Indirect Tax Update No. 32

GST 2.0 for structural reforms in IT & ITeS & GCC sector

In a significant boost to the IT ITeS sector, the Council has extended benefit of export of services in relation to provision of offshore IT services to the overseas customers invoiced through foreign branches. This should be more clarificatory amendment, as the offshore work was always being performed for overseas customer. Further, allowing input tax credit for employee medical insurance has aided in improving profitability of the sector, which is one of the largest private sector employers. At the same time, certain issues still remain pending to be addressed at field office level, including deduction for bad debts, refund to SEZ units. Detailed discussion of impact on the sector is provided below:

Offshore services rendered to customer through branch to qualify as export:

The 57th GST Council held on 8th September 2026 has announced a major relief to the IT, ITeS and other sectors in India providing services to the overseas customers through its foreign branch outside India by way of omitting sub-clause (v) of clause (6) of section 2 of the Integrated Goods and Service Tax Act, 2017 (“IGST Act”).

At present, the conditions to qualify as ‘export of service’ is provided in Section 2
(6) of the IGST Act, which inter alia includes that the supplier of service and recipient are not merely establishment of distinct persons.

The fifth condition is peculiarly specific to the distinct persons, making the otherwise obvious scenario of export of service, an exempt supply under the GST law and the notifications issued thereunder. Such a condition is not only detrimental to the otherwise export transactions invoiced and realized by an Indian entity from overseas customer through its foreign branch.

India is rapidly advancing across pivotal global sectors, driving international technology as a powerhouse in IT and ITeS while expanding its footprint in Global Capability Centres (GCC). This multi-sector growth requires establishing branches across the world for seamless provision of services. Hence, omission of the sub-clause (v) of Section 2(6) is a significant step in the direction of Ease of Doing Business.

Further, with omission of sub-clause (v) of Section 2(6) and omission of the provision pertaining to place of supply of intermediary under Section 13(8)(b) of the IGST Act, has brought significant clarity to the GCC ecosystem.

However, the change will be incomplete without omission of relevant exemption entries exempting supplies by an Indian establishment to its foreign establishment. Such changes in law may be seen in due course.

ITC eligibility qua group health insurance for employees and its impact viz-a-viz SEZ Units:

The GST Council has announced unblocking of ITC in relation to group health insurance services, allowing the companies to avail ITC qua the tax paid. Thereby, allowing input tax credit to flow seamlessly through the supply chain without leakage or distortion.

It is to be noted that as the law stands today, input tax credit pertaining to the group insurance policies are restricted under Section 17 of the CGST Act unless the recipient is engaged in further supply of general/ health insurance services or if it is a statutory obligation. Due to the same, the employers/ companies are currently paying tax at the rate of 18% while receiving the group insurance services for their employees. However, ITC qua the same is restricted for the said employers/ companies.

Non-allowability of ITC is distorting the credit chain resulted in tax cost in the hands of the companies. Therefore, this is a beneficial step for the businesses as insurance coverage forms a significant cost for the IT sector, which is one of the largest private sector employers.

While ITC is streamlined, it is pertinent to also streamline the refund of ITC for SEZ units. Various High Courts have consistently ruled in favour of SEZ Units and have held that the SEZ Units are entitled for refund of ITC. Implementation of the said principles will significantly help the sector.

Bad debt and loss of ITC/ export benefits:

Another major issue faced by the industry is reversal of ITC and export benefits in the event of bad debt. This is due to non-fulfilment of the condition related to realisation of foreign currency. RBI write-off qua non-realisation of export proceeds may be considered and reversal of export benefits may be scrapped for export sector. This has been left unattended in the present round of amendments.

Refunds of ITC on capital goods– significant boost in working capital:

In a significant relief for exporters, refund for capital goods will now be available over a period of 5 years, starting from April 2027. This will significantly improve working capital cash flow and unlock blocked capital of IT / ITeS / GCCs, allowing them more freedom to spend on further expansions and use cash for general business purposes.

Permanent transfer of Intellectual Property Rights as services:

Temporary transfer of intellectual property rights qualified as supply of services. However, there was lack of clarity with regard to permanent transfer of IP rights, as to whether which would otherwise qualify as goods. Earlier, there was ambiguity with respect to both exports and imports as well as local supplies (whether IGST or CGST+SGST is payable), since intangibles do not require any physical movement.

The amendment in Schedule II to classify it as supply of services brings clarity for domestic supplies and import and export alike.

Having said that, for transactions between related parties, the valuation aspect will still play an important role for determining the tax liability.

Faceless assessment and arrest:

In line with the GST Council’s resolution to facilitate ease of doing business and strengthening ‘trust-based tax regime’, arrest powers under Section 69 of the CGST Act have been completely withdrawn removing a very draconian measure and providing considerable relief to taxpayers being subject to investigation and scrutiny. Further, provisions in relation to prosecution and issuance of show cause notice have been rationalized, adding various fetters on initiation of proceedings and imposition of penalties. punitive measures like arrest during investigation which is also in line with the direction of various High Courts.

However, it is to be noted that only the monetary threshold has been increased for institution of prosecution and certain concessions have been made in relation to offences. Thus, punitive measures such as penalty and imprisonment for offences enlisted would continue with respect to serious cases of fraud and evasion of tax, under section 132 of the CGST Act . The Central Government has introduced faceless assessment similar to Income tax and Customs for taxpayers under central jurisdiction.

Significant automation reforms:

It is proposed to significantly reform the processes relating to return mismatch, including credit note matching and acceptance, IMS, providing legal backing to electronic credit and reversal and RCM statements, provide for automatic amendment and cancellation of registration as also faster refunds, clarifications relating to interest on pre-deposit and ISD. This is a significant structural reform, aimed at reducing taxpayer interaction with GST officials and moving towards automation driven systems. While some of the changes will be implemented on staggered basis, it enforces confidence for businesses towards achieving the objective of making GST a good and simple tax.

Bunching of SCNs to be validated:

Bunching of SCNs for multiple financial years is sought to be taken care by amending the provisions. This may put to rest the litigation in relation to technical point of bunching, wherein Courts have so far offered differing views on its validity.

Note: The above update is based on PIB Release and announcements made post Council meeting. The same is subject to appropriate amendments / notification to be implemented in due course.