JULY 22, 2016

By Geetika Srivastav

AN aggregator is a person who acts as a connector between the service providers and their potential customers located at varied locations through their web based software application and makes its services available to the service provider by associating its brand name with such services.

Broadly, there are two transactions which take place under this business model. One transaction is undertaken between an aggregator and the service providers attached to it wherein the aggregator extends its facilitation services to the service providers in the form of providing their applications and brand name, payment collection, etc. The other transaction takes place between the service providers and the ultimate customer in respect of underlying services. The services of the service providers are popular in the name of the aggregator.

Current issues under service tax

As per the present service tax law, the first leg of this transaction which involves provision of facilitation services by the aggregator to the service providers are taxable in the hands of the aggregator as provider of services. However, the law had imposed the liability to pay service tax on the second leg i.e. services provided or agreed to be provided by the service providers to their customers also on the aggregator. In a nutshell, an aggregator is not only liable to pay service tax on the facilitation services provided by it to the service providers but also on the services provided by the service providers attached to it to their ultimate customers.

This shift in liability to pay service tax from service providers to aggregator resulted in various issues and challenges for service providers as well as aggregators. Some of the key issues that have been under discussion are listed herein below:

(1) Increased compliance requirements for aggregators as they have to maintain records and discharge service tax liability in respect of dual transactions;

(2)  Eligibility of an aggregator to pay the service tax liability on aggregator services using cenvat credit.

(3) Cenvat credit accumulation in the hands of service providers in respect of services provided through aggregator in the absence of any service tax liability arising on them for such services.

(4) Eligibility of an aggregator to avail cenvat credit of service tax paid on aggregator services under reverse charge mechanism.

(5) Mechanism of passing of cenvat credit on the aggregator services to the eligible customers without tax invoice.

While the above issues still remain unanswered under the present service tax law, let us see whether Model GST law will be able to bring some relief for the aggregators and service providers by resolving any of the above problems faced by them.

What's the change for aggregators in GST?

Deemed supply by the aggregator

The concept of aggregator will continue to exist in the GST regime. Model GST Law has also defined the aggregators in the same manner as it stands today under the service tax law. However, unlike today's law, which imposes service tax liability on the aggregator in respect of supplies made by the service providers, the new law deems the supplies of branded services by an aggregator as supply of the said services by the aggregator. Branded services have also been defined to mean services which are supplied by an electronic commerce operator under its own brand name or trade name. This would imply that the taxability on supplies made by an aggregator is proposed to be shifted from reverse charge to forward charge under GST regime.

Compliance Issue resolved?

We saw that one of the key challenges faced by the aggregators is regarding the increased compliance requirements for them as they have to maintain records and discharge service tax liability in respect of their services as well as for services provided by the service providers. The new law does not seem to provide any relief or relaxation to them in this area. In fact the GST law proposes to bring a lot more compliances in the form of filing of returns (3 monthly return, 1 annual return and 1 monthly information return), assessments, etc. This is certainly going to increase the compliances in the hands of the aggregators.

Input tax credit issues resolved?

Under the GST regime, a supplier making outward supply is entitled to take the input tax credit of inputs, capital goods and input services used or intended to be used by him for making supplies in the course or furtherance of business. Since the supplies of branded services are proposed to be deemed as supplies of an aggregator, an aggregator, being a deemed supplier, will be entitled to avail the credit of admissible input tax and discharge its GST liability by utilising such input tax credit. This would significantly reduce the cash outflow in the hands of the aggregator as compared to the current position wherein they are paying service tax on aggregator services in cash.

However when we look at the service providers, the position for them would remain unaltered. In the absence of any tax liability on services provided by them, the service providers will continue to face the situation of having an accumulated input tax credit in their hands thereby defeating the intent of seamless flow of credit chain in GST. Such credit accumulation would result in high cost of services to the ultimate consumers.

Dual supplier for same supply or dual supplies?

While going through the provisions relating to supply and taxable person as provided under Model GST law one would notice that where, on one hand the supply of branded services made through aggregator have been deemed as supplies by aggregator and made taxable in their hands, there is no specific exclusion for the supplies made by the actual service provider either from the scope of supply or from the definition of taxable person.This would lead to an absurdity as the same supply would become taxable in the hands of both the service provider as well as the aggregator resulting in double taxation on the same supply.

Alternatively, would it mean that by not excluding the service providers from the scope of GST,the Model GST law is contemplating two supplies in the said transaction i.e. one by the supplier of service to the aggregator and the other by the aggregator to the customer.

One needs to understand what the real intention of the Model GST Law is.

Tax Collected at Source by an aggregator?

Model GST Law requires an E-Commerce Operator to collect an amount in the name of tax collected at source out of the amount payable or paid to the supplier as consideration for its supplies. The credit of such tax collected will flow to the suppliers operating through E-Commerce Operator which can be set off by them while discharging their tax liabilities. It has been noticed that E-Commerce Operator is defined in such a manner that it would even cover an aggregator.

Here another issue that may be of concern for an aggregator would be if they are also governed by the provision of collecting tax at source even when full GST is to be discharged by them on the same supplies. If yes, then in this situation also there is going to be a double taxation on the single transaction and credit accumulation in the hands of service providers. Moreover, other critical issues relating to registrations and payment of such tax collected at source would also require immediate attention.This does not seem to be the intention of the Model GST Law.

Snapshot

As we see, the Model GST Law has attempted to fix few issues relating to cenvat credit, at the same time the issues relating to compliances do not seem to be getting resolved for the aggregators. On the contrary, the Model GST Law might increase the compliances for this sector by bringing them under deemed supply and requiring them to comply with various provisions of the GST Law. Further, the requirement of collection of tax at source and the dual supply in same transaction is going to open up new areas of controversies for them unless the position is clarified.