The Authority for Advance Rulings (AAR) has recently notified that GST cannot be levied on payments sent by a foreign company to its liaison offices in the country for reimbursement of various expenses.
Most foreign companies start their operations in India by first setting up their liaison offices, usually to get an idea of the market before they start officially. The purpose of a liaison office is strict as a communication hub between the foreign company and its Indian partners. It must be registered by the Reserve Bank of India (RBI) and in no circumstances can involve in any commercial activities here. Since a liaison office cannot earn its income in India, its expenses are borne by the parent company, payment of which is usually made through banking channels.
The ruling was made by the AAR in response to a request made by the Jaipur based liaison office of Habufa Meubelen, a Dutch furniture manufacturing firm. The request sought clarification on GST liability on the reimbursement of expenses to the liaison office and salary paid to its employees by the head office located in the Netherlands. The head office pays for rent, salary, electricity, travel and security expenses of its liaison office in India.
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The AAR said in its report that since the liaison office does not make any income in India and gets the entire payment for all its expenses from its foreign head office, the two offices (the liaison office and the head office) cannot be treated as separate entities for tax purposes. Thus, any transactions between the two parties are transactions to self, since they cannot serve each other as separate persons. Therefore, the payments made by the head office for the reimbursement of expenses of its liaison office in India cannot be treated as a payment for a service. And since there is no service (or transaction of goods) involved, there cannot be any GST levied.
The AAR office also confirmed that the Indian liaison offices of foreign companies are not required to get GST registrations.
