Section 13(8)(b) Omitted by Finance Act 2026: Indian Intermediary Services Gain Export Status Under GST

Overview

For over two decades, the "intermediary" classification under India's indirect tax framework has been a persistent source of disputes — first under the service tax regime, and subsequently under the Goods and Services Tax (GST) architecture. The fundamental grievance was straightforward: Indian service providers rendering services to overseas clients were denied export benefits solely on account of how "intermediary services" were treated under the Place of Supply (PoS) rules.

Section 13(8)(b) of the Integrated Goods and Services Tax Act, 2017 (IGST Act) mandated that the place of supply for intermediary services would be the location of the supplier — not the recipient. This single provision had far-reaching consequences, trapping cross-border service transactions within the Indian GST net and effectively making Indian intermediaries more expensive in global markets.

Section 157 of the Finance Act, 2026 has now addressed this structural flaw by omitting Section 13(8)(b) altogether. This article provides a detailed analysis of what this omission means, when it takes effect, whether it applies to past periods, and how it affects both outbound and inbound intermediary service arrangements.

Understanding the Intermediary Problem: How Did We Get Here?

Statutory Definition and Its Expanding Application

Under the IGST Act, an "intermediary" is defined as a broker, agent, or any person who arranges or facilitates the supply of goods or services between two or more persons. While the definition appears narrow on its face, tax authorities applied it expansively in practice.

Any transaction involving three parties — regardless of contractual structure, nature of work, or degree of independent judgment exercised — was frequently labelled as an intermediary arrangement. This interpretation ignored fundamental factors such as:

  • Whether the assessee had a direct contractual relationship with the end customer
  • Whether the assessee assumed independent business risk
  • The degree of discretion exercised in performing the service
  • Whether the assessee was acting as a principal or a mere conduit

The Place of Supply Distortion

The core legal issue arose from the interplay between two provisions of the IGST Act:

  • Section 13(2) — the general rule, which determines place of supply based on the location of the recipient of services
  • Section 13(8)(b) — the special rule for intermediaries, which overrode Section 13(2) and pegged the place of supply to the location of the supplier

When an Indian company provided what would otherwise be an export service to a foreign client, but the arrangement was classified as "intermediary," the place of supply defaulted to India — the supplier's location. This meant:

  • The transaction could not qualify as export of services under Section 2(6) of the IGST Act
  • GST at 18% became applicable on the transaction
  • Refund claims on input tax credits were rejected
  • Substantial demands were raised on assessees, often accompanied by interest and penalties

Sectors Most Severely Affected

The following industries bore the brunt of this provision:

  • Sales promotion and marketing support services provided to foreign principals
  • Procurement and vendor sourcing arrangements
  • Educational counselling and overseas admission support
  • Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO) operations
  • Commission-based arrangements where Indian entities facilitated transactions for overseas parties

The cumulative impact was not just financial — it created interpretational uncertainty that deterred foreign companies from routing service operations through India, undermining the country's positioning as a competitive global services destination.

The Legislative Correction: What Section 157 of the Finance Act, 2026 Does

The Amendment in Plain Terms

Section 157 of the Finance Act, 2026 omits clause (b) of sub-section (8) of Section 13 of the IGST Act. In effect, the special place of supply rule for intermediaries — which previously anchored the place of supply to the supplier's location — has been removed from the statute.

With Section 13(8)(b) gone, intermediary services are no longer governed by an exception. The place of supply for such services will now be determined by the general rule under Section 13(2), which is the location of the recipient. For services rendered to overseas clients, this means the place of supply shifts outside India.

Key Consequences of the Omission

1. Export of Services Status

Intermediary services provided to foreign clients will now qualify as "export of services" under Section 2(6) of the IGST Act, provided the remaining conditions are satisfied:

  • The supplier of service is located in India
  • The recipient of service is located outside India
  • The place of supply is outside India (now satisfied after omission)
  • Payment is received in convertible foreign exchange or Indian rupees wherever permitted by RBI
  • The supplier and recipient are not merely establishments of the same person

2. Zero-Rating and ITC Refunds