Big GST relief for MNCs where expats were working at Indian subsidiaries

Supreme Court in 2022, while deciding the Northern Operating Systems case had held that secondment of employees of foreign principal companies to Indian subsidiaries would fall under "manpower supply" in the erstwhile service tax provisions. The apex court also took note of the fact that in the said case the salary expenses of expatriate employees were reimbursed to the foreign principal by the Indian subsidiary.

This ratio would equally apply under GST as well.

Applying the ratio of the above judgement DGGI had initiated investigation in multiple cases involving GST of over ₹3,000 crore across India. BMW India, Mitsubishi Electric India, Metal One Corporation, Alstom Transport India, United Breweries, and Kanematsu India were some of the companies that received notices for 18% GST on expat salaries, among many others.

In a few cases, even where taxpayers have agreed with tax authorities and paid the tax, investigation by certain formations proposed to deny the input tax credit alleging wilful misstatement, fraud, etc leaving the taxpayers in a quandary.

The instructions issued by CBIC now clearly state that the ratio of the aforesaid decision cannot be applied universally to all cases of secondment and each case had to be investigated with reference to relevant facts.

This is significant from the taxpayer's perspective as in the secondment model, there are differences in facts compared to the NOS ruling as payment is made to seconded employees in INR or reimbursement of expenses is restricted only to social security and not the full salary cost.

Experts feel that in such cases taxpayers could expect a fair appreciation of facts by the authorities in the light of the above instructions. Another welcome factor is the clarification to the effect that the provisions of section 74 shall not be invoked mechanically unless suppression, wilful misstatement, or fraud is involved.

Experts see this circular as a big relief and well in time.

"This is a welcome clarification and a good step to avoid unnecessary litigation. Post NOS judgment plethora of Indian entities were at the receiving end of Show Cause Notices for alleged evasion of GST on secondment of overseas employees.

This clarification will help in filtering out those cases wherein the facts and circumstances of the agreement between an Indian firm and an overseas entity do not warrant GST liability. The department has been urged to use extended periods of limitation only in cases where evidence of fraud or wilful suppression of facts exists, thereby providing a welcome relief to honest taxpayers.

In cases where such evidence does exist, making it part of the show cause notice is in the interest of transparency. It is expected that at the field level, the tax department will consider this circular. Also, the existing SCNs already issued should be adjudicated based on this clarification," said Anita Rastogi Indirect Tax Partner at PWC.

Expressing similar sentiments, Saurabh Agarwal, Tax Partner, EY, said, "This circular could bring much-needed relief to taxpayers, as it potentially allows full input tax credit on paid tax when section 74 proceedings are not initiated.

Nevertheless, the department recognises the existence of various types of secondment arrangements, highlighting the potential for different tax implications depending on the specific case. This suggests a nuanced approach from the department, where the Supreme Court's judgment won't be universally applied."

Rajat Mohan, Senior Partner at AMRG & Associates, also added, "A much-anticipated clarification issued by CBIC regarding the intricacies of employee secondment by foreign entities to Indian firms and the associated tax implications. This clarification marks a significant advancement, arriving more than a year after the Supreme Court's pronouncement.

The directive places strong emphasis on the nuanced application of the Northern Operating System (NOS) judgment, cautioning against a blanket application in all scenarios. The Central Board of Indirect Taxes and Customs (CBIC) underscores the critical importance of conducting a meticulous assessment of the factual matrix, encompassing contractual terms, in every investigative process.

Additionally, the board provides clarification on the procedural aspects concerning the invocation of limitation under Section 74(1) by field formations. It unequivocally states that Section 74(1) should only be invoked when situations involve fraud, wilful misstatement, or the suppression of facts with the intent to evade tax.

Importantly, the Board categorically asserts that Section 74(1) cannot be invoked solely based on the non-payment of GST. While this clarification represents a commendable step forward, urging tax officers to approach secondment arrangements with due diligence and in adherence to legal principles, it is notable that the Board has deliberately refrained from offering specific illustrative cases. Litigation on this account is not expected to settle unless a clarification is issued on other related aspects of the eligibility of input tax credit, levy of interest, and penalty."