GST on Intermediaries: The Bombay HC Issues a Split Decision On The Constitutionality Of IGST Act Section 13(8)(b)

What is the case

• The validity of Section 13(8)(b) of the IGST Act, which imposes GST obligation on services provided by intermediaries to people residing outside India, was split by a division bench of the Bombay High Court.
• Justice Abhay Ahuja dissented with Justice Ujjal Bhuyan's ruling that the clause was invalid. On June 16, Justice Ahuja plans to issue a separate opinion outlining his reasons for disagreeing with Justice Bhuyan.
• The location of the supplier of intermediary services is regarded to be the location of the supplier of the services under Section 13(8)(b) of the Integrated Goods and Services Tax Act. As a result of this deeming rule, services provided to overseas clients by intermediaries such as agents, brokers, and others are subject to taxation.
• Under Section 13(8)(b) of the IGST Act read with Section 8(2) of the IGST Act, the export of a service by an intermediary is classified as an intra-state supply of services, requiring payment of both the central and state goods and services taxes (SGST).

Details of the case

• Dharmendra M Jain, who ran a sole proprietorship providing marketing and promotion services to international clients, contested the provision, claiming that Parliament lacked the legal authority to tax 'export of service' by treating it as a domestic supplier. The petitioner claimed that his customers do not have a presence in India and that his payment was made in foreign currency.
• GST stands for Goods and Services Tax. It is an indirect tax. The primary rule of indirect taxation is that it must be able to be passed on to the service's ultimate recipient. As a result, it is self-evident that an agent cannot be subjected to GST.
• The petitioner stated that the tax on service exports is arbitrary and discriminatory, and hence violates Article 14 of the Indian Constitution. Furthermore, the provision violated Article 19(1)(g) of the Constitution, which protects the right to commerce and business.
• The Union Government contended that the measure could be enacted since it was within its legislative authority. If the recipient's usual place of residence is outside India, the place of supply for all intermediaries located in taxable territory providing services to a person whose usual place of residence is outside India would be the recipient's usual place of residence, i.e., outside India, and thus such services would have escaped the tax net. Parliament has the authority to make deeming provisions in tax concerns.

Courts Observation

• The disputed clause, according to Justice Bhuyan, is antithetical to the GST Act's plan. By arbitrarily inventing a deeming provision in the shape of Section 13(8)(b) of the IGST Act, the place of supply has been treated as the location of the supplier, i.e., in India, where the recipient of a service given by an intermediary is located outside India. This is antithetical to both the CGST and IGST Acts' schemes, as well as being outside of both Acts' charge provisions, he stated in the courtroom.
• The provision also goes against the premise of GST being a destination-based tax, according to the judgement. The extraterritorial effect conferred by section 13(8)(b) of the IGST Act has no real connection or nexus with the taxing regime in India introduced by the GST system; rather, it runs completely counter to the very fundamental principle on which GST is founded, namely, that it is a destination-based consumption tax as opposed to origin-based taxation.
• The validity of this rule was reaffirmed by the Gujarat High Court last year. Justice Bhuyan, on the other hand, noted that the decision of another High Court was not binding and chose to disagree with it. "Thus, in light of the foregoing discussions and after careful deliberation, we have no problem in determining that Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 is ultravires the said Act in addition to being unconstitutional," Justice Bhuyan said.

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