Services by foreign entity’s arm to parent to qualify as export

Shishir Sinha New Delhi | Updated on September 22, 2021

CBIC’s circular clarifies that such services will be eligible for claiming GST refunds

A subsidiary, sister concern or group concern of a multinational company in India will find it easy to claim refund for GST paid here, as the Central Board of Indirect Taxes and Customs (CBIC) has come out with a detailed circular clarifying provisions related to export of services.

The CBIC said a company incorporated in India and a body corporate incorporated by or under the laws of a country outside India, which is also referred to as foreign company under Companies Act, are separate persons under CGST Act, and thus are separate legal entities.

It added that these two separate persons would not be considered as “merely establishments of a distinct person in accordance with Explanation 1 in section 8 (of GST law).”

This clarification was required as there was ambiguity in interpretation of provisions in law by different tax officials, leading to denial of refunds to exporters who were exporting services to their parent or subsidiary companies abroad.

Clarification hailed

Experts believe that this, along with the circular on intermediaries, will bring a lot of clarity, especially for IT enabled services and help India attract more foreign companies to set up a subsidiary here, also creating more job opportunity.

Both circulars are a follow-up to a decision by the GST Council on September 17.

Harpreet Singh, Partner, Indirect taxes at KPMG in India, feels this is one of the best outcomes of the recent GST Council meeting, as a lot of refunds for service exporters were being denied/held back on account of allegation of supply of service by a subsidiary in India, to its foreign company outside India, not qualifying as export. “Hopefully, with the clarification, authorities will not any more challenge export of services on this ground and the same should result in speedy refunds and better working capital for service exporters,” he said.

According to Aditya Singhania, Founder at Singhania’s GST Consultancy & Co, both Circular 159 on intermediary service and 161 on clarity over treatment of separate persons largely address concerns of the exporter community and will serve as an impetus to their refunds getting sanctioned. The claims are pending at large before the adjudicating/appellate authorities.

The CBIC has also come out with a circular clarifying that service by a back office to its foreign entity will not be treated as intermediary services, thus not attract GST at 18 per cent.

Intermediary services

The circular listed primary requirements for intermediary services. These include minimum of three parties, two distinct supplies, intermediary service provider to have the character of agent, broker or any other similar person, does not include a person who supplies such goods or services or both or securities on his own account, sub-contracting for a service is not intermediary service.

GST law defines intermediary as broker, an agent or any other person, by whatever name called, who arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account. However, because of interpretation of this definition, there has been litigation.

Published on September 21, 2021

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