No GST on salary paid to expats working in Indian project office of foreign companies: AAR

Shishir Sinha New Delhi | Updated on July 02, 2020 Published on July 02, 2020

Maharashtra’s Authority of Advance Ruling (AAR) has said that salary paid to expats employed in a project office (PO) based in India will not attract GST.

Germany-based Hitachi Power Europe GmBH, which has a PO in India for supply of goods and supervisory services to NTPC, Meja Urja and Damodar Valley Corporation etc, employs a number of expats. Since most of these employees have their primary bank account outside India, their salary is paid from the company’s bank account located abroad, for administrative convenience.

As per the Indian Companies Act, 2013, any PO of a foreign company is required to maintain its financial books of accounts in a manner which would reflect a true and fair view of the business of the company in India. Thus, in order to keep a record of the expenses of salary cost of the expat employees working from India, the PO makes an accounting entry in its financial books of accounts in India.

To get clarity, Hitachi Power approached the AAR on whether the GST is applicable on the accounting entry made in the books of accounts of the PO for salary cost of expat employees

The argued that the PO is merely an extension of the foreign company in India and maintains financial statements only for the requirement of the Indian law. The rights and responsibilities of the PO in India are not independent from that of the head office. The PO does not enter into contracts directly and only executes the contract agreed to by the head office. It is funded by the head office and any surplus of the PO is repatriated to the head office.

Extension of foreign office

The question before the AAR was whether a foreign company and its PO in India can be considered as distinct entity or as part of same entity.

The AAR affirmed the company’s stand that the PO is an extension of the foreign head office, thus, both are same under the GST legislation and there exists employer-employee relationship between the PO and the expat employees.

Further it observed that the entry of salary in the financial books of the PO is made to keep a record of the expenses of salary cost of expat employees working in India. Also, the PAN and tax deduction and collection account numbers have been allotted to the PO by the Income Tax authorities in the name of the head office situated abroad.

Accordingly. it ruled that the GST is not applicable as it is only one establishment and PO is only an extension.

According to Harpreet Singh, Partner at KPMG, it is trite in law that in taxation matters, substance prevails over form and thus, this ruling has rightly held that levying the GST could not be determined basis the accounting treatment of a transaction. “One has to unveil the true substance of the transaction before determining the taxability,” he said.

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Published on July 02, 2020
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