The AAR Maharashtra has recently ruled that the back office services provided by an Indian company to a foreign company will be treated as an intermediary service taxable at the rate of 18% and will not be treated as export of service (For details, please refer to our GST weekly highlight volume 73, November 2018).

This AAR decision has hit both Indian back-office service providers as well as the captive units of multinationals. Last week, the media reports stated that the tax department is issuing notices to captive units of multinationals and Indian companies exporting offshore support services. During this week, media reports have stated that the 18% GST on these services would completely disrupt the cost dynamics of the back-office model that operates on thin margins and would face challenges from other low-cost jurisdictions.

Therefore, it is anticipated that the issue could be taken up by the GST Council or even clarified by the GST Implementation Council once the law committee firms up its view.