origin-based or destination-based in their reach. 

Destination-based tax denotes that the tax base will be determined by consumption as opposed to production, which is the case when the tax is origin-based. It is charged on consumption and not on production. The Goods and Services tax is supposed to be destination-based. Therefore all goods and services consumed within India are brought within the tax net. Therefore imports are subject to GST while exports are excluded from the tax base. This theory also facilitates the distribution of tax earned among the States. Destination-based tax does not fall foul of the commitments under the WTO.

Though Economics provides the conceptual basis for taxation seldom do the underlying theories find explicit mention in the relevant enactment. For example, there are several dogmas that pervade the income tax law like the doctrine of diversion of income by overriding title, mutuality principle, etc., though these are not explicitly worded in the Law. 

There are twin challenges when a taxpayer tries to invoke these dogmas to justify their position. First one being such theories need to be sanctified by higher judiciary in judicial precedents for it to be relied upon. The second challenge is that of demonstrating that a particular provision of law is built on the inherent basis of such dogmas before the lower-level appellate authorities. It is also pertinent to mention that any legal challenge stating that a particular legal provision is ultra vires the Constitution can be taken up only by the High Courts.

If the higher courts sanctify that the doctrine of destination-based tax is the foundational principle of Goods and Services tax law, it will help taxpayers in disputes on several fronts like when refunds on exports are denied on flimsy procedural grounds, etc.


  • Intermediary Service:-


The word “intermediary” finds a place in the IGST Act, 2017 but does not find mention in the CGST Act, 2017. The intermediary is defined as a broker, agent, or any other person who arranges or facilitates the supply of goods or services or both or securities between two or more persons but excludes those who supply on their own account. Thus the definition fairly resonates with the meaning as understood in layman’s language.

Now the question arises as to whether it is a class of service with a separate identification code under GST Law. It is certainly not. Each type of broking or facilitation service is separately classified. For example broking services for transportation, broking services for securities, financial intermediation, agency services for arranging purchases and sales, etc., have different identification codes for classification. Hence intermediary service is a broad category.

The second place where the word intermediary finds mention in the IGST law is in the context of place of supply where the location of the supplier or location of the recipient is outside India. The Law states that in the case of intermediary services, the location of the supplier shall be the place of supply of such service. A commission agent located in India procuring orders for a foreign supplier and earning a commission in foreign exchange is left in quandary because of this provision. As the place of supply for intermediary service is the location of the supplier, the commission agent will be required to remit GST and the supply will be considered as within the State supply. It is relevant to note that the supply of service of the said commission agent would otherwise be considered as an export of service if this provision were absent in the IGST law. 

Thus, we have a dichotomy on hand. If you apply the test to determine the export of services, the service would be an export of services and hence would not be subject to GST but if you apply the provision of intermediary services, this would be a taxable supply. One view would be to see intermediary service as a separate carve-out to the general rule applicable for exports. The contradictory view considers that the GST law is built on the foundation of destination-based tax and therefore taxing exports is beyond its realm and violates the relevant Article of the Constitution under which the authority to levy GST is bestowed on the Legislature.

This provision not only impacts such straightforward cases but also the sweep of the word “intermediary” brings various other services within its ambiguity and causes undue hardship to certain sectors of the economy. We have had liaison offices of foreign bodies taking matters before advance ruling authorities and contradictory rulings being rendered as to whether their services are subject to tax in India. Thus taxation of intermediary service has become a proverbial mystery wrapped in an enigma. Suppliers of intermediary service are well-advised to consider the same as a taxable supply and remit goods and services tax.

Till the final word is spoken by the judiciary or by the GST Council, the destiny of intermediary service provider is as uncertain as the one playing the game of snakes and ladders what with higher rungs of the judicial ladder like the High Courts and the Supreme Court alone capable of pronouncing emphatically as to whether express provisions can be given the go by when they are in direct conflict with the dogmatic basis of the Law.

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