The GST Council has approved significant changes to export definitions and refund rules that are expected to benefit IT firms, consulting companies and global capability centres (GCCs) by reducing tax disputes and working capital costs. According to Business Standard, the Council's recommendations will make it easier for Indian companies to claim back GST paid on business inputs, addressing longstanding industry concerns. An Indian company that serves a foreign client through its own branch abroad will get export benefits, including analytics firms, design studios, engineering consultancies and the offices of global companies. Similarly, work done in India on goods belonging to a foreign client, such as testing, repair, certification, research or processing, will be counted as an export of services even though the goods do not leave the country. These moves to widen the definition of export of services and ease refund rules are set to benefit Indian information technology, consulting, engineering and other service exporters.
The Council has removed the export condition that stated the supplier and recipient should not be establishments of the same person, with the decision directly affecting software services companies such as Tata Consultancy Services (TCS), Infosys and Wipro. As per Business Standard, "That condition has now been removed. What decides the question now is whether the customer is abroad," the Council stated. Nasscom has welcomed this move, with the industry body stating that "The Council's recommendation to remove this restriction addresses a longstanding concern that Nasscom has raised with the government. Subject to the other export conditions, it should reduce tax uncertainty, litigation, and unnecessary working capital costs." The move addresses a longstanding concern where refunds were often denied and disputes arose even when contracts were signed by the foreign branch, despite favourable rulings under the earlier law.
The GST Council has proposed significant changes to services exports that will benefit IT services, professional consulting firms, research organisations and engineering companies, as reported by Business Standard. The most significant change removes the restriction that required the supplier and recipient to be establishments of different persons, meaning that supplies routed through an exporter's own office no longer fall within that description. What decides the question now is whether the customer is abroad, and how the exporter has arranged his overseas presence no longer matters. This change directly benefits information technology and business services, professional and consulting firms, research organisations and engineering companies. The proposals also include clarification on when export payment counts as received and by when it must arrive, following Reserve Bank rules to ensure one standard applies rather than two. Importantly, these changes will not be restricted to IT services but will apply to a wider export segment, including design studios, testing laboratories, medical transcription, and other technology-enabled services.
The beneficiaries of the second decision will be global capability centres (GCCs), which have a significant presence in the country and are involved in cutting-edge research and development work. According to Business Standard, the Council also clarified that for contract manufacturing and processing, India is placed on the same tax footing as competing locations. Nasscom has been advocating for clarity around the GST treatment of international HO-BO (head office-branch office) transactions, which has remained a persistent area of litigation for Indian IT-ITES exporters. The current rules generally treat such a service as supplied in India, where the work is done, and deny it export treatment, but the customer receives and uses the result abroad, and the service should qualify as an export, as noted by Nasscom Vice President Ashish Aggarwal. The industry body has been working with the government on the GST treatment of services exports for several years, with the Council's 2021 clarifications settling export status for GCCs serving their foreign group companies.
The proposals seek to tackle working-capital pressures arising from the inverted duty structure in pharmaceuticals, according to Business Standard. Inputs used by the industry are largely taxed at 18 per cent, while medicines typically attract GST of 5 per cent, resulting in accumulation of input tax credit. Under the proposal, 90 per cent of eligible refund claims could be released automatically after a risk check, allowing companies to recover accumulated credit faster and reduce the amount of working capital locked up in accumulated tax credits while refund claims are processed. The Council is implementing different timelines for capital goods and input services refunds, with capital goods refunds likely from April 1, 2027, spread over five years, while input services refunds are expected this year itself once approved by the Council. At present, businesses can claim refunds of accumulated ITC arising from inverted duty structure primarily on inputs or raw materials, while credit accumulated on capital goods such as machinery and input services remains locked in the electronic credit ledger.
According to industry experts, these measures are expected to significantly support one of India's largest foreign exchange earning sectors. "Allowing export benefits for services delivered through foreign branches is a big relief for the IT and ITeS sector, where refunds were often denied and disputes arose even when contracts were signed by the foreign branch, despite favourable rulings under the earlier law. Aligning export receipts with RBI rules should also help more payment routes qualify for refunds," said Abhishek Jain, indirect tax national head and partner at KPMG India. The GST Council's measures are a positive development for GCCs, with "allowing input tax credit on employee health and life insurance is important for a sector where talent is the largest investment and employee benefits are an integral part of the operating model," noted Ritika Loganey Gupta, partner and GCC tax leader at EY India. The current framework creates a disparity between exports delivered through overseas branches and those routed through subsidiaries, leading to input tax credit reversals and additional compliance burden for exporters.
