A circular via the GST department might be furnished to address the dispute of the spate of notices sent before the Indian arms of the foreign firms asking for the tax salaries filed to immigrants via the local unit.
As per the circular input tax credit (ITC) must not be held back from 2017 to 2022 since the action of sending immigrants to the Indian unit called a secondment, amounts to exports of services, people experienced with the development said on anonymity condition.
Before the GST council the proposal might be provided after the law committee arrives at the consensus on the problem, they added. The GST law committee consists of officials from states and the centre recommends the Council on laws, rules, and procedures.
Certain law committee members have the opinion that ITC must not be provided to the MNCs 2017-22 invoking section 74 since GST is being recovered late as the acts of suppression via MNCs. Section 74 of the GST law is related to the fetching of the evasion of tax as well as the levy of penalties for the matter in which the tax council fetches that an assessees has the intent to evade the taxes under the norms of Goods and Services Taxes (GST).
To solve the problem the centre is looking to submit a circular. Under the circular, it specifies that section 74 must not be invoked mechanically. It shall solve the problem to a greater extent since the MNCs shall obtain the ITC for 2017-2022 and shall merely need to file the additional interest cost. Certain members of the law committee do not have any interest in taking on such an approach. The problem might postponed to the subsequent GST council meeting till the law committee reaches a consensus.
Concerning taxation, the suppression act is concerned with the actions that the assessee opts for concealing the income, assets, or transactions to evade taxes. The suppression consists of under-reporting of income, overstating deductions, concealing assets or transactions, and misrepresenting the particulars.
The Issue of Revenue-Neutral
MNCs send the executives to India where they work for a specific duration. Indian subsidiary paid these employees in rupees and the total cost gets refunded by the overseas firm. When the secondment salaries are paid via the Indian employers hence there is no expense for the business.
MNCs’ local subsidiaries have the opinion that the salaries filed via them are excluded from GST and merely the portion of the pay package concerning social security, it is due to such expats being qualified for social security in their own country must be under the tax slab.
GST council acknowledges that the whole salary counted beneath the GST post a Supreme Court ruling of 2022 that mentioned that the secondment services shall levied to tax. Therefore from 2022, MNCs file the GST on expat salaries and opt for the credit for the same as it is the export services. For the firms and the GST council, the same is revenue neutral.
For 2017-2022, the interest as well as the penalty seeks by the GST council. The GST council has recovered Rs 2500 cr tax for the same duration from the MNCs as per the reports.
Expert View
These notices were created from a 2022 judgment by the Supreme Court, popularly called Northern Operating Systems Pvt. Ltd (NOS). The court stated that if a foreign company provides manpower to its Indian affiliate, it is called a ‘service’. Accordingly, firms obtaining employees on secondment from their foreign affiliates became accountable for paying service tax to claim the ‘services.’ As GST is a successor to the service tax law, such companies under the GST law in 2024 started obtaining notices.
“These notices are issued as per the ruling of the Supreme Court in Northern Operating Systems maintaining that secondment of employees via overseas entities to Indian firms counted under the category of manpower supply attracting service tax. Therefore, judgment was furnished in the context concerning reimbursement of expat salary and additional allowances through the Indian firms to the overseas entity, and the court retained that it was equal to the supply of manpower and thus obligated to service tax,” the tax expert mentioned.
The show cause notice is been furnished to such MNCs that choose the lead from the NOS judgment and apply it blindly on every expat transaction for the period 2017 onwards.
The Central Board of Indirect Taxes and Customs (CBIC) in December 2023 issued a circular to the GST department not to apply for the NOS judgment for every case of the secondment and sent the notices. CBIC has shown that each secondment agreement should be determined factually before applying the judgment and issuing the notice.
Tax experts elaborated that such notices have been provided despite the guidelines of the CBIC in each arrangement, different tax implications might be there laid on the particular kind of contract and the other terms and conditions pertinent to the same.
A few high courts have allotted an interim stay against the GST demands.
Bombay HC Stays Effect
One such notice is been received by Carmaker Mercedes Benz, which approached the Bombay High Court and received an interim stay against the adverse action via the GST council. The High Court seeks the GST to furnish a reply to the petition of the carmaker, on February 20 the case now seems to come up for hearing.
The Bombay High Court is the to issue the stay, before that Punjab Haryana, and Karnataka high courts stayed identical notices issued to BMW and Alstom Transport. “I shall not be shocked to notice more interim orders like this through different High Courts shortly, or this is a pan-India issue, there is the chance of even a transfer petition being filed by the Central Government before the Supreme Court to carry this dispute to its logical end as soon as possible,” tax expert stated.
The interim stays could not be deemed the final word on this as acknowledging the case is yet to be heard on the grounds of merits. The court has issued the time to the tax department for the reversal before the Writ Petition furnished via Mercedes Benz, till the time has stayed the process of the assessment order which the tax department enacted.
Combating the GST demand in High Courts is the most promising option available to MNCs nowadays. Considering the particular that the GST Tribunals are not in place, to approach the High Court is suggested to contest the very basis of issuance of show-cause notice, particularly under the fact that the majority of such show-cause notices are mechanical.
These companies can adjudicate this problem at the GST department. Based on the particulars of each case it is open for the MNCs to either take part in the adjudication proceedings and differentiate their particulars from Northern Operating and highlight the norms that the CBIC issued.
There are some instances for the judgment of the NOS if the GST council overlooks these demands on being notified of the nature of the relationship between the secondee and the firm.
