In a bid to provide relief to the taxpayers, the Central Board of Indirect Taxes and Customs (CBIC) has directed the Goods and Services Tax (GST) authorities to follow more a nuanced approach towards determining the tax liability of Indian subsidiaries of MNCs with regards to secondment charges.
According to GST authorities, the secondment or deputation of expatriates is subject to GST, if the expatriate employee is being reimbursed by the Indian arm of the foreign company for the services provided to the subsidiary.
“Therefore, the decision of the Supreme Court in the NOS (Northern Operating System) judgement should not be applied ‘mechanically’ in all the cases. Investigation in each case requires a careful consideration of its distinct factual matrix, including the terms of contract between overseas company and Indian entity, to determine taxability or its extent under GST and applicability of the principles laid down by the Supreme Court’s judgment,” it said.
In May 2022, the Supreme Court had ruled that the secondment of employees to group companies, based in India, resulted in provision of a taxable service, and the amount of salary cost of seconded employees reimbursed to the group companies would be subject to tax.
On November 16, FE reported that the Indian subsidiaries of as many as 80-90 MNCs have together paid around Rs 1,600 crore as GST on services availed from offshore related companies, quoting a government official.
“So far, the companies have made payment (around Rs 1,600 crore) of the tax liability that they owed, but they haven’t yet paid the penalty. The cumulative penalty amount is close to Rs 1,300-1,400 crore,” the official told FE.
The CBIC notification instructed tax authorities to not invoke Section 74(1) of the CGST Act mechanically in all secondment cases, but only in those “where there is a fraud or wilful mis- statement or suppression of facts to evade tax on the part of the said taxpayer.”
“Section 74(1) cannot be invoked merely on account of non-payment of GST, without specific element of fraud or wilful mis-statement or suppression of facts to evade tax,” the notification said.
Post the apex court’s ruling, business associations filed representations before the Finance Ministry saying that the Supreme Court gave the ruling after examining the agreements on certain specific criteria, and it should not be applied ipso facto in all cases, which was happening at the field level.
This led to many taxpayers depositing GST on a reverse charge basis. As a consequence, industry raised concerns regarding availability of credit on such payments and interest due on such reverse charge GST payments.
Saloni Roy, Partner, Deloitte India, said: “The instruction issued by the Finance Ministry acknowledges the issues faced by industry. Since this is an interpretational issue, the levy of 100% penalty would be applied only when a willful evasion of tax is found. The instruction would help mitigate litigation and closure of ongoing proceedings where businesses are able to distinguish their facts with the ruling of the SC.”
Vivek Baj, Partner at Economic Laws Practice, however, noted, “while the instruction may seem to provide some relief to assesses, it is worth noting that no concrete way forward has been suggested on this issue. Industries should be mindful of the fact that field officers have not been precluded from initiating investigation or issuing show cause notices.”