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MNC arms pay Rs 1,800-cr GST for services from kin abroad

Gunjan Prabhakaran, Partner and Leader
Indirect Tax

16 November 2023

The Indian subsidiaries of as many as 80-90 multinational corporations (MNCs) have together paid around Rs 1,600 crore as Goods and Services Tax (GST) on serviced availed from offshore related companies, an official aware of the matter told FE. The taxes paid by the MNCs in the last few months are for the transactions made between FY18 – FY22.

“(The Directorate General of GST Intelligence) has served GST liability notices to several MNCs in the past few months post the Supreme Court’s ruling in Northern Operating System’s (NOS) case, which was delivered last year,” the official said. “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 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.

After the judgment in case of NOS, the tax authorities have issued notices to various companies, where there were inbound secondments. While the judgment pertains to the Service tax regime, the observations made by the Supreme Court are equally relevant for determination of applicability of GST in the context of secondments from overseas group companies during GST regime. The Supreme Court had made various comments based on the specific agreements and proceeded to determine the issue of selecting substance over form,” explained Gunjan Prabhakaran, Partner & Leader – Indirect Tax, BDO India.

According to GST authorities, the salary or allowances of foreign expatriates which is paid by foreign companies, and later reimbursed by their Indian arms is taxable under the GST regime.

“Many companies have chosen to pay tax without interest at the moment and plan to contest if a demand is raised with respect to interest and penalty,” said Prabhakaran.

The tax official quoted earlier said that the MNCs who have paid the taxes include Maruti Suzuki, Hyundai, Aramco India etc. The companies did not respond to e-mails sent to them in this regard, till press time on Wednesday.

In September, Maruti Suzuki had informed the exchanges that GST authorities had issued a show cause notice to the company for an amount worth Rs 139 crore for the period July 2017 to August 2022 proposing to demand interest and impose penalty, besides appropriating tax already paid under reverse charge basis on certain services. Maruti Suzuki had said it will file a reply to notice before the Adjudicating Authority.

Sandeep Sehgal, Partner- Tax, AKM Global, said, “as an immediate impact, the Supreme Court ruling led to GST liability on a reverse charge basis on Indian companies availing services of foreign expatriates from overseas group companies. Though the GST would be allowed as a set-off as an input tax credit from the output service tax liability, in case of export entities, it will block the working capital since exporters usually have to rely on GST refunds to recoup the cost as against the domestic supplier who are generally allowed an immediate set-off.”

Source: financial Express