A division bench of the Bombay High Court delivered a split verdict on the constitutionality of Section 13 (8) (b) of the IGST Act, which imposes the liability of the GST on services provided by intermediaries to people outside India.
While Judge Ujjal Bhuyan found the provision unconstitutional, Judge Abhay Ahuja dissident. Judge Ahuja said he would issue a separate opinion on June 16, recording the reasons for his disagreement with Judge Bhuyan.
In accordance with Section 13 (8) (b) of the Integrated Goods and Services Tax Act, the place of supply of the intermediary services is deemed to be the location of the supplier of the services. Due to this deeming provision, services provided by intermediaries such as agents, brokers, etc., to foreign clients are subject to tax liability. The export of services through a tan intermediary would be treated as an intra-state supply of services under Article 13 (8) (b) read with Article 8 (2) of the IGST Act, making this transaction liable payment of the central goods and services tax (CGST) and the state goods and services tax (SGST).
Arguments of the petitioner
The provision was challenged by a certain Dharmendra M Jain, who ran a private company providing marketing and promotion services to foreign clients, claiming that Parliament did not have the legislative power to tax “the export of services” considering them as a local supply.
The petitioner claimed that his clients did not have an establishment in India and that his consideration had been received in foreign currency.
The GST is a destination-based consumption tax. Therefore, services supplied by a service supplier in India to a recipient of services located outside India which are treated as an export of services cannot be taxed; to tax a service, it is not the place of performance but the place of consumption that is relevant. Once the services are consumed outside India, Parliament has no jurisdiction to levy a tax on those services consumed outside India.
The GST is an indirect tax. The cardinal rule of indirect taxation is that it must be able to be passed on to the final recipient of the service. Therefore, it is commonplace that an agent cannot be charged the GST.
The petitioner argued that this charge on the export of services is arbitrary and discriminatory, which constitutes a violation of Article 14 of the Indian Constitution. In addition, the provision infringed the right to commerce and business under Article 19 (1) (g) of the Constitution.
The union’s arguments
The Union government argued that there was legislative competence to adopt the provision.
If the place of supply were to be the location of the recipient, the place of supply of all intermediaries located in the taxable territory providing services to a person whose place of habitual residence is outside India would be the place of location of the recipient, that is to say outside India and therefore services would be out of the tax net. In tax matters, Parliament has the power to create determinative provisions.
Greater latitude must be given to Parliament or the legislature in the formulation of tax laws and the exercise of the power to tax can normally be presumed to be in the public interest.
Judge Bhuyan’s conclusions
Justice Bhuyan concluded that the impugned provision ran counter to the scheme of the GST Act.
“… by artificially creating a deeming provision in the form of Article 13 (8) (b) of the IGSTAAct, when the place of residence of the recipient of the service provided by an intermediary is outside India , the place of supply has been treated as the location of the supplier, ie in India. This goes against the scheme of the CGST law as well as the IGST law in addition to being au- beyond the pricing sections of the two laws “, he said in the judgment
The judge also said the provision goes against the principle that the GST is a destination-based tax.
“The extraterritorial effect given through Section 13 (8) (b) of IGST has no real connection with the tax regime in India introduced by the GST system; rather, it goes completely against the very fundamental principle on which the GST is based, i.e. that it is a consumption tax based on destination unlike the principle of taxation based on the origin “
Last year, the Gujarat High Court confirmed the constitutionality of this provision. However, Judge Bhuyan observed that the decision of another High Court is not binding and chose not to agree with it.
“Thus, in view of the above discussions and after careful consideration, we have no hesitation in concluding that Section 13 (8) (b) of the Integrated Goods and Services Tax Act, 2017 is said law in addition to being unconstitutional ”, said Judge Bhuyan in conclusion.
Judge Abhay Ahuja wrote a one-page order stating that he was unable to persuade himself to share Judge Bhuyan’s opinion.
Case title: Dharmendra M. Jani v Union of India et al.
Click here to read / download the judgment