2023 GST Recap: Secondment Of Labour To Be An Emerging Concern For MNCs

2023 has been a year of significant GST litigation. From the survival of online gaming industry to the exposure of multinational corporations to future liabilities, all of this has highlighted the need for India Inc. to step up on securing prudent future indemnities, according to experts.

In this series, NDTV Profit reached out to lawyers and corporate advisors to count down the significant legal developments in 2023 and what corpora. . .

2023 has been a year of significant GST litigation. From the survival of online gaming industry to the exposure of multinational corporations to future liabilities, all of this has highlighted the need for India Inc. to step up on securing prudent future indemnities, according to experts.

In this series, NDTV Profit reached out to lawyers and corporate advisors to count down the significant legal developments in 2023 and what corporates need to be mindful of. This is the first of three reports. Secondment Of Labour As one of the most recent GST clarifications issued, it highlights the evolving nature of GST legislation and cuts across industries to define the tax treatment of labour services involving expats.

Earlier in December , the Central Board of Indirect Taxes clarified to its field units that the 2022 Supreme Court judgement on the application of service tax in secondment cases “should not be mechanically applied”, with regards to alleged GST payment. It should only be applied in cases of genuine fraud or wilful evasion of taxes, following representations from businesses on the matter, the department said in its circular. Expat employees are often temporarily sent to work for their Indian group companies by multinational corporations in an advisory or operational capacity.

This is called a ‘secondment’. The employee’s salary is disbursed by the overseas company, which is then reimbursed to it by the Indian entity. The department’s stand, NDTV Profit has learnt, is that when an Indian company is receiving a service, and the services are provided by the expatriate, it would count as “supply of manpower” under the GST law.

This makes them liable to pay GST on the value fixed for the supply. In many cases, this includes the agreed salary that is either paid to an Indian or overseas bank account. An ET report claimed that the Directorate General of GST Intelligence across Delhi, Bengaluru and Mumbai have issued approximately 100 show cause notices and have collected revenue of over Rs 1,500 crore from these companies on the secondment issue.

A third of them have paid dues and the majority are contesting the interest and penalty, having made ‘a part payment’ before the adjudicating authority, it said. The circular doesn’t address the scenario for those who have paid GST, upon receiving notices for alleged shortfall in payment, said Rajat Bose, indirect tax partner at Shardul Amarchand and Mangaldas. “What happens to those who paid the GST? Will they get a refund with interest?” According to Bose, whether the relation between the company and the expat is in the nature of employer and employee; and if not, the valuation of the service on which GST is required to be paid are two important considerations which vary case by case.

The issue of GST on secondment of manpower for Indian subsidiaries of MNCs is sector-agnostic and is something every MNC with operations in India and sending expatriates to India may be exposed to, said Sudipta Bhattacharjee, indirect taxes partner at Khaitan & Co. Such companies are awaiting clarity on credit availability, in case such GST is paid for the past period and the applicability of interest and penalty thereon, said Bhattacharjee. “The expectation of those who made the GST payment in such scenarios was that (input tax) credit would not be challenged.

But I foresee some legal battle ahead on this quarter, as it has already started in Karnataka, Punjab and Haryana, where field formations have challenged credit and the matter has reached the High Court. ” The usual advice to companies, subject to case specifics, is to contest the applicability of interest and penalty for the past period from 2017 till May 2022, when the CCE&ST vs Northern Operating Systems Pvt. —or NOS Supreme Court judgement—was given, since it marked a change in legal position, he said.

“Interest is compensation for revenue loss, but here if credit would have been available, which was the initial assumption, then there is no revenue loss arising. Therefore, interest and penalty amount are being contested,” Bhattacharjee said. The other implication is that payment of GST should not be seen as an acceptance of the allegation of the GST authorities, that there is a service of manpower supply from the foreign entity to the Indian recipient companies, since that would have implications on income tax and employment laws as well, according to him.

This aspect has to be clearly brought out through relevant documentation by the Indian recipient entities deciding to pay up the GST so demanded on secondments, Bhattacharjee said. .