New AAR Ruling takes the software industry by surprise

In the case of Vserv Global, Maharashtra’s AAR bench upheld that back office support services now qualify as ‘intermediary’ services. This service will be liable to 18% Goods and Services Tax (GST).  The AAR further added that to qualify a transaction as an export service, it must satisfy all five components of export services concurrently; whereas the services provided by the applicant are not eligible for ‘export of services’ and therefore does not qualify for a ‘zero rate supply’ under section 16(1) of the IGST Act, 2017.  

National Association of Software and Services Companies (Nasscom) was highly critical of the move and stated that the ruling would result in potential job losses and depress India’s image as a global service provider.  

In a detailed statement Nasscom asserted “If the implication of this ruling is not suitably clarified, it will make our companies non-competitive in the global market, potentially resulting in loss of revenue, jobs and customers…at a time when, when India’s image is bullish on ease of doing business parameters, it is advisable that we ensure a transparent and clear tax regime to maintain our global leadership position.”

The ruling may result in a substantial tax demand from some of industries biggest players since India is amongst the largest exporter of ITeS, and will also directly impact the GIC’s in the country who employ a large chunk of the nation’s population.   

Legal experts suggest that while AAR rulings are not binding and have no precedent value, this particular ruling may cause massive confusion and lead to unwarranted disputes.  

The ruling has caused a considerable uproar in the India markets and can possibly stunt an environment for healthy competition. However, NASSCOM is hopeful that the government will step in soon and put an end to this confusion.