GST on Intermediary Services — Finance Act 2026 Finally Resolves a Decade of Hardship

For nearly a decade, Indian service providers who served foreign clients through an intermediary arrangement were caught in one of the most perverse provisions in India's GST law. They received payment in foreign currency from clients outside India, provided services exclusively for offshore benefit — yet they were required to pay Goods and Services Tax at 18% because of a single deeming clause: Section 13(8)(b) of the IGST Act, 2017.

This provision denied them the status of exporters, cut them off from refunds and zero-rating benefits, and sparked litigation across multiple High Courts — with contradictory rulings that left thousands of businesses in a state of perpetual uncertainty. The pending disputed tax demand from this single provision was estimated at approximately ₹3,300 crore.

The Finance Act, 2026 — which received Presidential assent on 30 March 2026 — has finally resolved this. Section 13(8)(b) has been omitted. Intermediary services provided to foreign clients can now qualify as exports. This guide explains the full history, the precise legal change, and what it means for businesses across India.

What is an Intermediary under GST?

Section 2(13) of the IGST Act, 2017 defines an intermediary as:

The key operative phrase is "arranges or facilitates the supply" between two or more persons. The critical exclusion is equally important: a person who supplies services on their own account is not an intermediary. This distinction — between facilitation and principal-to-principal supply — became the central battleground in years of litigation.

Practical Examples of Intermediary Services

• An Indian commission agent who sources buyers in India for goods sold by a foreign manufacturer
• A digital marketing agency in India that runs campaigns for a foreign company to find customers
• A back-office BPO in India that coordinates between a foreign client's operations and third-party vendors
• A freight forwarding agent arranging logistics between a foreign principal and Indian carriers
• A consultant in India who facilitates business-to-business introductions for a foreign client
• An Indian subsidiary performing liaison, sales support, or procurement coordination for a foreign parent

What distinguishes these from non-intermediary exporters: an IT company that builds software for a foreign client entirely on its own account is not an intermediary — it provides its own service to its own client. An Indian company that connects a foreign client with Indian suppliers, while itself remaining in the background, is an intermediary.

Section 13 of the IGST Act — Understanding Place of Supply for Cross-Border Services

Under GST, the place of supply determines where a transaction is taxed and, critically, whether it qualifies as an export. For services where the supplier and recipient are in different countries, Section 13 of the IGST Act governs the determination of place of supply.

Section 13(2) — The Default Rule

The general rule under Section 13(2) is simple and logical: the place of supply is the location of the recipient of services. If an Indian service provider supplies a service to a recipient located outside India, the place of supply is outside India. The transaction qualifies as a zero-rated supply under Section 16 of the IGST Act and an export of services under Section 2(6), subject to the fulfilment of five conditions:

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

For a typical IT company or consulting firm providing services directly to a foreign client, all five conditions are typically met and the transaction is an export — zero-rated, eligible for refund of accumulated ITC, or exportable under LUT without payment of IGST.

Section 13(8) — Specific Override Rules

Section 13(8) created specific exceptions to the default rule for three categories of services, deeming the place of supply to be the location of the supplier instead of the recipient:

By deeming the place of supply for intermediary services to be India (the supplier's location), Section 13(8)(b) created an immediate and consequential problem: the third condition for export — that the place of supply must be outside India — was automatically not satisfied. No matter how clearly the service was provided to a foreign client, no matter how genuinely the consideration was received in foreign exchange, the transaction could not qualify as an export.

The Problem with Section 13(8)(b) — A Decade of Hardship

Origins — The Service Tax Legacy

The problem did not begin with GST. The concept of "intermediary" was first introduced in the Service Tax regime under Rule 9(c) of the Place of Provision of Service Rules, 2012. Prior to this, services provided to foreign entities were largely treated as exports. When these rules created the deeming fiction for intermediaries under Service Tax, legacy disputes began — and when GST was introduced in 2017, Section 13(8)(b) carried forward the same approach, and with it came unresolved legacy disputes.

What Section 13(8)(b) Meant in Practice

Consider a straightforward example:

The Compounding Harm — Section 8(2) and Double Taxation

The damage went beyond merely paying 18% GST. Section 8(2) of the IGST Act states that if the location of the supplier and the place of supply of services are in the same state or union territory, it is treated as an intra-state supply. Since Section 13(8)(b) placed the supply at the supplier's India location, the transaction became intra-state — subject to CGST and SGST, not IGST. This created the risk of double taxation: the Indian supplier paid CGST + SGST in India while the foreign recipient could also face indirect tax in their jurisdiction on receipt of the same service.

Furthermore, the ITC accumulated on inputs and input services for these transactions — rent, salaries, professional fees, technology costs — was trapped. It could not be refunded because the supply was not zero-rated. For businesses where intermediary services formed a significant portion of revenue, blocked ITC could amount to 30–40% of total service revenue being locked up.

The Aggressive Classification Problem

The ITeS and BPO/KPO sectors struggled with the ambiguity in distinguishing between intermediary facilitation and principal-to-principal service exports. Specifically, back-office support services, marketing agents, commission agents found themselves caught in this conflict. Multinational corporations with Indian subsidiaries were frequently litigated against, as tax authorities characterised their principal-to-principal arrangements as facilitation or intermediary services.

The CBIC attempted to address this ambiguity through CBIC Circular No. 159/15/2021-GST dated 20 September 2021, which sought to clarify the scope of intermediary services and distinguish them from direct service exports. The circular offered guidance on scenarios where Indian entities provide IT services, BPO services, or support services to foreign affiliates. However, the circular could not override the statutory deeming provision — and field-level enforcement continued to be inconsistent.

Who Was Affected — Industries and Businesses

The Litigation Trail — Courts, Conflicts, and Confusion

Section 13(8)(b) generated some of the most contested litigation in India's GST history — with High Courts in different jurisdictions reaching conflicting conclusions on the same provision.

Gujarat High Court — Material Recycling Association of India (2020)

The Gujarat High Court upheld the constitutional validity of Section 13(8)(b), holding that Parliament has exclusive power under Article 246A of the Constitution to make laws on GST in the course of inter-state trade. The court held that merely because consideration was received in foreign exchange, the transaction did not automatically qualify as an export of services. This judgment kept Section 13(8)(b) alive and enforceable in Gujarat — and gave tax authorities confidence to continue issuing show-cause notices.

Bombay High Court — Dharmendra M. Jani v. Union of India (2021–2024)

The most significant litigation arose before the Bombay High Court. A division bench delivered a split verdict on the constitutionality of Section 13(8)(b). While Justice Ujjal Bhuyan held the provision to be unconstitutional, Justice Abhay Ahuja dissented.

Justice Bhuyan's reasoning was compelling: the GST provision provides for a differential treatment of intermediary services leading to imposition of GST outside India. He held that levy of indirect tax on intermediary services is against the fundamental concept of GST as a destination-based tax. By taxing a service that was consumed outside India at the supplier's location in India, the very principle of destination-based taxation was inverted.

Justice Ahuja disagreed, holding that Parliament was within its legislative competence and the specific definition of "intermediary" in Section 2(13) meant the general export-of-service provision could not override it.

Given the split verdict, the matter was referred to a third judge. In 2024, the referee judge upheld the constitutional validity of Section 13(8)(b) — keeping the provision operative. However, the judge also recognised the anomaly in the law and effectively signalled that a legislative fix was needed.

The court added as an aside that serious concerns on the issue of place of supply of intermediary services had been raised by the Department-Related Parliamentary Standing Committee on Commerce in its 139th report on "Impact of Goods and Services Tax on Exports", presented before the Rajya Sabha and Lok Sabha on 19 December 2017, which observed that an amendment to Section 13(8) of the IGST Act is required to exclude intermediary services and make it subject to the default rule.

The Parliamentary Standing Committee had itself recommended this fix in 2017 — nine years before it was finally enacted.

The Cumulative Effect of Litigation

Different High Court rulings, an unresolved constitutional challenge, conflicting advance rulings by State AAR authorities, and CBIC circulars that could not override the statute — all of this created a legal environment where businesses took inconsistent positions, assessees received show-cause notices with no certainty about outcome, and approximately ₹3,300 crore in disputed tax remained locked in forums across the country.

56th GST Council Meeting — The Turning Point

The 56th GST Council meeting held on 3 September 2025 under the chairpersonship of Finance Minister Nirmala Sitharaman made a formal recommendation: omit clause (b) of Section 13(8) of the IGST Act. After this amendment, the place of supply for intermediary services will be determined as per the default provision under Section 13(2) of the IGST Act, 2017, i.e., the location of the recipient of such services. This will help Indian exporters of such services to claim export benefits.

The Council's recommendation followed years of representations from industry bodies, the recommendations of the Parliamentary Standing Committee, and the persistent litigation that had failed to provide certainty. It acknowledged the fundamental incongruity in taxing a service that was consumed outside India simply because its provider was in India.

Finance Act 2026 — What Exactly Changed

The Legislative Change — Clause 141

Clause 141 of the Finance Bill, 2026 (Bill No. 3 of 2026) proposed the outright deletion of Section 13(8)(b) from the IGST Act. The Finance Act, 2026 received Presidential assent on 30 March 2026. The deletion is now law — though the operative effective date is to be separately notified by the Central Government.

Before and After — The Legal Position

What Has Not Changed

Impact — What This Means for Your Business

For Indian Service Exporters Classified as Intermediaries

This is the group that benefits most directly. Going forward, once the effective date is notified:

• No GST on export commissions: Commissions, agency fees, or facilitation charges received from foreign clients in convertible foreign exchange will be zero-rated — no GST payable under LUT, or 0% IGST with refund route
• ITC becomes fully recoverable: Input tax credit on office rent, employee costs (as applicable), technology, professional services — which was previously blocked — becomes available for refund
• Pricing competitiveness restored: Indian intermediaries no longer need to embed an 18% GST cost into their pricing for foreign clients, improving competitiveness against service providers in other jurisdictions
• LUT filing required: File a Letter of Undertaking (LUT) on the GST portal for FY 2026-27 (if not already filed) to export without payment of GST — this is a one-time annual compliance, filed online at gstin.gov.in
• Refund claims for accumulated ITC: Once zero-rated status is established, file GST RFD-01 for refund of accumulated ITC — the balance may be substantial for businesses that were paying GST for several years

For Businesses that Import Intermediary Services from Abroad

This is the other side of the amendment that many businesses have not considered. After the amendment, with clause (b) omitted, intermediary services fall under the general rule in Section 13(2). When an Indian entity receives intermediary services from a foreign provider, the place of supply is India — making the transaction an import of services.

Under Section 5(3) read with the RCM notifications, import of services is taxable under Reverse Charge Mechanism (RCM) in India. Prior to the amendment, such imports from foreign intermediaries were not taxable in India because the place of supply was outside India. After the amendment, Indian businesses receiving intermediary services from abroad must pay IGST at 18% under RCM on such payments.

Reverse Charge — A Practical Walkthrough

Action Points — What to Do Now

If You Export Intermediary Services to Foreign Clients

1. Wait for the effective date notification — the Finance Act has received assent but the operative date is to be separately notified by CBIC. Do not change invoicing practices until the notification is issued. Monitor CBIC's official website and GST portal for the notification.
2. Review all existing contracts with foreign clients for language that determines intermediary vs. principal-to-principal characterisation. Contracts that say "arrange," "facilitate," "procure," or "source on behalf of" are more likely to attract intermediary characterisation. Ensure contracts accurately reflect the commercial reality.
3. File LUT for FY 2026-27 — if not already filed. The LUT is available on the GST portal under Services → User Services → Furnish Letter of Undertaking. This must be filed before the first zero-rated invoice is raised after the effective date.
4. Quantify accumulated ITC — calculate how much ITC on inputs has been blocked in prior years that is now available for refund once zero-rated status is established.
5. Do not settle pending show-cause notices prematurely — if you have received demands or notices for non-payment of GST on intermediary services, evaluate carefully before settling, particularly for periods that may benefit from the amendment (once the effective date is known).
6. Transition period invoicing — for invoices raised before the effective date but paid after, apply the old rules. The time-of-supply rules under GST determine which regime applies to each transaction.

If You Import Intermediary Services from Foreign Providers

1. Identify all foreign agents, brokers, and commission payments in your procurement or sales chain
2. Assess RCM liability — compute the IGST that will become payable under RCM on each category of payment from the effective date
3. Update accounting and compliance processes — RCM payments must be declared in GSTR-3B (Table 3.1(d)) and paid in cash (cannot be paid from ITC ledger)
4. Verify ITC eligibility — if your business is eligible for full ITC on IGST paid under RCM, the net cash impact is zero. If not, plan for the additional cost