MNCs challenge GST notices on services received from expats
Secondment or deputation of expatriates is subject to GST if the expatriate employee is being reimbursed by the Indian company for the services provided to the company. As per the GST law the Indian company is deemed as the recipient of the service, and the services provided by the expatriate will be considered as a “supply of manpower” under the GST law. Thus the Indian company is liable to pay GST on the value of the deemed supply at the applicable rate.
Amongst those who have contested include Kawasaki Motors and Shinhan Bank (India) who have contended that supply of manpower between a parent company and it’s Indian arm cannot be deemed as ‘supply of manpower’ hence doesn’t attract GST as argued by the department.
Sources further add that almost one-third of the 100 odd- MNCs issued SCNs across the country have paid the dues, a majority of them have made ‘part payment’ and are contesting the penalty and interest levied by the department on the dues before the adjudicating authority (AA).
Earlier in May, the Supreme Court declared that secondment of personnel to group firms situated in India resulted in the supply of a taxable service, and that the amount of wage cost refunded to the group companies would be liable to tax.
The DGGIs across Delhi, Bengaluru and Mumbai have issued around 100 SCNs and have collected revenue of over Rs 1500 crores from these companies on the secondment issues, sources further added.
“While most of the companies have paid up, most of them have made part-payment and are contesting the interest and penalty levied by the department before the adjudicating authority. A few of the companies have contested the SCNs in totality arguing that this was an arrangement made between the parent and the Indian arm and doesn’t amount to supply of manpower. The issue is now before the AA and the appellate authority will decide on the matter,” said an official privy to the matter.
“The SCNs were issued post the SC’s order which clearly stated that If the Indian company is treated as an employer, the payment would in effect be reimbursement and not chargeable to tax in the hands of the overseas entity. However, in the event the overseas entity is treated as the employer, the arrangement would be treated as service by the overseas entity and taxed. However many of these companies are contending with the arrangement of the employment and are before various AAs,” the official added.
“Pursuant to the Supreme Court decision in the case of Northern Operating Systems, which confirmed service tax applicability on secondment of employees to India, the DGGI has been active in issuing notices seeking recovery of tax, along with interest, for the service tax and GST period. Given that the demands have arisen pursuant to a Supreme Court ruling, most taxpayers have either already paid the tax or acceded & paid the demands. However, disputes have also arisen on the eligibility of credit in respect of payments made by company pursuant to the decision for past periods under GST,” one of the expert said. “While some High Courts (Karnataka, Delhi and Punjab & Haryana) have provided interim relief to taxpayers on the issue, a clarification from the GST policy wing confirming eligibility of credit of taxes paid on this issue will help alleviate taxpayers concerns and avoid disputes on this matter,” he added.
“These are contractually and factually driven transactions and accordingly, while there may be a presence of supply of service in these cases, the moot point remains the valuation of such services. For instance, if there is no markup and only the actual cost of the employee is reimbursed, then the concept of pure agency may come into play”, another expert said. “In some instances, the expatriates are on a dual employment and part of the salary cost is paid in the overseas bank account only for administrative convenience. Factually, it can be proved that the relationship is that of an employee and employer in such cases”, he added.
