Time limit of issuance of notice for GST Assessment for FY 2017-18 lapsed on 30th September, 2023. Every industry is flooded with GST notices on various allegations including Purchase from canceled dealers, ITC reversal on exempted supplies, ITC ineligible under Section 17(5) of CGST etc. Notices are issued for FY 2017-18 till FY 2022-23.
One of the issues on which thousands of MNCs have received notice is GST on salary of foreign expats paid by foreign parent companies. GST Authorities have alleged that Indian Subsidiaries are liable to pay GST on such reimbursement considering it as “Manpower Supply services” rendered by the parent company.
This article makes a detailed discussion on applicability of GST on reimbursement of Expat salaries and what action Indian companies are required to take to avoid such liability:
Employment of foreign expats works in following scenarios:
GST Authorities have contended that Foreign Companies are providing “Manpower Supply services” to the Indian Companies. Since, place of supply for such service lies in India and location of service provider is outside India, therefore, such supply shall tantamount to “Import of service” and Indian Companies are liable to pay GST on such services under Reverse Charge Mechanism.
GST Authorities are also content if salaries to expats are paid by Indian companies directly then GST authorities have no objection as these foreign expats are considered as employees of Indian Subsidiaries.
Flood of Show Cause Notices on salary of foreign expats is consequent of recent judgment of Hon’ble Supreme court in the matter of M/s C.C., C.E. & S.T., Bangalore (Adjudication) Vs Northern Operating Systems Pvt. Ltd. [2022 (61) G.S.T.L. 129 (S.C)] wherein Hon'ble apex court analyzed whether the activity of secondment of employees from a foreign group company to an Indian entity amounted to manpower supply service and required Indian entities to pay GST under RCM.
Hon’ble Apex court made following analysis:
Even though precedence was issued with respect to service tax law, i.e., Pre-GST regime, it will have a major impact under GST as well. Under the GST regime, if such services are considered Manpower Supply services, place of supply shall be determined in accordance with provisions of Section 13 of IGST Act.
As per Section 13 of IGST Act, “place of supply” of manpower services shall be determined as per Section 13(2), i.e, location of recipient. Location of supplier is outside India and place of supply is in India, so, cases where such service is considered as “Manpower Supply service”, such supply shall be considered as “Import of Service” and Indian company is required to pay GST under Reverse Charge Mechanism.
a. Factors to be considered to determine “Employment Contract” or “Manpower Supply Service”
Hon’ble Apex court has determined following factors which are to be considered collectively to determine who is the employer of the Foreign expats:
b. 现金流压力
It is pertinent to note that GST liability under RCM is required to be paid through electronic cash ledger only and can’t be paid through Electronic credit ledger. Therefore, if such service is held as “manpower supply service” it may result in huge cash outflow for Indian companies.
Further, Entities having accumulated ITC or excess balance in electronic credit ledger may have to face unnecessary compilation of ITC which is paid in cash only.
c. Cautionally drafting of agreement
Therefore, to escape liability under GST and avoid huge cash outflow, the only remedy is cautionally drafting of agreement between Indian Company and Foreign company as different drafting may change the tax position completely and may result in heavy taxes and penalties.
Therefore, it is of utmost importance to get these agreements and transactions vet and incorporate the specific clause to protect the interest of both the companies and the employee.
