You’ve been hearing a lot about GST and its related rules and sections, right? It can be confusing, especially when no one breaks it down in simple terms. So, let’s discuss one of the most confusing and controversial terms – Intermediary in GST.
If you are in the service sector and also engaged in export, you must have encountered an issue of intermediary. The intermediary issue is not new. It has been carried forward from the erstwhile Service Tax Act.
To avoid any penalty or notice from the department, it is necessary to understand the concept of intermediary in GST and drive your business financially in the right direction.
Definition of intermediary under GST
First, we will see what is the definition of intermediary under GST Act
‘Intermediary’ has been defined in the sub-section (13) of section 2 of the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as “IGST” Act) as under–
“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 own account.”
An intermediary is someone who arranges or facilitates the supply of goods, services, or securities between two or more people but doesn’t supply these on their own account. Think of an intermediary as a matchmaker in business transactions.
In simple terms, An intermediary is like a broker or an agent who helps two parties (let’s call them A and B) complete a deal. The intermediary (let’s call them C) doesn’t own the product or service but helps A and B make the exchange.
To avoid any confusion among tax officers and taxpayers, the CBIC has issued a clarification circular no. 159/15/2021-GST dated 20.09.2021
Basic Requirements for Intermediary Services
1. Minimum of Three Parties
This concept wwe will understand with illustrations. There must be at least three parties involved:
- A: The supplier of goods/services.
- B: The receiver of goods/services.
- C: The intermediary who facilitates the deal between A and B.
Example:
- A is a manufacturer of machines.
- B is a company that wants to buy these machines.
- C is the intermediary who introduces A to B and helps finalize the deal.
Now, i think you must have understand what is intermediary. An intermediary service provider acts as an agent, broker, or similar person. The definition clearly states that an intermediary is someone who arranges or facilitates a main supply but does not provide the main supply themselves. This means that intermediaries play a supportive role, helping with the main service rather than delivering it directly.
2. Two Distinct Supplies
There are two types of supplies:
- Main Supply: The actual product/service being exchanged between A and B.
- Ancillary Supply: The facilitation service provided by the intermediary (C).
Example:
- Main Supply: Sale of machines from A to B.
- Ancillary Supply: C’s service of helping A and B close the deal.
3. Role of an Agent, Broker, or Similar Person
An intermediary acts in a supporting role, arranging or facilitating the main supply but not supplying it themselves.
4. Not Supplying on Their Own Account
If the intermediary starts supplying the goods/services themselves, they are no longer considered an intermediary. This means you are supplying services or goods on principal to principal or cost plus mark-up basis where you incur all expenses and charge from your client based on the expenses plus your margin.
5. Subcontracting is Different
If the main service is outsourced, the subcontractor (say D) directly provides the service to A or B, and is not considered an intermediary. The supplier of main service may decide to outsource the supply of the main service, either fully or partly, to one or more sub-contractors. Such sub-contractor provides the main supply, either fully or a part thereof, and does not merely arrange or facilitate the main supply between the principal supplier and his customers, and therefore, clearly is not an intermediary.
Practical Examples (Intermediary or not)
Example 1: Machine Sale
- A: Manufacturer of machines.
- B: Buyer of machines.
- C: Broker who helps A and B finalize the deal.
- C charges a commission for arranging the sale.
Example 2: Software Development
- A: Software company.
- B: Client needing software.
- C: Developer subcontracted to create part of the software.
- Here, C is not an intermediary as they directly supply the development service to A.
Example 3: Insurance Claims
- P: Insurance company outside India.
- Q: Indian firm arranging claims processing.
- R: Service provider processing the claims.
- Q arranges the service but doesn’t process claims, making Q an intermediary.
The role of an intermediary is not limited to these illustrations, nor to the activities of an agent, pure agent, or broker. Your business activities need to be understood precisely and wisely to determine whether they qualify as intermediary in nature.
What I observed
While dealing with many taxpayers, I have noticed a few cases where the taxpayers were performing sales and marketing of the main product which is developed by their parent company situated outside and this sales and marketing of the Indian company affects the purchase of the customers.
One more case where the company is checking and testing the products of the Indian manufacturers and sending the report to their parent company and then, that parent company places orders with the verified vendors.
If you receive notice in similar service matter or refund gets rejected, the company can file an appeal as the nature of services or business activity can vary and it is not limited to the examples quoted above.
Note: I am not here to affirm my view above the law or any judgment. Every consultant or company can have their own views. I have quoted the example based on what i experienced. Taxpayers have the full right to file an appeal against any order passed by the authorities. Ultimately, the appellate authority or the Courts are here to interpret the law and the concept to clear ambiguity on the issue of intermediary.
Why Is This Important?
Understanding whether a service qualifies as intermediary affects the place of supply and taxation under GST. Intermediaries play a crucial role in global business transactions, ensuring smooth deals and efficient services.
It is also important to effectively know your business process based on the above scenario. If you are an exporter, it becomes more important. If your supply is intermediary, your refund claim will be rejected and you will be compelled to pay the duty along with interest.
This concept of intermediaries primarily affects service exporters from India, as many foreign companies fail to understand it and mistakenly do not pay taxes, believing that their activities qualify as exports.
Common Questions (FAQs)
Q1: Can a service provider be an intermediary if they also supply goods?
A: No, if they supply goods on their own account, they aren’t intermediaries. As I told you already, intermediaries only affect the services sector.
Q2: What happens if an intermediary deals with only two parties?
A: The intermediary role requires three parties. With only two, it’s a direct transaction.
Q3: Is subcontracting considered intermediary service?
A: No, subcontractors directly provide the service and are not just facilitating the main supply.
Q4: How is the supply performed between two parties?
A: There should be principal to principal basis supply of work and transactions without involving the third party.
Conclusion
Intermediary services are a vital part of the GST framework, ensuring clarity in how services are taxed. By understanding these roles, businesses can better navigate their tax responsibilities and optimize their operations.
Read This also – Understanding HSN 9973: Leasing or Rental Services under GST
