India arms of 1,000 MNCs asked to pay GST on expat salaries, allowances

Tax demands for 18% GST range from Rs 1 crore to Rs 150 crore

The Indian arms of around 1,000 multinational corporations (MNCs) have recently received tax demands from goods and services tax (GST) authorities. The demands raised sought an 18 per cent tax on salaries and allowances paid to foreign expatriates (expats) by their overseas parent companies.

The tax demands, which have been issued in the past few weeks, range from Rs 1 crore to Rs 150 crore for the period between FY18 and FY22. “Payments to expats working in Indian subsidiaries of multinationals by their foreign parent are liable for GST,” an official privy to the matter told Business Standard. 

This matter came to light during audits of the local arms of MNCs across various sectors, including smartphones, automobiles, software, FMCG, consumer durables, and cosmetics, he said.
 

The official explained that while tax demands for transactions made in FY18 were time-barred as on September 30, demands were also being served for later years (FY19, FY20, FY21, and FY22). Companies have been given 30 days to respond to these tax demands.

GST authorities view the salary or allowance of expats, which is paid either fully or partially by the foreign company and later reimbursed by the Indian company to the foreign company, as akin to a “supply of manpower” and hence taxable under the GST regime.

This has been the practice under which employment contracts remain vested with the foreign company, even if the Indian arm exercised control over expats. This is to maintain their social security benefits in the home country where their family resides, the official said.

However, if salaries are directly paid by the Indian company to the employees and not reimbursed, they won't attract GST as in that case expats are perceived as employees of the Indian company only, he clarified.

The spate of tax demands on MNCs has been triggered by a Supreme Court judgment in May 2022, in the Northern Operating System (NOS) case. The ruling held that the activity of secondment (deputation) of employees from a foreign group to an Indian entity amounted to “manpower supply service” and thus is liable for service tax under the reverse charge mechanism (the liability to pay tax is on the recipient instead of the supplier) by the Indian firm.

The decision was in connection with service tax (pre-GST era), however, inferences have been drawn under the GST because the deputation of foreign expats and payment of salary overseas is a common industry practice that still continues.

 The industry has been divided on this issue after the SC ruling. Some players have paid off GST and claimed credit but are contesting interest. A few have not paid the tax but want to litigate on the premise that their facts differ from the NOS case.

 “Basis the SC ruling in the case of Northern Operating Systems (NOS), upholding levy of service tax on expats seconded to India, revenue authorities have issued numerous show-cause notices to various players demanding GST on the expats seconded -- more prominently witnessed in foreign companies where employees are seconded to India subsidiaries,” said Abhishek Jain, indirect tax head & partner, KPMG. He further said industry has been evaluating the facts and taking an appropriate view.

Meanwhile, industry expects the government to come out with detailed guidelines on what constitutes employment in the case of expats, besides clarity on the nature of the manpower supply in different scenarios.

“GST exposure on expat arrangements needs to be evaluated carefully as the terms of such arrangements, bifurcation of compensation, roles and responsibilities, and control exercised over such employees would be relevant. While the issue came up during recent audits, many companies had already begun re-evaluation of their contracts with expats after the top court decision,” said M S Mani, partner, Deloitte India.

 According to experts, there is a need for clarity on scenarios where an employment contract does not specify the role and assignment of expats and how would that trigger the levy if an expat terminates his/her relationship with the Indian arm or if an expat is on the payrolls of both parent and local entities.

 It has been observed that in some cases, notices were sent to those firms where the contract is with the Indian arm. Besides, it is not clear whether expats deputed as consultants would be liable for GST, they said.