Goods and services tax made a lot of changes to the indirect tax structure prevalent earlier than 1st July 2017 and made huge changes to make it accurate and uncomplicated as compared to past tax projects.
The main aim of this article is to focus on the debate concerning to tax of liaising services which is accommodated by liaison offices ( ‘LO’ / ‘LOs’ ) to its parent company under GST reign.
The issue given above is becoming more and more controversial after the announcement of Advance Ruling in this condition, Where the LO is used as an extended arm of the parent company and it is been told that LO cannot provide services to its parent company and it cannot provide services to itself. Nevertheless, the next step of the Government was to issue a Notification recently on July 26, 2018, which allow an immunity to provide the services by inauguration in India to an inauguration in Foreign of the same organization ( subject to preconditioned ), counting such project to supply under GST, which makes the topic more uncertain.
Liaison offices – The framework
Offices managed by Reserve Bank of India (RBI) are Liaison offices, which are organized by the foreign companies in India to get business opportunities in India.
LOs can tackle only liaising activities which were phrased in RBI Master Circular, which acts entirely as the communication channel between the parent company and customers in India. The main duty of these offices is that it limits the collecting information about the possible market chances and give information about the parent company and its products to the possible Indian customers.
More distantly in India, LOs cannot take any business activity; i.e. they cannot earn any remuneration in India. In lack of remuneration, the cost suffers for running such offices are met through concave payment of foreign trade from the parent companies.
The content discussed above raises a question for resolution, whether the liaising services provided by LOs must be subject to GST, especially about the fact that the LOs are not permitted to switch any business activity and are entirely marketing wings of the parent company which do not receive any contemplation for the provision of such liaising services?
GST Suggestions For Liaising Services in India
By the inspection of GST prescription, the liaising services might be the subject to GST, which appears to be contrary to the aim of lawmakers.
The word ‘distinct person’ is defined under the GST law which involves an organization of a person in India and other organization of the same person in foreign. In terms of GST legislation, the LO and its parent company must qualify as ‘ distinct persons ‘. As per GST law (s), there are few activities/transactions that have been considered to ‘supply’ even in a dearth of deliberation. Anyone of such activities includes services between distinct persons.
In the absence of deliberations, liaising services provided by LO to its parent company shall be interpreted as ‘supply’ under GST. Under Section 13 of Integrated Goods and Services Tax ( ‘IGST’ ) Act the services which are being provided by LO to its parent company, the Place of Supply ( ‘PoS’ ) in case of liaising services must be the location of the recipient of services i.e. in foreign.
The place of supply is in foreign, as the supplier is situated in India, and the transaction must qualify as an interstate supply and must be subject to IGST.
As mentioned above, we so wish to mention that the liaising services must not be liable from IGST, as the services are qualified as ‘export of services ‘. It is the supplier and the recipient that should not entirely be the organization of a distinct person.
In terms of GST legislation, establishments of distinct persons are done by LOs and parent company, therefore, the liaising service must not be liable from IGST and it should not undertake LOs to qualify as “export of service”.
Debate Continues
As the GST is being kicked from past one year, many considerations are being made regarding tax of the liaising services provided by LOs. In one of the warrants filed with the Delhi High Court, the tax of LOs was challenged. Nevertheless, the same has been successively withdrawn.
There is another resort which is available for someone under GST reign which is to get an Advance Ruling to control the tax treatment of the hesitant transaction.
M/s. Habufa Meubelen B.V. ( Indian Liaison Office ) gave another angle to the tax of the LOs of AR pronounced by the Rajasthan Authority for Advance Rulings ( ‘AAR’ ) in the application filed in this regard. It expressed that LO is just is an expanded arm of the outside India counterpart and be operated by itself. It does not have any source of enumeration and runs only on the repayments received from foreign. As it is an extended arm, there cannot be ‘supply’ by one to itself as both cannot be separated persons. As there is no flow of service amongst both the organizations, so to conclude, the AAR accepts the fact and therefore, the question of ‘supply’ does not raise.
Contrarily, on 21 July 2018, the GST council decided to give the requisite relief to transactions between organizations of distinct persons under IGST Act.
Therefore, vide Notification No. 15 / 2018 – Integrated tax ( rate ) issued on 26 July 2018,services which will be supplied by an organization of a person in India to any organization of same person in foreign, which is treated as persons under GST, have been exempted from remuneration of IGST provided the PoS is in foreign.
The relief given above to an exemption from IGST to the transactions amongst distinct persons head to another school of thought that Government had always considered such activities as ‘ supply ‘.
As per divergent AR and the Notification. no GST is payable if LO goes by the reasoning pronounced in the AR. Contradictory if LO goes by the Notification, then GST will be payable for the period 1 July 2017 till 26 July 2018. The tax will depend upon the determination of PoS after 26 July 2018.
From July 17, 2018 exemption has kicked and the depend has raised by Authorities for the period during which the exemption was not in place. In this case, GST has not been paid by the LO on the provision of liaising services.
Clarity Still Required on Liaising Services
Continuous efforts of Government to clarify industry problems, it will be interesting to see how will the authorities deal with the problems of tax of liaising services provided by LOs between 1 July 2017 to 26 July 2018. An illumination to this impact would be the welcome help for the LOs set up in India.
