Budget 2026 killed Section 13(8)(b) — GST on exports
For nearly a decade, Section 13(8)(b) of the IGST Act forced Indian service exporters to pay 18% GST on work done for overseas clients. Digital marketing agencies, BPOs, IT firms, and freelancers all paid this tax with no refund route available. Finance Bill 2026 changes everything. Clause 141 of the Bill proposes to delete Section 13(8)(b) entirely, unlocking zero-rated export status for thousands of businesses across India.
This single Budget 2026 GST amendment could save the Indian services industry billions of dollars each year. Here is exactly what changed, why it matters, and what you should do next.
What Section 13(8)(b) actually did to Indian service exporters
Under India's GST framework, exports are zero-rated supplies. You do not pay GST when you sell services to an overseas client. That was the rule for most service providers. But Section 13(8)(b) created a brutal exception for anyone classified as an "intermediary."
The provision stated that, for intermediary services, the place of supply shall be the supplier's location. Since the supplier was in India, the place of supply was always India. This made it impossible for intermediary services to qualify as exports under Section 2(6) of the IGST Act. The result was simple and devastating. Indian intermediaries paid 18% GST on their foreign earnings. They received no zero-rated benefit. They could not claim refunds on input tax credit.
This was not a small technical issue. It was a fundamental flaw in India's tax treatment of service exports. The provision traced back to Rule 9(c) of the pre-GST Place of Provision of Service Rules, 2012. The 139th Parliamentary Standing Committee on Commerce had flagged this problem and recommended changes. For years, nothing happened.
The intermediary trap that caught agencies, BPOs, and GCCs
Section 2(13) of the IGST Act defines an intermediary as a broker, agent, or any person who arranges or facilitates supply between two or more parties. It excludes someone who supplies services on their own account. That exclusion should have protected most Indian service providers. In practice, tax authorities read contracts broadly and aggressively.
Any contract that used words such as "assist," "support," "coordinate," or "facilitate" triggered an intermediary classification. The GST on export of services in India became a trap for firms doing genuine work for overseas clients.
Digital marketing agencies running SEO and paid media campaigns for foreign companies were referred to as intermediaries. BPO firms performing back-office accounting, data entry, and IT support under subcontracts were considered intermediaries between the overseas principal and end-customers. India hosts over 1,700 Global Capability Centres employing 1.9 million professionals and generating $ revenue. Many of these GCCs faced constant classification disputes.
Even overseas education consultants earning commissions from foreign universities faced demands totalling nearly ₹600 crore. Show-cause notices worth approximately ₹3,357 crore were issued to companies classified as intermediaries. Working capital was blocked. Refund claims were denied flatly. Indian service providers became 18% more expensive than competitors in countries following the destination principle.
Countries like the UK, Singapore, Australia, and the entire EU offer zero-rate cross-border intermediary services. Indian firms lost contracts because they could not match global pricing. Many companies moved their operations to Dubai, Singapore, and Hong Kong. In a business with 8-9% margins, paying 1% of gross revenue was not viable.
How courts dismantled the intermediary fiction one case at a time
Indian courts spent years pushing back against the broad intermediary classification. Their rulings built a strong body of law that ultimately forced the government to act.
The constitutional challenge started in Gujarat. In Material Recycling Association of India v. Union of India (2020), the Gujarat High Court upheld Section 13(8)(b) as constitutionally valid. But in Dharmendra M. Jani v. Union of India (2021), the Bombay High Court split. Justice Ujjal Bhuyan struck the provision down. Justice Abhay Ahuja disagreed. The referee judge (Justice G.S. Kulkarni, April 2023) upheld the constitutionality but limited the provision. He ruled that Section 13(8)(b) could not be used to levy CGST or SGST. This created a gap that weakened the entire tax mechanism.
In factual classification cases, courts consistently sided with taxpayers. The Punjab and Haryana High Court ruled in Genpact India v. Union of India (2022) that BPO services on a principal-to-principal basis are not intermediary services. It restored a refund of ₹26.34 crore. The Delhi High Court held in Ernst & Young Ltd. v. Additional Commissioner (2023) that professional services provided directly to overseas entities are exports, not intermediary supplies.
The Supreme Court settled the debate further in 2025. In KC Overseas Education v. Union of India, the revenue's special leave petition was dismissed. It confirmed that education facilitation services under a direct contract with foreign universities qualify as exports of services under the IGST intermediary place-of-supply rules.
The pattern was clear. Courts found the intermediary tag misapplied in case after case. The government had to respond with a legislative fix.
Once the amendment takes effect, service exporters will need to file their LUT for zero-rated export of services to avoid paying IGST upfront.
From the GST Council recommendation tothe Financee Bill 2026
The legislative journey followed a clear path over the past 18 months. At the 55th GST Council Meeting in December 2024, the Council first discussed the need to reform intermediary reports. In June 2025, reports confirmed that the Council's Law Committee had approved reclassification.
The decisive moment came on 3 September 2025. The 56th GST Council Meeting formally recommended omitting Section 13(8)(b) as part of its next-generation GST reforms. NASSCOM welcomed the move, calling it a step that restores export status and refund eligibility for services delivered from India.
On 1 February 2026, Finance Minister Nirmala Sitharaman introduced the Finance Bill 2026 in the Lok Sabha. Clause 141 of Bill No. 3 of 2026 proposes the outright deletion of Section 13(8)(b). Once enacted, the place of supply for intermediary services will default to Section 13(2) of the IGST Act. That means the place of supply is the recipient's location.
When an Indian agency or BPO serves a foreign client, the place of supply shifts outside India, and the transaction qualifies as an export of services. It becomes a zero-rated export service under Section 16 of the IGST Act. Under the Letter of Undertaking route, no GST is payable. Accumulated input tax credit becomes fully refundable.
The effective date has not been notified yet as of February 2026. The Bill must pass Parliament and receive Presidential assent before the government notifies the operative date.
How muchcan Indian agencies and BPOs actually save
The numbers tell a powerful story. India's IT-BPM industry generated $2Revenuellion in revenue in FY2024. IT-ITES exports alone reached $224 billion in FY2024-25. BPO exports account for approximately $45 billion. GCCs contribute $64.6 billion. India holds a 57% share of the global services sourcing market.
Even a conservative estimate that 5% of IT-ITES exports were affected by intermediary misclassification puts roughly $11 billion in services under the 18% GST net. That translates to approximately $2 billion in annual GST savings for the sector. The immediate relief from resolving ₹3,357 crore in pending show-cause notices adds further value.
Beyond direct tax savings, companies gain working capital benefits from unlocked ITC refunds. They can price services 18% more competitively in global markets. The sector employs 5.4 million people. Smaller digital marketing agencies, freelancers, and education consultants operating on thin margins stand to benefit the most. For a firm with 8% profit margins, removing 1% of revenue from gross revenue is transformational.
EY India described the reform as one that will reduce tax exposure, lower litigation risk, and position India as a preferred global service delivery hub. Lakshmikumaran & Sridharan noted the amendment will make Indian exports cost-effective and align the country with international practice.
This GST relief adds to the growing list of export incentives available for Indian businesses aiming to compete in global markets.
What still needs attention after the amendment takes effect
The deletion of Section 13(8)(b) is overwhelmingly positive. But several issues remain unresolved. Past litigation involving demands of ₹3,357 crore may not automatically disappear. The amendment has no retrospective application announced so far. Industry bodies are actively pushing for retrospective relief or an amnesty mechanism.
Reverse-charge implications also arise on the other side. Indian businesses that import intermediary services from overseas providers will be liable for RCM under IGST. This will impact sectors with restricted input tax credits, such as hospitality, travel, and petroleum.
Transitional provisions for invoices raised before the amendment but paid after remain unclear. Companies should track these closely once the effective date is notified.
What should Indian service exporters do right now?
The change creates immediate action items for every firm affected by the intermediary classification. Review all existing contracts with overseas clients for language that triggered intermediary status. Remove or reword terms such as "facilitate" and "arrange" when they do not accurately reflect the actual service relationship.
Prepare LUT applications for zero-rated export treatment once the effective date is notified. Assess all accumulated ITC that was blocked due to intermediary classification. File refund claims promptly once the mechanism allows it.
Companies with pending show-cause notices should not pay disputed amounts prematurely. Monitor the Finance Act's final text for any retrospective relief clauses. Consult with your tax advisor to quantify the exact savings on your export revenue.
This reform represents a fundamental shift in how India taxes cross-border services. After years of litigation, billions in disputed demands, and the migration of businesses to friendlier tax jurisdictions, the destination principle finally wins. Indian agencies, BPOs, and IT firms can compete on a level playing field with global peers. The 18% GST penalty on exports is over.
Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute financial or legal advice. Winvesta makes no representations or warranties about the accuracy or suitability of the content and recommends consulting a professional before making any financial decisions.
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Table of Contents
For nearly a decade, Section 13(8)(b) of the IGST Act forced Indian service exporters to pay 18% GST on work done for overseas clients. Digital marketing agencies, BPOs, IT firms, and freelancers all paid this tax with no refund route available. Finance Bill 2026 changes everything. Clause 141 of the Bill proposes to delete Section 13(8)(b) entirely, unlocking zero-rated export status for thousands of businesses across India.
This single Budget 2026 GST amendment could save the Indian services industry billions of dollars each year. Here is exactly what changed, why it matters, and what you should do next.
What Section 13(8)(b) actually did to Indian service exporters
Under India's GST framework, exports are zero-rated supplies. You do not pay GST when you sell services to an overseas client. That was the rule for most service providers. But Section 13(8)(b) created a brutal exception for anyone classified as an "intermediary."
The provision stated that, for intermediary services, the place of supply shall be the supplier's location. Since the supplier was in India, the place of supply was always India. This made it impossible for intermediary services to qualify as exports under Section 2(6) of the IGST Act. The result was simple and devastating. Indian intermediaries paid 18% GST on their foreign earnings. They received no zero-rated benefit. They could not claim refunds on input tax credit.
This was not a small technical issue. It was a fundamental flaw in India's tax treatment of service exports. The provision traced back to Rule 9(c) of the pre-GST Place of Provision of Service Rules, 2012. The 139th Parliamentary Standing Committee on Commerce had flagged this problem and recommended changes. For years, nothing happened.
The intermediary trap that caught agencies, BPOs, and GCCs
Section 2(13) of the IGST Act defines an intermediary as a broker, agent, or any person who arranges or facilitates supply between two or more parties. It excludes someone who supplies services on their own account. That exclusion should have protected most Indian service providers. In practice, tax authorities read contracts broadly and aggressively.
Any contract that used words such as "assist," "support," "coordinate," or "facilitate" triggered an intermediary classification. The GST on export of services in India became a trap for firms doing genuine work for overseas clients.
Digital marketing agencies running SEO and paid media campaigns for foreign companies were referred to as intermediaries. BPO firms performing back-office accounting, data entry, and IT support under subcontracts were considered intermediaries between the overseas principal and end-customers. India hosts over 1,700 Global Capability Centres employing 1.9 million professionals and generating $ revenue. Many of these GCCs faced constant classification disputes.
Even overseas education consultants earning commissions from foreign universities faced demands totalling nearly ₹600 crore. Show-cause notices worth approximately ₹3,357 crore were issued to companies classified as intermediaries. Working capital was blocked. Refund claims were denied flatly. Indian service providers became 18% more expensive than competitors in countries following the destination principle.
Countries like the UK, Singapore, Australia, and the entire EU offer zero-rate cross-border intermediary services. Indian firms lost contracts because they could not match global pricing. Many companies moved their operations to Dubai, Singapore, and Hong Kong. In a business with 8-9% margins, paying 1% of gross revenue was not viable.
How courts dismantled the intermediary fiction one case at a time
Indian courts spent years pushing back against the broad intermediary classification. Their rulings built a strong body of law that ultimately forced the government to act.
The constitutional challenge started in Gujarat. In Material Recycling Association of India v. Union of India (2020), the Gujarat High Court upheld Section 13(8)(b) as constitutionally valid. But in Dharmendra M. Jani v. Union of India (2021), the Bombay High Court split. Justice Ujjal Bhuyan struck the provision down. Justice Abhay Ahuja disagreed. The referee judge (Justice G.S. Kulkarni, April 2023) upheld the constitutionality but limited the provision. He ruled that Section 13(8)(b) could not be used to levy CGST or SGST. This created a gap that weakened the entire tax mechanism.
In factual classification cases, courts consistently sided with taxpayers. The Punjab and Haryana High Court ruled in Genpact India v. Union of India (2022) that BPO services on a principal-to-principal basis are not intermediary services. It restored a refund of ₹26.34 crore. The Delhi High Court held in Ernst & Young Ltd. v. Additional Commissioner (2023) that professional services provided directly to overseas entities are exports, not intermediary supplies.
The Supreme Court settled the debate further in 2025. In KC Overseas Education v. Union of India, the revenue's special leave petition was dismissed. It confirmed that education facilitation services under a direct contract with foreign universities qualify as exports of services under the IGST intermediary place-of-supply rules.
The pattern was clear. Courts found the intermediary tag misapplied in case after case. The government had to respond with a legislative fix.
Once the amendment takes effect, service exporters will need to file their LUT for zero-rated export of services to avoid paying IGST upfront.
From the GST Council recommendation tothe Financee Bill 2026
The legislative journey followed a clear path over the past 18 months. At the 55th GST Council Meeting in December 2024, the Council first discussed the need to reform intermediary reports. In June 2025, reports confirmed that the Council's Law Committee had approved reclassification.
The decisive moment came on 3 September 2025. The 56th GST Council Meeting formally recommended omitting Section 13(8)(b) as part of its next-generation GST reforms. NASSCOM welcomed the move, calling it a step that restores export status and refund eligibility for services delivered from India.
On 1 February 2026, Finance Minister Nirmala Sitharaman introduced the Finance Bill 2026 in the Lok Sabha. Clause 141 of Bill No. 3 of 2026 proposes the outright deletion of Section 13(8)(b). Once enacted, the place of supply for intermediary services will default to Section 13(2) of the IGST Act. That means the place of supply is the recipient's location.
When an Indian agency or BPO serves a foreign client, the place of supply shifts outside India, and the transaction qualifies as an export of services. It becomes a zero-rated export service under Section 16 of the IGST Act. Under the Letter of Undertaking route, no GST is payable. Accumulated input tax credit becomes fully refundable.
The effective date has not been notified yet as of February 2026. The Bill must pass Parliament and receive Presidential assent before the government notifies the operative date.
How muchcan Indian agencies and BPOs actually save
The numbers tell a powerful story. India's IT-BPM industry generated $2Revenuellion in revenue in FY2024. IT-ITES exports alone reached $224 billion in FY2024-25. BPO exports account for approximately $45 billion. GCCs contribute $64.6 billion. India holds a 57% share of the global services sourcing market.
Even a conservative estimate that 5% of IT-ITES exports were affected by intermediary misclassification puts roughly $11 billion in services under the 18% GST net. That translates to approximately $2 billion in annual GST savings for the sector. The immediate relief from resolving ₹3,357 crore in pending show-cause notices adds further value.
Beyond direct tax savings, companies gain working capital benefits from unlocked ITC refunds. They can price services 18% more competitively in global markets. The sector employs 5.4 million people. Smaller digital marketing agencies, freelancers, and education consultants operating on thin margins stand to benefit the most. For a firm with 8% profit margins, removing 1% of revenue from gross revenue is transformational.
EY India described the reform as one that will reduce tax exposure, lower litigation risk, and position India as a preferred global service delivery hub. Lakshmikumaran & Sridharan noted the amendment will make Indian exports cost-effective and align the country with international practice.
This GST relief adds to the growing list of export incentives available for Indian businesses aiming to compete in global markets.
What still needs attention after the amendment takes effect
The deletion of Section 13(8)(b) is overwhelmingly positive. But several issues remain unresolved. Past litigation involving demands of ₹3,357 crore may not automatically disappear. The amendment has no retrospective application announced so far. Industry bodies are actively pushing for retrospective relief or an amnesty mechanism.
Reverse-charge implications also arise on the other side. Indian businesses that import intermediary services from overseas providers will be liable for RCM under IGST. This will impact sectors with restricted input tax credits, such as hospitality, travel, and petroleum.
Transitional provisions for invoices raised before the amendment but paid after remain unclear. Companies should track these closely once the effective date is notified.
What should Indian service exporters do right now?
The change creates immediate action items for every firm affected by the intermediary classification. Review all existing contracts with overseas clients for language that triggered intermediary status. Remove or reword terms such as "facilitate" and "arrange" when they do not accurately reflect the actual service relationship.
Prepare LUT applications for zero-rated export treatment once the effective date is notified. Assess all accumulated ITC that was blocked due to intermediary classification. File refund claims promptly once the mechanism allows it.
Companies with pending show-cause notices should not pay disputed amounts prematurely. Monitor the Finance Act's final text for any retrospective relief clauses. Consult with your tax advisor to quantify the exact savings on your export revenue.
This reform represents a fundamental shift in how India taxes cross-border services. After years of litigation, billions in disputed demands, and the migration of businesses to friendlier tax jurisdictions, the destination principle finally wins. Indian agencies, BPOs, and IT firms can compete on a level playing field with global peers. The 18% GST penalty on exports is over.
Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute financial or legal advice. Winvesta makes no representations or warranties about the accuracy or suitability of the content and recommends consulting a professional before making any financial decisions.
Get paid globally. Keep more of it.
No FX markups. No GST. Funds in 1 day.
