WELCOME TO FUNDSCOOP ADVISORS

Business Process Outsourcing (“BPO”) and Knowledge Process Outsourcing (“KPO”) are engaged in providing back end support to Technology Support and were classifiable under the category of Business Auxiliary Service or Business Support Service upto 30.06.2012 under the selective based taxation regime and effective 01.07.2012 the classification is limited only for the purpose of remittance of service tax.

Levy of tax

The implication of GST for a BPO/KPO can be best understood with an illustration wherein a call centre has operation at multiple location as given below:

Illustration - ABC Limited operates call centre at Bangalore and Pune. ABC Ltd has a client PQR Limited located in Delhi who has outsourced the customer call support to ABC Limited. The contract is entered by ABC Limited, Pune with PQR Limited and the billing is done from ABC Limited, Pune. The calls from the customer of PQR Limited can be routed to the customer executive located at Bangalore Unit or Pune Unit. The tax implications on the same under GST would be as under:

The entities having operations from more than one State will have to obtain separate registration in each such State where they are operating. Each operating location in different States will be treated as distinct persons and transactions between the two, whether with consideration or without consideration, will be liable to GST.

Hence, in the above illustration, to the extent of work executed by Bangalore office towards the assignment, Bangalore Unit will have to raise invoice charging IGST on Pune office. Pune office will raise an invoice on PQR Limited charging IGST. Pune office will be entitled to avail credit of taxes charged by the Bangalore office and set it off against its liability of outward supplies.

Suppose in the above illustration, the customer PQR Limited is located outside India - transaction flow is same as above i.e. Pune raises invoice on the customer and Bangalore raises invoice on Pune. In this case, Bangalore unit will charge IGST on supplies made to Pune unit.

The supply of service by Bangalore unit to Pune will be under Valuation Rules where value need to be arrived at (i) open market value, (ii) value of service of like kind or quality or (iii) cost of provision of service +10%. It is to be noted that these options are sequential i.e. one need to establish that determination of value under (i) is not possible before moving to (ii) and so on. To avoid determining open market value in case of revenue neutral transactions where recipient unit (Pune) is entitled to avail the credit, Bangalore may raise invoice valuing the services at its will and value declared in the invoice shall be considered to be open market value.

One should bear in mind that raising of invoice by one unit located in State A to another unit located in State B will not have any impact on the revenue / profitability of a taxable person but these transactions will be reconciliation item between the inward supplies and outwards supplies as per GST returns and expense and revenue as per financial statements.

IGST charged on supply of service by Bangalore to Pune shall be eligible as credit to Pune. Service provided by Pune to overseas client shall be in the nature of zero rated supply i.e. export of service in respect of which it shall have two options for export of service:

• Export on payment of IGST and claim refund of tax paid on export (which may be paid by utilising the ITC availed on input and input service including received from Bangalore)
• Export under bond/letter of undertaking without payment of IGST and claim refund of accumulated input tax credits

It is to be noted that filing and sanction of refund under GST would be easier where 90% of refund amount would be given to claimant within 7 days of filing of claim and balance 10% within 2 months from the date of making complete application, subject to post verification. The refund claim be filed online requiring no interaction with the department officers. The simplified and faster refund process is expected to reduce the accumulation of credits taking place with these industries under existing law.

Return filing

Under GST, service providers would be required to file monthly returns for each State from where they operate. Additionally each of these units will be assessed separately. Since majority of the BPO / KPO sector is engaged in provision of export services, unadjusted input tax credit would be available at different locations which would mean filing multiple state level refund claims for the same tax period.

Input tax credit

Under the GST regime, the input tax credit scheme would be broad based, as compared to the current CENVAT credit scheme and this would augur well for the IT sector. Credit would be available on most inputs and input services that are used for business purposes.

BPO / KPO spend a lot of money on employees in the name of “employee experience” which includes free / subsidized food, cab facility, travel etc. A  table of ineligible input service credits as per GST Law which are relevant is provide below:

Under the GST regime, registration is a mandatory pre-requisite for availment of and claiming of refund of unutilized input credit.

Transactions between Related Persons

Overseas Parent Company         

• Supplies between related parties are liable to GST irrespective of whether such supplies are made for a consideration or not.
• Hence, any support received from the parent company (not being a loan transaction) including visit of Management Team of the Overseas Parent Company to oversee the operations of the local company, assistance in decision making, Central Human Resource Team which interviews candidates to be employed by the local company, extending of corporate guarantee etc. will be liable to GST.
• A review of these transactions will have to be conducted and a proper valuation mechanism has to be arrived taking into account the valuation rules under GST regime and the transfer pricing laws under Income Tax Laws for recording of these transactions and discharging of GST under reverse charge mechanism on the same.

Overseas Subsidiary Company

• Inversely, support functions provided by a local company to its overseas subsidiary company would be treated as zero rated supply (viz. export of services) and will have to be accounted based on the valuation principals mentioned above.

• In the absence of consideration being realised in foreign currency (one of essential conditions of considering supply as export of service), the supply would be liable to IGST.

BPO/KPO'S engaged in export of services

Export of information technology is an important source of foreign exchange, with India being the biggest exporter of IT services.

Exports are zero-rated and input taxes paid will be allowed as a refund.

 “Export of services” means the supply of any service when –

1. supplier of service is located in India;
2. recipient of service is located outside India;
3. place of supply of service is outside India;
4. payment for such service is received by supplier of service in convertible foreign exchange;
5.  supplier of service & recipient of service are not merely establishments of a distinct person

All these conditions should be fulfilled for a service to qualify as ‘export’

In case a transaction does not satisfy any one of the conditions for export, the same should be liable to GST. The supply will be treated as inter-state supply and will be subject to IGST.

The default rule for place of supply (export of service) is the location of the service recipient if the address of the recipient is available. So, exporters must ensure that the address of service recipient can be presented before the authorities on request. The typical IT/ ITES services which come under the default rule will be software development, BPO operations, software consultancy, etc. Apart from these, this rule will also apply to other services like software support/ maintenance and intermediary services as there are no exceptions under GST.

Refund of ITC 

Refund of unutilized input tax credit can be claimed in case of unutilized input tax credit on zero-rated goods/services on which no payment of tax was made.

No refund of unutilized ITC would be allowed under the following cases:

1.  If the unutilized ITC is for GST paid on goods exported out of India which attract excise duty.
2. If the supplier of goods has availed duty drawback on the excise duty paid or claims the refund on the integrated tax paid on such supply.

The application process for claiming refund shall include:

(a) such documentary evidence as may be prescribed to establish that a refund is due to the applicant and

(b) such documentary or other evidence, like the amount mentioned in tax invoice, as the applicant may furnish to establish the amount of tax and interest, if any, paid by the applicant and that he has not passed the tax burden to another person.

If the amount of refund claimed is less than Rs 2 lakhs then the taxpayer can file an application based on documentary or other evidence but only by certifying that the incidence of such tax is not passed on to any other person.

Time limit for filing refund claim

Any person claiming the refund of the GST tax, or the interest paid should make an application within a period of two years from the relevant date using the Form GST RFD-01 electronically. A registered person may claim the balance available in the electronic cash ledger by filing the return as per the dates mentioned under GST.