This exception had two material adverse consequences. First, it precluded Indian intermediaries from treating their cross-border services as exports, since export status under the IGST Act requires the place of supply to be outside India. Indian firms providing marketing support, lead generation, sourcing, vendor coordination and similar facilitation services to overseas clients were taxed as if the supply were domestic, even when every other conditions of an export was present. Second, the supplier-location rule created a gap in import taxation. When an overseas supplier provided intermediary services to an Indian recipient, the place of supply remained outside India, effectively placing such transactions beyond the reach of the reverse charge mechanism.

These outcomes generated persistent classification disputes. Multinational groups with Indian operations found their service arrangements reclassified by tax authorities as intermediary services, triggering domestic tax demands. The Central Board of Indirect Taxes and Customs issued clarificatory circulars in 2019 and 2021, to provide guidance, but these interventions did not stem the tide of disputes, which continued to multiply across sectors including information technology support, advertising, business process outsourcing and cross-border procurement.

Judicial Landscape: Courts Weighed In, but the Anomaly Persisted

The constitutional validity of Section 13(8)(b) was directly challenged before the Bombay High Court in the landmark case of Dharmendra M. Jani v. Union of India [2023-VIL-346-BOM]. The Division Bench was divided on the question of whether the provision contravened the Constitution. On referral, the Chief Justice upheld its constitutional validity but simultaneously limited its operational scope, holding that the provision could not be invoked to treat cross-border intermediary services as intra-state supplies subject to CGST and state GST. The Gujarat High Court, in a parallel challenge, similarly upheld constitutionality while clarifying that IGST rather than CGST and SGST, applied to intermediary services rendered to persons outside India.

Notably, the Bombay High Court drew attention to a recommendation by the Parliamentary Standing Committee on Commerce, which had urged the government to remove the intermediary exception from Section 13(8) and apply the default recipient-location rule, so that qualifying services could be treated as exports. These judicial and parliamentary indications added considerable weight to calls for legislative reform.

The GST Council’s Recommendation and the Finance Bill 2026

Acknowledging the adverse impact on India’s service export sector, the GST Council in its 56th meeting on September 3, 2025, recommended the omission of Clause (b) of Section 13(8) of the IGST Act. The Law Committee of the GST Council agreed that the current provision was against the destination-based principle and was adversely impacting India’s export sector, concluding that any delay in settling the issue would further impact exports and investments.

On February 1, 2026, Finance Minister Nirmala Sitharaman presented the Union Budget 2026-27 and introduced the Finance Bill, 2026 in the Lok Sabha. The Finance Bill proposed the omission of Section 13(8)(b) of the IGST Act. The Explanatory Memorandum to the Finance Bill clarified that this omission was intended to classify intermediary services under the default provision of Section 13(2), meaning the place of supply would be the location of the recipient of services. The Finance Bill was passed by Lok Sabha on March 25, 2026 and the resulting Finance Act 2026 received Presidential assent on March 30, 2026.

The Mechanics of the Amendment

The amendment is structurally simple but far-reaching in its consequences. By omitting Clause (b) from Section 13(8), intermediary services are no longer subject to a special place-of-supply rule. Instead, they fall under the ambit of default provision of Section 13(2), which fixes the place of supply at the location of the recipient of services. This means that where the recipient is a foreign entity located outside India, the place of supply shifts outside India. Conversely, where an overseas supplier provides intermediary services to an Indian recipient, the place of supply becomes India.

The statutory definition of “intermediary” under Section 2(13) of the IGST Act remains unchanged. Similarly, the place of supply rules for other specific services enumerated under Section 13, such as performance-based services or those relating to immovable property, remain governed by their existing respective sub-sections. The amendment does not grant a special exemption; rather, it restores the default rule that applies to most other categories of services.

Impact on Exports: A Boost for India’s Service Sector

For Indian businesses that provide intermediary services to foreign clients, the amendment opens the door to export treatment. When the recipient is located outside India, the place of supply shifts abroad and the service can qualify as an export under Section 2(6) of the IGST Act, provided all other conditions are met including that consideration is received in convertible foreign exchange and that the supplier and recipient are not merely establishments of a distinct person.

The practical benefits are substantial. Qualifying exporters can supply services without charging output GST by furnishing a Letter of Undertaking or bond, or they can charge GST and claim a refund. Accumulated input tax credit on business costs such as rent, software licenses, professional fees becomes refundable, directly improving cash flow and liquidity. The removal of output GST for qualifying exports also enhances pricing flexibility, enabling Indian suppliers to engage with global clients on more competitive terms and with reduced working capital pressure.

The amendment is expected to be particularly significant for India’s large IT services sector and the growing Global Capability Centre (GCC) ecosystem, which provide services to global clients and parent companies. It is also expected to benefit marketing and advertising agencies serving foreign principals, lead generation and sales support firms, BPO and shared service centres providing operational support to overseas group entities and sourcing and vendor coordination firms working for overseas buyers. The proposal seeks to resolve approximately Rs.3,300 crore in pending litigation and ensure a level playing field for Indian service exporters.

Impact on Imports: Reverse Charge Liability Expands

While the amendment is largely beneficial for exporters, it creates new compliance obligations for Indian businesses that procure intermediary services from overseas suppliers. With the place of supply shifting to the recipient’s location, intermediary services supplied by a non-resident to an Indian recipient now satisfy the conditions for “import of services” under Section 2(11) of the IGST Act, which requires the supplier to be located outside India, the recipient in India and the place of supply in India.

As a result, IGST becomes payable by the Indian recipient under the Reverse Charge Mechanism (RCM). Previously, receipt of these services was not taxable in India because the place of supply fell outside India under the supplier-location rule. This shift has significant implications for cash flow, as GST under RCM must be paid in cash initially, though ITC is available subject to conditions. Businesses with exempt or mixed supplies must also consider proportionate reversals, raising the risk of ITC accumulation. For entities that were not previously registered under GST and were procuring intermediary services from overseas suppliers, there may now be a need to re-evaluate their tax position and consider registration requirements.

The Litigation Landscape Shifts: Ending the Classification Conundrum

Beyond the direct fiscal benefits, the amendment is expected to substantially reduce the volume of classification disputes that have burdened both industry and the tax administration. The former rule created a powerful incentive for tax authorities to characterize cross-border services as intermediary in nature, since that classification converted an export into a taxable domestic supply. Businesses, in turn, invested heavily in arguing that their arrangements were principal-to-principal rather than facilitation-based.

With the place-of-supply consequence removed, the stakes of the intermediary classification change fundamentally. Whether a service is classified as intermediary or own-account supply, the place of supply for a cross-border transaction follows the recipient’s location. Disputes will not disappear entirely – questions around export conditions and factual characterization will remain but the structural incentive that generated years of aggressive assessment and costly litigation loses much of its force. It is important to note, however, that the amendment is prospective and outstanding demands relating to past periods will not be automatically resolved. Appeals and pending litigation for prior periods must still be contested independently.

Action Steps for Business

Businesses on both sides of the equation should move promptly to update their internal processes and compliance framework.

Exporters of intermediary services should review and refine their contracts to clearly identify the recipient and the recipient’s location. Invoicing must be aligned with contract terms and robust records of foreign currency receipts must be maintained. Firms intending to export without payment of GST should ensure their Letter of Undertaking or bond compliance is current. Refund claims should be supported by clean input tax credit records and taxpayers should carefully segment their pre and post-amendment positions to manage the transition.

Importers of intermediary services should map their vendor contracts to identify arrangements that now attract reverse charge GST. Accounting systems should be configured to process reverse charge payments and align them with return filings. Input tax credit claims must be tracked for eligibility and entities should model the working capital impact of the new cash outflows. Intercompany and vendor agreements should be reviewed to allocate the reverse charge exposure appropriately.

Conclusion: A Turning Point for Indian Services

The removal of Section 13(8)(b) from the IGST Act is one of the most consequential indirect tax reforms India has undertaken since the introduction of GST. By bringing intermediary services back within the destination-based framework that governs most other cross-border services, the government has addressed a structural disadvantage that weighed on Indian service exporters for nearly a decade. The reform is expected to improve pricing competitiveness, unlock refunds of stranded input tax credit and materially reduce the litigation burden across sectors. For businesses that source intermediary services from abroad, the trade-off is a new compliance layer, but one that aligns India’s treatment of these services with established international norms. Taken together, the change strengthens India’s credentials as a global hub for technology, consulting, research and shared services and signals a clear policy commitment to supporting the country’s service export ambitions.

As the dust settles on this long-overdue reform, one might say that for Indian intermediaries, the journey to a level playing field was nothing short of “taxing”. To put it plainly, Section 13(8)(b) was always a provision that was out of place and with its omission, India’s intermediary services have finally found their rightful place of supply.

This article was originally published in VILGST on 2 April 2026 Co-written by: Sanjiv Malhotra, Senior Advisor – Head of Tax Practice, Mihir Deshmukh, Partner; Abhijeet, Principal Associate. Click here for original article

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